Perhaps unsurprisingly given the macroeconomic background, the report suggests that pressures on RIA mergers and acquisition deals will increase, with transactions taking longer to complete. Even so, the overall picture is one of robust activity.

This year may see M&A deals in the registered investment advisor industry become more selective and amounts of leverage in transactions could fall as rising interest rates bite, and corporate marriages may take longer to consummate, a study said.

The comments come in the latest RIA Deal Room report from Advisor Growth Strategies (and sponsored by BlackRock). As Family Wealth Report has already noted, tightening central bank monetary policy to curb inflation may at some point reduce the pace and scale of deals. In recent years, the RIA deal-making arena has been busy, fueled by buyers’ desires to surf a wave of intergenerational wealth transfer and to capture cost efficiencies, and sellers’ goals of cashing out and retiring.

The report, entitled Back to the Future, said private capital continued to chase investments in the independent wealth management space and capital-backed RIAs grew through continued acquisitions as the median adjusted EBITDA multiple increased, but the rate of increase slowed. 

While stock markets tanked in 2022 as macroeconomic and geopolitical conditions changed, the RIA sector set another record for transaction volume as buyers expressed a cautiously optimistic tone for the year ahead but were modifying deal structures, it said. However, deal flow volume could decrease in 2023 from the year before.

Brandon Kawal, principal, and John Furey, managing partner, at Advisor Growth Srategies, told FWR in an interview that they expect multiples to decline this year. 

"While the bottom hasn't fallen out, we are seeing a tempering of multiples," Furey said. Multiples for M&A transactions are a lagging effect, Kawal noted. The challenges RIAs began to face last year, he said, are now being reflected in valuations.

Earnings multiple
The report tracked amounts paid for firms, expressed as a multiple of earnings before interest, taxation, depreciation and amortization (EBIDTA). The median adjusted multiple rose by 11 per cent between 2021 and last year, rising for a fifth year in a row, but median growth decelerated in the fourth consecutive year. Drilling into the numbers, the report’s authors said RIAs that are thinking of doing a deal have to contend with market returns plus the sort of client withdrawals traditionally seen. As a result, firms have had to think more about the structures of deals in an environment of fluctuating cashflow and revenue.

“2022 demonstrated that RIA M&A is operating on a strong foundation of supply and demand, and increased sophistication. Activity remained healthy as the industry set another transaction volume record with 225 deals, but the valuation data is not the only nuance. The RIA industry’s maturity allowed for a successful year even though conditions suggested deal-making should slow,” the report said.

The report also noted that deal structures showed “early signs” of moving away from the cash-intensive structures seen during 2019 to 2021, and a move toward more use of equity.