A weekly update on issues important to the Investment Management industry
During ATO’s annual meeting in New Orleans, industry experts weighed in on pressing topics for independent trust companies. Key discussions revolved around the limited impact of the FTC’s proposed ban on non-compete agreements, the potential advantages of AI in trust administration, and the unique financial trends and risks observed in the TrustCo sector. For those in the trust industry seeking insights on its current state, this conference provided invaluable perspectives and recommendations.
In a surprising move, Goldman Sachs has sold its Personal Financial Management (PFM) division, aimed at mass affluent clients, just four years after acquiring it for $750 million. The division wasn’t as profitable as Goldman’s core asset and wealth management businesses, prompting a pivot back to their expertise in ultra-high net worth clientele.
The first half of 2023 witnessed a minor decline in wealth management M&A deal volume, but an increase in total transacted AUM and deal size, fueled by a surge in the number of deals with AUM over $1 billion and RIA partnerships with private equity firms. This robust RIA deal activity demonstrates the resilience of the sector in contrast to a significant decrease in overall M&A transaction value across all industries. As RIAs continue to offer a growth strategy for strategic buyers and investors, it is imperative for sellers to identify their motivations, the type of partner they seek, and align their goals with the buyer’s strategy to ensure post-transaction satisfaction.
This week’s post discusses the importance of regularly reviewing and understanding the terms of buy-sell agreements for RIAs, as these agreements can often become sources of contention when unexpected events occur. We highlight issues related to determining the transaction price during a buy-sell event, with scenarios such as fixed-price and formula pricing causing potential misunderstandings or disputes. We also offer advice on avoiding such conflicts, such as getting your RIA valued regularly to manage expectations and drafting fair pricing mechanisms, urging owners to familiarize themselves thoroughly with their buy-sell agreements.
Understanding the intricate complexities of buy-sell agreements can provide a basis for shareholder transactions and mitigate costly legal disputes down the road. We explain the pitfalls of rules-of-thumb based valuation measures, the importance of the ‘As Of’ date, the necessary qualifications of your appraiser, and how updating your agreement annually can manage expectations and avoid surprises. Stay informed and avoid the inevitable challenges by familiarizing yourself with these key components of a well-crafted buy-sell agreement.
While closing a deal is an important milestone, it’s not the end of the process. After the ink dries on the purchase agreement, there’s a host of issues that the acquiror must address regarding the integration of and accounting for the acquired firm. In this blog post, we address one such post-transaction accounting issue. After a transaction, acquirers are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. This post explores the purchase price allocation process as it relates to acquisitions of assets and wealth management firms, highlighting the valuation considerations surrounding intangible assets like customer relationships, tradename, non-competition agreements, and the assembled workforce.
The much-ballyhooed consolidation trend in the RIA space is in a state of transition. Many acquisition platforms, fine-tuned in an era of zero interest rates and plentiful equity capital, are challenged in the post-ZIRP environment. Picking up on economist George Box’s observation that “all models are wrong, some are useful,” it’s worthwhile to survey the acquisition landscape and see what worked and what still works.
The intricate journey of selling a business you’ve built can be daunting, filled with complex emotions and countless considerations. This process, particularly in the investment management space, requires thorough preparation, strategic thinking, and an understanding of the many dynamics involved. In this post, we explore four critical areas that every investment manager must consider: developing a pragmatic pricing expectation, establishing a solid rationale for selling, preparing your firm’s financial documents, and understanding the tax implications of different deal structures.
CI Financial’s pivot from a planned IPO to the sale of a 20% convertible preferred stake of its US wealth management division to a consortium of institutional investors is not only a significant move for CI Financial but also sends ripples through the wealth management industry. In this post, we explore the details of this transaction, the potential consequences for CI Financial, and the broader implications for the wealth management industry.
The secret of selling your RIA for peak pricing lies in the terms, but it’s not as straightforward as it may seem. Investment management transactions these days involve creative deal terms, risk-sharing and evolving market conditions that keep the market bustling, despite a host of economic challenges. From managing buyer-seller relationships to balancing risk and reward, we explore how industry players are adapting to maintain the appearance of peak pricing, while carefully guarding against market downturns. Find out how the art of the deal is being redefined and learn how to navigate the market to achieve your transaction goals.
RIA M&A activity has remained resilient through the first quarter of 2023, even as macro headwinds have emerged for the industry over the past year. Fidelity’s March 2023 Wealth Management M&A Transaction Report listed 68 deals through March 2023, up 19% from the 57 deals executed during the same period in 2022. These transactions represented $108.3 billion in AUM—a 21% increase from the first quarter of 2022.
Last weekend I had a chance to join my dad for the annual Concours on Amelia Island, a fantastic gathering of car collectors and interesting automobiles of all kinds and eras. Coinciding with the weekend’s events were collector car auctions from all the major houses. A cursory review of prices paid and those auction sell-through rates suggest that there’s not much of a recessionary cloud hanging over the economy yet—at least not the economy inhabited by classic car buyers.
