Share prices for most publicly traded asset and wealth management firms trended upward with the broader market during Q4 2023.  For the second quarter in a row, alternative asset managers outperformed the market and other RIAs, ending the quarter up about 21% compared to 11% for the S&P 500.  On a year-over-year basis, all sectors of RIAs experienced growth as the markets rebounded from the 2022 slump.  RIAs directly benefit from improving market conditions as they result in a stronger asset base on which to collect fees.

Performance by Sector

The market uptick in Q4 translated to increased prices for most public RIAs.  Prices for alternative investment and traditional asset managers experienced a stronger increase than the S&P 500.  In the last twelve months, most RIA sectors saw a decline in year-over-year revenue despite rising AUM reflecting fee compression.  Year-over-year price performance showed this, with aggregators and traditional asset managers underperforming the S&P 500 in 2023.  Notably, however, alternative asset managers outperformed for the year.  Market volatility since 2020 is one of the factors responsible for the increased demand for alternative asset manager stocks.  Private equity funds and other alternative investment vehicles typically lock in assets for ten to twelve years, leading to a more predictable and stable revenue stream that is less correlated with the broader market.

Performance by Size Category

RIA performance during Q4 varied by AUM size.  Larger RIAs (the $100b to $500b and the >$500b AUM groups) outperformed the S&P 500, RIAs with AUM between $10b and $100b performed on par with the S&P, and the smallest RIAs (those with AUM under $10b) underperformed.  Similar trends exist for the full year 2023.  The smallest RIAs faced a decrease in share price for the year, whereas all other RIA size groups and the S&P increased in value during the same period.

Pricing Trends

The median LTM earnings multiple for publicly traded asset and wealth management firms increased 18.3% during the fourth quarter of 2023.  After trending downwards for most of 2022, multiples began to increase during the first half of 2023 as LTM earnings metrics began to fully reflect the impact of 2022 market conditions.  The multiple increase in Q4 represents a recovery from the short-lived Q3 trough inflicted by price declines.

Implications for Your RIA

The value of public asset and wealth managers provides some perspective on investor sentiment towards the asset class, but strict comparisons with closely held RIAs should be made with caution.  Many smaller publics are focused on active asset management, which has been particularly vulnerable to headwinds such as fee pressure and asset outflows to passive products.  Many sectors of closely held RIAs, particularly wealth managers and larger public asset managers, have been less impacted by these trends and have seen more resilient multiples as a result.  In the case of wealth management firms, strong demand from aggregators has also helped to bolster pricing in recent years.  Focusing on the fundamentals of your RIA—compensation structures, cost controls, hiring practices, etc.—may offer protection from arbitrary changes in market multiples.

In our Q3 2023 M&A update, we described an increase in volume of transactions, both in number of firms and AUM transacted.  M&A is often viewed as a lagging economic indicator since deals take several months or even quarters to complete.  Later this month, we will report on Q4 2023 M&A activity to keep you informed on market trends.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of asset managers, wealth managers, independent trust companies, broker-dealers, PE firms and alternative managers, and related investment consultancies.