Mergers and acquisition activity continues to be busy in the North America wealth industry, even as the financial and economic news is challenging. How much longer can this situation last, and what are the drivers at work? Regular FWR correspondent Charles Paikert looks at the data and talks to the sector.

When advisory firm transactions soared to record highs last year, M&A executives said the headwinds they feared most were higher interest rates and a stock market downturn.

Both have come to pass, yet M&A activity is on track for yet another record year, according to DeVoe & Company’s RIA Deal Book report for the third quarter.

The report stated that there was a “perfect storm of factors that should be compressing valuations and dragging down M&A volume.” Those factors include stock market volatility, interest rate increases, looming or actual US recession, employee turnover, and extreme global uncertainty. Nonetheless, “it is business as usual in RIA M&A land,” according to DeVoe.

Why?
“Wealth management M&A has passed the point of no return,” said veteran M&A investment banker Peter Nesvold, partner at Republic Capital Group. “There are more than a dozen professional acquirers in the industry. They are in the business of buying RIAs, not trying to time the market. At least so far, the decline in the equity markets hasn’t been enough to shake that.”

Nearly all of those aggregators are backed by private equity, noted Karl Heckenberg, CEO of Emigrant Partners and Fiduciary Network.
 
“Private equity raised a lot of money in 2019 and 2021,” Heckenberg said. “Given their incentive to deploy and the continued interest in wealth and alternative asset management, I don’t think you will see multiples drop much in 2022 and even early 2023.”

Sub-$1 billion deals driving market
Sales of small and mid-size firms are driving this year’s heavy volume, according to the Deal Book report from DeVoe and Company. Activity by RIA sellers with less than $1 billion in assets increased 54 per cent from the same period a year ago.

This surge in activity is partially due to delayed sales from the Covid era, the report said. After working extensively with clients during the pandemic, firms with under $1 billion in assets “engaged with latent succession and external sale strategies, which are now reflected in the numbers,” DeVoe said.

RIAs with less than $1 billion in AuM account for about 70 per cent of all transactions year-to-date, and 2022 is on track to potentially double the total number of transactions from 2020. This is a reversal of the trend the industry experienced over the past two years, when larger firms were the most active sellers.

The uptick in small and medium sellers, and the decrease of large and mega sellers, dragged down the average seller size. Only 6 per cent of transactions through Q3 2022 involved firms with $5 billion or more in assets. The industry average AuM of sellers during the first nine months of 2022 was $884 million, a 20 per cent decline from the 2021 average of just over $1.1 billion.