One car that caught my attention last weekend sold for a comparatively modest sum. The beautiful 1949 Packard convertible pictured above and featured at the RM Sotheby’s auction brought just under $45,000. If you’re younger than 65, you can be forgiven for not knowing Packard, as the marque was discontinued in the late 1950s. Bad markets and a bad transaction got the best of a great automaker, which is a cautionary tale for anyone planning the future of their business. This week, we review lessons from the consolidation of the automobile industry that have merit in the RIA space.
Stock consideration is rarely discussed in RIA transactions but is a common financing feature in other industries. We expect to see more stock-for-stock deals in RIAs for two reasons. As debt financing becomes more expensive (and scarce) and consolidators start to question how much leverage they want to maintain, buyers will be tempted to use equity consideration instead of cash. And if capital gains tax rates rise and sellers can use rollover equity to defer gains, the structure will become more attractive to sellers. How can a seller decide whether or not to accept a suitor’s stock? Find out in this week’s post.
RIA M&A activity set new records in 2022, even as macro headwinds for the industry emerged throughout the year. However, deal volume was most significant in the first half of 2022 and began to cool in the second half of the year, particularly in the fourth quarter. Although transaction volume is still up over the prior year, there has been a decline in the size of these transactions.
Before this year, yields didn’t move much and generally stayed between 2% and 8%, depending on the term and credit quality of the issuer. That all changed last November when the Federal Reserve and other central banks began raising interest rates to fight mounting inflationary pressures in the global economy. Now RIA aggregator bond yields are in the 6% to 14% range after fairly steady gains throughout this year.
The continued strength of RIA M&A activity amidst the current environment dominated by inflation, rising interest rates, and a tight labor market is noteworthy, given that all these factors could strain the supply and demand dynamics that have driven deal activity in recent years. Rising costs and interest rates coupled with a declining fee base will put pressure on highly leveraged consolidator models, and a potential downturn in performance could put some sellers on the sidelines until fundamentals improve.
When business owners think about the value of their firm, they frequently think in terms of the dollar value that they believe they could sell the business for in an arms’ length transaction. However, the nuances of real world transaction terms in the investment management industry can often obscure what’s being paid for the business on a cash-equivalent basis. In this blog post, we explore various transaction structures employed in the industry and their relationship to fair market value.
We’re sometimes surprised when we hear about buyers paying 20x EBITDA for RIAs with under $1 billion in assets under management, so you can imagine our reaction to MassMutual Ventures, Bessemer Venture Partners, and Khosla Ventures paying an implied valuation at 20% of AUM and 20x revenue for Farther Finance Advisors, a start-up, tech-heavy RIA with $250 million in AUM. We’ll explore the logic and potential pitfalls of this valuation in this week’s post.
As one of the more active acquirors in the investment management industry, Focus Financial Partners (Focus) has a broad perspective into the state of the RIA industry and M&A activity. In this week’s blog we summarize five key takeaways for RIAs based on Focus’ recent Q2 earnings release.
One reason deal activity can remain strong in tough financial markets is that buyers can use earn-outs to control what they pay for deals, offering more money in the event that markets recover and justify higher valuations, and managing their outlays if performance lags. For sellers, the relevant consideration is bear markets may tank a big part of their expected deal consideration, well beyond their control. A falling tide may not simply work to the detriment of sellers, but also hand buyers a bargain purchase when markets improve. Earn-outs align interests in the near term but can provide asymmetric benefits in years ahead.
Last week Pzena Investment Management, Inc. announced that it had entered into an agreement to become a private company again via a transaction in which holders of PZN Class A common stock would receive $9.60 per share in cash, a 49% premium to its closing price before the announcement ($6.44). In this week’s post, we attempt to rationalize this premium and any implications for the investment management industry.
The continued strength of RIA M&A activity amidst the current environment dominated by inflation, rising interest rates, and a tight labor market is noteworthy given that all of these factors could put a strain on the supply and demand dynamics that have driven deal activity in recent years. Rising costs and interest rates coupled with a declining fee base will put pressure on highly-leveraged consolidator models, and a potential downturn in performance could put some sellers on the sidelines until fundamentals improve. Despite these pressures, the market has proven robust (at least so far).
What does all this mean for your RIA if you are planning to grow through strategic acquisitions, considering internal transactions, or considering to sell? Read this week’s post to find out.
As we’ve been writing in recent blog posts, consolidation efforts in the RIA space are facing multiple headwinds. Among them, market conditions and inflation are motivating buyers to scrutinize profit estimates more than ever. In that light, we thought our readers would appreciate this guest post by our colleague, Jay D. Wilson, Jr., CFA, ASA, CBA, who works with banks and FinTechs. We’re getting more requests for QoE assessments from both the buy-side and sell-side (the latter wanting to buttress their CIMs).
RIA M&A activity and multiples have trended upwards for more than a decade now, culminating in new high watermarks for both activity and multiples set late last year. Deal momentum continued strong into the first quarter, but we sense at least initial signs of slowing as the macroeconomic backdrop has deteriorated.
