A weekly update on issues important to the Investment Management industry
A racecar is an example of something that, as a whole, is greater than the sum of its parts. An RIA is another example. But, breaking down an RIA into constituent functions yields certain understandings that cannot be seen clearly by focusing on the whole. In this post, we think about what can be learned from component analysis of RIA returns.
A recent CityWire article noted that private equity firms are extending their holding periods for RIA aggregator firms to take advantage of the industry’s higher margins and long-term growth prospects. This stalling tactic shouldn’t spook their LPs since the RIA sector is renowned for its recurring revenue, above-average margins, and demonstrated ability to grow cash flows over an extended period of time. Not many industries have businesses that can sustain The Rule of 40, which posits that venture investors prefer to invest in businesses in which the profit margin plus the growth rate adds up to at least 40%. The investment management industry is a notable exception since it typically boasts EBITDA margins in the 20% to 30% range and annualized growth in revenue on the order of 10% to 15%. So what’s so scary about paying +15x EBITDA for these businesses? We explore in this week’s post.
Alternative asset managers fared particularly well during favorable market conditions for the RIA sector. Over the past year, both alternative asset managers and large RIAs (with assets under management, or AUM, exceeding $250 billion) outperformed the S&P 500, achieving gains of 64.6% and 37.7%, respectively. As these dynamics continue into Q4 2024, the outlook for continued multiple expansion and robust deal activity for alternative asset managers remains favorable.
Following a year where deal volume in the RIA industry nearly matched the all-time high of 2022, RIA M&A activity has cooled in 2024. Fidelity’s September 2024 Wealth Management M&A Transaction Report listed 155 deals through September 2024, down 11% from the 174 deals executed during the same period in 2023. As RIA deal activity experienced a greater decline than the broader M&A market, we explore what this means for your RIA.
RIAs outperformed the S&P in the third quarter of 2024, with alternative asset managers experiencing the strongest returns amid multiple expansion. All groups examined experienced growth in AUM and revenue year-over-year. We explore further in our Q3 2024 Market Update.
In the investment management world, evaluating a firm’s margin isn’t as simple as “more is better.” For RIAs, margin reflects efficiency, but it also reflects the firm’s tradeoffs with compensation. Investment management is a talent business, and striking the right balance between margin and employee compensation that allows the firm to attract, retain, and incentivize talent is critical to an RIA’s success.
To the surprise of many, it’s been another very good year for the RIA community — but success can be fleeting. Whatever brings about the rollover in industry trend lines, we all know it’s coming at some point. So, if 2024 is indeed the peak of the cycle for the investment management industry, what will you one day wish you had done now?
For some reason, we get this question every four years or so: does this election matter to the RIA industry? Let’s start by saying that with all of the hot-button issues the candidates are currently squabbling about, the RIA industry does not appear to be top of mind for the former president and current vice president. We, therefore, have to step back and think about what either candidate’s election would mean for the broader financial services industry, taxes, and stock market returns, which we cover in this week’s post.
Despite the growth of the defined contributions sector, many RIAs have avoided retirement plans in favor of larger opportunities. This leads to the question: are retirement plans an underappreciated growth opportunity for RIAs?
As long as I can remember, RIAs and other closely-held businesses have used corporate owned life insurance to fund redemption provisions in buy-sell agreements. That practice is now in doubt, as the U.S. Supreme Court recently ruled that entity-purchased life insurance is additive to value for fair market value purposes. Has SCOTUS rendered what was long-standing conventional wisdom useless, or is the ruling subject to interpretation? Time will tell. For now, readers of this blog post will want to study the ruling and its implications for their own buy-sell agreements.
