Further rises to US interest rates, and the drama around Silicon Valley Bank and other lenders such as Credit Suisse, raise questions about what the macroeconomic story means for the M&A market among financial advisory firms.
Rising interest rates haven’t torpedoed the RIA merger and acquisition market to date, but how long the industry can continue to dodge that bullet remains unclear.
The US Federal Reserve Board’s quarter-point rate hike last week [March 22] and accompanying forecast of an additional increase possibly as soon as May has put interest rates squarely in the M&A spotlight. The Fed’s most recent 25 basis point increase has been taken in stride “because markets tend to absorb telegraphed changes well,” said veteran dealmaker M&A veteran Peter Nesvold, partner at Republic Capital Group. “It’s surprise moves that disrupt the indices.”
The anticipated rate increase in May has also already been priced in deals, said Brooks Hamner, vice president at valuation firm Mercer Capital. But additional escalations could have “an adverse effect on market conditions,” Hamner warned.
Beyond May, rate increases “may start to slow activity more than the limited drop we’ve seen,” agreed Dustin Mangone, director of investment advisor services for PPC Loan, a major lender to RIAs.
Even though interest rates have risen steadily for over a year from near zero to a range of 4.75 per cent to 5 per cent, they “haven’t had a material impact to the portion of the market where most deals happen,” Nesvold said.
Deal activity slowing
“Some of the very largest RIAs that took substantial debt loads have some capital structure work to do,” he added, “which could slow some of the deal flow. But at this time, there are plenty of buyers picking up any slack.”
Nearly three months into the year, however, the registered investment advisor M&A market has been “choppy,” with deal volume down approximately 10 per cent, according to David DeVoe, principal of San Francisco-based RIA consultancy DeVoe & Co.
Large aggregators backed by private equity are still willing to pay up for quality firms, DeVoe said, but smaller acquirers appear to be pulling back from M&A activity “because of lending costs and greater challenges to raise capital.”
Indeed, nearly two-fifths of RIA transactions through February
involved sellers with greater than $1 billion in AuM, compared
with only 16 per cent in last year’s fourth quarter and 29
per cent in the same period last year.