A number of firms in North America have been snapped up by foreign buyers, setting aside problems caused by COVID-19 - or even profiting from perceived falls in valuation - to make purchases. This also continues a mergers and acquisition trend in place for some time.

The US may be grappling with a pandemic, a recession and civil unrest, but global financial institutions are finding the American wealth management market as attractive as ever. International buyers have bought at least four US RIAs in the last few months, including two by CI Financial, of of Canada’s largest asset and wealth managers with approximately $175 billion in assets. 

Kingswood Holdings, a financial firm based in the UK and Swiss–based Cardea Capital have also bought US firms this year, and the Bank of Nova Scotia has announced it too plans to enter the US wealth management market.

“There’s clearly a desire to participate in the US market,” said industry consultant John Furey, whose firm, Advisor Growth Strategies, recently released a report on the US RIA M&A market. “Financial institutions see it as a very attractive market with a recurring revenue stream, good operators and growth potential. They’ve decided it’s worth it to deploy their capital here.”

CI Financial stakes its claim
The US also offers an alternative to well-established domestic markets.

“Canada is a very mature market and the US is the most attractive market for expansion, being four times larger than Europe,” CI Financial CEO Kurt MacAlpine, told this publication. 

The advisory business model itself is also compelling, according to MacAlpine.

“I firmly believe the role of the financial advisor is going to be more important than ever over the next twenty years,” he said, ”and that RIAs are the best business model for financial planners.”

MacAlpine is backing his rhetoric with cash. In addition to the two US firms CI Financial bought last year (Surevest Wealth Management and One Capital Management) and the two it has purchased so far this year (Cabana Asset Management and Congress Wealth Management), the Canadian firm will continue to be “very active” in the coming months, MacAlpine said.

“We’re buying at the fastest pace in the industry and that will continue,” he said.

To date, CI Financial’s acquisitions have had at least $1 billion in assets under management, but MacAlpine says he’ll also consider buying firms with around $500 million as well as minority stakes. “We’re pretty flexible,” he continued.

Are foreign buyers too bullish?                
But are CI Financial and other foreign buyers too bullish on the US market? And what challenges do they face as foreign buyers?

To be sure, buying a property in the early stages of a pandemic that might become widespread during a recession (possibly turning into depression), is not risk-free.

“The potential risk associated with COVID-19 is huge,” David DeVoe, who heads his own RIA M&A consultancy in San Francisco, said. “But wealth managers have been fortunate because their typical end client has not been in the cross-hairs for how COVID-19 is impacting unemployment.”

Other industry executives note that the keen competition for US wealth management firms may be forcing foreign buyers to overpay.

“It’s a very active market,” said investment banker Steve Levitt, managing partner at Park Sutton Advisors. “We’re seeing ten buyers for every seller. Multiples are up and it’s definitely a sellers’ market. There are a lot of people who are prepared to write significant checks.”

MacAlpine countered that descriptions of an overheated market are exaggerated.

The US advisory market is “relatively efficient and trading for what it’s worth,” he said. CI Financial isn’t overpaying for US properties, he insisted, but added that it is “willing to pay fair market value.”

What is that value?
According to Advisor Growth Strategies 2019 M&A review, the median adjusted EBITDA multiple increased to 6.6x in 2019, a nearly 30 per cent jump from the prior year. Firms with more than $2 billion in assets, however, commanded a substantial premium, reaching a multiple of at least 10 times cash flow. And the very best firms, according to Furey, can sell for multiples in the mid-teens.

What’s the value proposition?
Foreign buyers also face challenges of a cultural fit and familiarity with the US market, according to industry observers.

“It is harder for them,” said Furey. “They’re at a disadvantage when it comes to cultural fit. Foreign buyers need a US agent on the ground and, in addition to cash, they need to show sellers they have a worthwhile value proposition.”

CI Financial pitches itself as a hands-off strategic partner that can provide a permanent source of capital to help RIAs grow and solve internal succession planning needs.

The Canadian company also says it can provide US advisory firms referrals to its Canadian clients who spend much of their time in their second homes in the states. These “cross-order referrals,” can total over 300,000 clients, MacAlpine said.

Those selling points sounded good to Boston-based Congress Wealth Management, which sold CI Financial a minority stake last month.

“We’re looking to expand across the country and have very aggressive growth goals,” said Scott Dell’Orfano, Congress’ chief strategic officer. “CI provides us with access to capital and their existing Canadian clients that reside in the US can drive distribution to their US affiliates. That’s a good value that not a lot of firms can offer.”

Kingswood’s US RIA and broker-dealer, which the British firm bought from Chalice Financial Network, is also benefiting from its new owners, said chief executive Derek Bruton.

“We want to build a significant wealth management business in the US and Kingswood has the capital and resources to make it a reality,” Bruton said. “They offered the right solution set and showed they want to develop a relationship based on trust.”

And foreign buyers, especially Canadians, can point to a solid track record in the US wealth management market.

Toronto-based CIBC, for example, has had a string of successful US acquisitions, including Atlantic Trust in 2013, The Private Bank in 2016 and Lowenhaupt Global Advisors last year.

Don’t expect the foreign-buying trend to go away anytime soon, said industry consultant Mike Papedis, managing partner of Fusion Financial Partners.

“Demand is high,” Papedis said. “It’s a good financial investment for the buyer if RIAs can deliver an internal rate of return of between 20 per cent and 30 per cent. And there are many sellers in the RIA space who don’t have a succession plan, need growth capital and want to achieve more scale.”