RIA Valuation Insights

May 3, 2024 Transactions

Should You Accept Rollover Equity?

Road to Riches or “Worst Idea Ever”

If you’ve been offered rollover equity as part of a sale of your investment management firm, this post should offer a few things to consider on your road to riches. Rollover equity has become a standard feature of deal consideration in the RIA industry. At one time, sellers were typically offered cash plus an earnout to sell their firm. Both of these forms of payment are still prominent, although cash consideration has waned. We expect rollover equity to remain a prominent feature of deal consideration for the foreseeable future.

April 26, 2024 Transactions

What to Look for in a Quality of Earnings Provider for RIA Transactions

RIA dealmaking remains fairly robust, with a near-record year in 2023 and a significant uptick in year-over-year total transacted AUM during the first quarter of 2024.  In this environment, adequate due diligence is critical since the cost of corporate M&A failures is high for both buyers and sellers. A Quality of Earnings (or QofE) analysis is an essential component of transaction diligence for both buyers and sellers. Optimizing your transaction diligence requires assembling the right team. We discuss the five things RIA buyers and sellers should look for when evaluating potential QofE providers.

April 19, 2024 Alternative Asset Managers Asset Management Industry Trends

Market Resilience: Asset Managers Thrive Amidst Economic Volatility in 2023

Despite persistent inflation, elevated interest rates, and heightened geopolitical tensions, the asset management industry and the stock market as a whole saw a resurgence during 2023.  Our index of publicly traded asset management firms generally tracked the movement in the broader market, with stock prices for smaller asset managers (AUM under $250 billion) up 30.3% and large asset managers (AUM over $250 billion) up 22.0% over the year ended March 31, 2024, while the broader market (S&P 500) was up 29.9%. Read more about the market’s resilience and future outlook in this week’s post.

April 12, 2024 Transactions

RIA M&A Update: Q1 2024

Following a year where deal volume in the RIA industry nearly matched the all-time high of 2022, RIA M&A activity cooled in the first quarter of 2024. RIA deal activity experienced a greater decline than the broader M&A market, with activity dropping 29% compared to the M&A activity for all industries, which fell 9%. However, despite the decline in the total number of deals, there was a significant uptick in total transacted AUM during 2024. Total transacted AUM through March 2024 was $139.2 billion—a 63% increase from the same period in 2023. Get the details in this week’s post.

April 5, 2024 Industry Trends

RIA Market Update: Q1 2024

With Valuations Up, Investor Interest Moves to Alts and Big-Name Managers

Share prices for most publicly traded asset and wealth management firms trended up alongside the broader market in Q1 of 2024. Alternative asset managers continued to outperform the S&P 500 and other RIAs, ending the quarter up about 12.6%. On a year-over-year basis, all sectors of RIAs experienced growth as the markets rebounded from the 2022 slump.  Read more for a full overview of RIA performance.

March 29, 2024 Transactions

Revenue Share Transactions: Considerations for RIAs

Revenue share transactions offer a strategic option for RIA owners looking to monetize a portion of their firm without ceding control, addressing needs for succession, growth capital, and liquidity. This structure benefits sellers by allowing minimal operational interference post-transaction, as the investor’s return is tied to top-line revenue rather than bottom-line profit. However, revenue shares shift risk to common shareholders and require careful structuring to function effectively over time.

March 22, 2024 Practice Management

An Ontological Approach to Investment Management

Review of “Winning at Active Management” by William W. Priest et al.

“Winning at Active Management” by Bill Priest is an important book for managing a successful investment management practice. Emphasizing the importance of corporate culture, Priest argues against traditional command-and-control structures, highlighting that knowledge-based businesses like investment management thrive on intellectual contributions from all levels of the organization. The book provides a fresh perspective on the role of culture in mergers and acquisitions within the investment management sector, preaching that cultural compatibility is crucial for the success of such transactions.

March 13, 2024 Margins and Compensation

How EBITDA Margins Affect Revenue Multiples

Whenever someone asks us what their RIA is worth as a multiple of revenue, we respond by asking about their firm’s EBITDA margin. This week’s blog post explores how RIAs can enhance their value by focusing on EBITDA margin, revealing the pivotal role of profitability in investor attractiveness. It also provides strategic insights for balancing growth and profitability.

March 8, 2024 Practice Management Wealth Management

Employee Alignment Is Essential in Wealth Management

Employee alignment is crucial in asset and wealth management due to the industry’s reliance on human capital. Creating alignment between employees and shareholders is essential for the growth and success of these firms, particularly for firms with non-employee ownership. Effective compensation models and incentive programs can align interests, supporting the long-term growth and success of the enterprise.

March 1, 2024 Practice Management

Capital Budgeting for Team Building

Tools for Long-Term Greedy Practice Management

The recent cancellation of Apple’s decade-long “Apple Car” project underscores the opportunities that capital budgeting offers for strategic decision making. Capital budgeting is a modeling exercise that has applications in the RIA community as well, where resource allocation decisions are more likely to involve human capital as opposed to equipment. This week, we explore the concept of returns to labor versus returns to capital in investment management, illustrating how long-term strategic thinking about human capital can lead to significant returns using the same tools integral to decision making at industrial concerns.