Just over 30 years ago, the Memphis Area Transit Authority (“MATA”) made the dubious decision to construct a trolley line traversing most of the city’s downtown area.  It hasn’t gone well.  The entire streetcar transit system was halted in 2014 when two trolley cars caught on fire in the span of six months.  Shortly after coming back online in 2018, a MATA trolley collided with a pedal tavern, and in 2022, another trolley hit a parked MPD patrol car.  I live downtown and rarely see anyone riding them.  If MATA could do it all over again, I suspect they would divert taxpayer funds to a more viable project, and I’m a little surprised they haven’t permanently closed the trolley system altogether, given the issues they’ve had over the years.

Last year, many RIA industry participants expected a similar cessation to dealmaking in the sector following the adverse impact of higher interest rates and inflation on investment managers’ AUM balances and profitability in 2022.  Fortunately for the industry’s bankers, these economic headwinds haven’t derailed the sector’s M&A momentum.  Fidelity recently reported 227 deals last year involving RIA sellers with $100 million or more in assets under management, only a 1% decline from 2022 levels.

Bomy Hagopian of Berkshire Global Advisors partially attributes this phenomenon to aging advisors seeking a solution to their succession challenges.  The industry’s looming succession crisis is well documented since a majority of RIAs are still led by their founders, and only about a quarter of them have non-founding shareholders.  Selling the business to an aggregator, PE firm, or strategic buyer is often a viable solution for a founding principal looking to exit his or her position and build liquidity prior to retirement.

Ms. Hagopian also attributes the sector’s dealmaking resiliency to increasing demand for advisory services from wealthy individuals and growing interest from PE firms and RIA aggregators in the space, particularly over the last five years.  In 2019, 39% of all RIA transactions targeting firms with $100 million or more involved private equity-backed buyers, according to Fidelity.  In 2023, that percentage had doubled.  Large aggregator firms have also begun combining firms within their network to enhance operating efficiency and take advantage of economies of scale over the last six months.  This professionalization of the buyer market and the entrance of outside capital have driven demand and increased competition for deals.

Inflationary trends have also increased operating costs for RIAs, and many firms are turning their attention to the M&A market to reduce expenses and maximize value.  As HNW clients increasingly demand more from their financial advisors, many RIA buyers are looking to adjacent businesses to round out their service offerings, including tax and accounting, investment consulting, and trust services.

RIA multiples have also held up reasonably well despite our premonitions.  Transaction multiples in most other industries have been adversely affected by the impact of higher interest rates and capital costs, but so far, there has been little or no evidence of that in the RIA space.  Instead, we’ve seen more of the total purchase price pushed out from the down payment to some sort of earn-out or contingent consideration to protect buyers and bridge the valuation gap.  As long as the target firm continues to perform well after the acquisition, the transaction value and resulting multiple should hold up as well.

These favorable M&A trends for the RIA industry may not persist into perpetuity, but it’s hard to envision any of them reversing course in the near term.  Growing demand for wealth management services, favorable demographic trends, and continued interest from private equity and RIA aggregator firms mean sector dealmaking will likely hold up for this year as well.  The election is unlikely to have much impact on investment management M&A since both candidates’ impact on the industry was relatively muted during their presidencies.  So, as MATA has a trolley issue, it’s unlikely the RIA sector will have a MAGA issue if Trump gets reelected, and it’s also hard to envision that a second term for President Biden would have much impact either.  Unlike the MATA trolleys, there will not be a four-year pause under either scenario.

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.