Why RIA Mergers, Acquisitions Buck A Global Trend

Charles Paikert

19 September 2023

RIA deal-making continues to swim against the tide.

As interest rates and borrowing costs have risen over the past year, global M&A activity has, not surprisingly, slumped. But the number of RIA deals in the first half of 2023 fell only one per cent year-over-year, compared with an over 30 per cent decline in total M&A, according to valuation firm Mercer Capital.

What’s more, this past August proved to be the second strongest August on record in terms of RIA M&A activity with 20 announced transactions, and the third strongest August with $21.6 billion in purchased assets, according to the latest Wealth Management M&A Transaction report from Fidelity.

And DeVoe & Co, the San Francisco-based M&A consultancy, expects this year’s third quarter to be the first quarter that is higher than the year-prior same quarter since Q3 2022.

What gives?
So why is the RIA M&A market bucking the industry trend?

The lack of viable internal buyers is one reason, say both DeVoe & Co and Mercer. Only 18 per cent of surveyed advisors are confident that the next generation can afford to buy out the firms’ founders, according to DeVoe’s annual RIA M&A Outlook Study, unveiled at the company’s Succession Summit in Dallas this week.

That percentage is down significantly from just two years ago, the study noted, when 38 per cent of advisors felt that internal transactions could occur.

Big RIA buyers also face pressure to keep doing deals, argued Mercer vice president Zachary Milam in the firm’s weekly newsletter. Active acquirers have “invested significantly in various deal-making apparatuses, including dedicated deal teams and integration teams,” Milam wrote. “All of that infrastructure needs to be put to use so deals keep happening – at least in the short run.”

The PE factor
Private equity capital, which funds so many deals, is also a factor, Milam added. Unlike capital from an RIA’s own balance sheet, PE capital has a mandate attached, he pointed out.

“Private equity firms are beholden to their investors, and RIAs backed by PE are beholden to their PE backers,” according to Milam. “Private equity funds don’t have the luxury of sitting on the sidelines forever. Thus, there’s an impetus to put capital to work, even if that means looking for the least bad deal. If funds become more difficult to raise , there won’t be as much hot money chasing the RIA space.”

New buyers
Strong demand from first time buyers is also fueling the RIA market, says Fidelity’s vice president of practice management and consulting Laura Delaney.

Ninety per cent of acquisitions in August represent firms under $1.0 billion in AuM, Delaney noted, “which reinforces the notion that smaller RIAs continue to partner with larger, more scaled firms to keep up with evolving client needs, strengthen their competitive edge, and build enduring, persevering firms…The combination of a slight strategic acquirer pull-back, continued private equity investment, and more favorable deal structures, may have chartered this more suitable path for first-time acquirers.”

And buyer demand overall remains robust, with nearly two-thirds of surveyed advisors reporting that they expect to acquire a firm within the next two years, according to the DeVoe study.

“RIA M&A activity may continue to be volatile in the short-term; yet the mid-term and long-term should be an upward trajectory,” said CEO David DeVoe. “The aging of RIA founders and an increasing interest in scale are expected to drive increasing M&A activity for the next several years.”