Sustained momentum will likely result in another year of record-breaking mergers and acquisitions activity among registered investment advisory firms, according to a report released this week by Echelon Partners, a boutique investment bank specializing in M&A and succession planning for the wealth and investment management industries.
Representing a transitioning and rapidly growing segment of those industries, RIA firms have been breaking M&A records year after year for about a decade. Now, halfway through the year and with a record 181 deals closed, 2022 appears it will remain on track to beat last year’s record—but Echelon analysts predict it will only do so by a hair.
After reaching an all-time high in the fourth quarter of 2021 with 99 closed deals, the number of transactions decreased in both subsequent consecutive quarters (to 94 and then to 87) while still combining for a record-breaking first half that represents a 39.2% increase over the first half of 2021, which saw only 130 transactions. The 87 deals that took place in Q2 of this year represented a 61% increase over the 54 deals that closed a year ago.
Even so, the report seems to suggest market conditions will dampen some of the enthusiasm that abounded in the second half of 2021, continuing the downward trend and resulting in nearly identical year-end totals. While 2021 saw 307 M&A transactions among RIAs, Echelon expects only 308 this year.
“The year-ago comps are relatively difficult, particularly for the fourth quarter, so it’s feasible that we’ll see a year-over-year decline in the second half,” agreed Peter Nesvold, partner at M&A investment bank Republic Capital. “However, all indications are that activity will remain elevated for at least the next several quarters.”
Along with the number of deals, the size has also begun to decline from 2021 record levels. Average YTD assets under management being transacted fell by 12.1% compared with all of 2021, dropping once again below the $2 billion mark as smaller acquisitions became more common. (Data excluded transactions over $20 billion.) Deals involving $1 billion AUM or more decreased by 20.9% from the last quarter of 2021 to the second quarter of 2022—from 43 to 34.
Four of the 10 largest Q2 transactions by seller AUM involved private equity infusions; two were debt financing raises; another two represent acquisitions by turnkey asset management platforms Morningstar and AssetMark; and broker/dealer Advisor Group acquired American Portfolios and Infinix Financial Holdings—with $40 billion and $30 billion AUM, respectively.
“The buyer makeup for the industry’s largest deals continues to be notably different than that of the broader wealth management industry with more activity by banks and private equity firms,” wrote the report’s authors. “The most notable private equity transaction of the second quarter is the recapitalization of Cerity Partners led by Genstar Capital. The transaction values Cerity Partners at approximately $1.6 billion and was for a controlling stake in the firm. The recapitalization will give Cerity Partners fresh capital to continue its aggressive M&A efforts that have seen the company announce five acquisitions so far in 2022.”
Pointing out that Cerity’s previous private equity partner Lightyear Capital is remaining a minority stakeholder following the transaction, the Echelon report maintains this is a trend that is likely to continue due to market growth dynamics.
Powered by private equity, consolidators and strategic acquirers remain the most active dealmakers, accounting for 46% of the YTD total, or 83 deals. This is about on par with their participation in 2021, when that cohort began acquiring in earnest. Likewise, banks remain on the other end of this spectrum, announcing only three transactions in Q2 and bringing their YTD share to a meager 2.7%—but all three transactions involved sellers with more than $1 billion in AUM and the $75 million in debt financing provided by First Citizens Bank to the $13 billion RIA Homrich Berg was among the quarter’s above-mentioned largest deals.
RIA-to-RIA M&A, while remaining below pre-2021 levels, still accounts for nearly 25% of all deals closed in 2022. According to the report, the diminished share is due primarily to the increasing prevalence of strategics and consolidators, the introduction of new buyer types and the rising valuations to which both have contributed.
In the ‘Other’ category, which comprises 27% of all 2022 deals (the same as all of 2021), private equity investors and asset managers have been joined by TAMPs such as Morningstar, AssetMark and Orion.
The report called Morningstar’s acquisition of the $19 billion SMArtX Advisory Solutions “an example of the continued convergence of the wealth management and Wealthtech sectors.”
“Meanwhile, AssetMark’s acquisition of Adhesion and Orion’s deal with TownSquare Capital demonstrate the consolidation trend within the TAMP sector that mirrors that which is occurring in the broader wealth management industry,” the report stated.
Year-to-date, private equity-backed RIAs are leading the M&A pack by volume, with Creative Planning topping the list with 12 deals, followed by Mercer Advisors with 10; Beacon Pointe Advisors with 8; Mariner Wealth Advisors with 7; Wealth Enhancement Group with 6; and Cerity Partners and Merchant Investment Management both with 5. (Mercer, Mariner, Beacon Pointe and WEG also appeared on the most active acquirer list for 2021.) Of the deals that have taken place in 2022, 66% (121) involved companies that have completed at least two deals this year.
“These firms have business models centered around scale and use M&A to drive growth,” according to the report.
In addition to investing liberally in wealth management at home, Echelon found private equity firms are increasingly looking abroad, with the report highlighting Bain Capital’s 24.9% stake in the $44 billion AUM, Mumbai-based IIFL Wealth Management and Emigrant Partners’ minority acquisition of $7 billion AUM Koda Capital in Sydney, Australia.
“Firms continue to look overseas for buying opportunities as the U.S. wealth management M&A market has become increasingly competitive,” according to the report. “Over the past two years, valuations have increased, and private equity investors have enabled large strategics to act on their consolidation efforts.”
Finally, Echelon expects that increasing M&A activity in the industry’s wealthtech subsector is a trend that is likely to continue as firms look to capitalize on ongoing innovation in the space.
“TAMP behemoths are committed to building new service lines and scaling current client bases via M&A,” according to the study.
Echelon, which played a part in brokering at least a handful of the deals closed in the first half of 2022, concluded there continues to be plenty of private equity capital available to fuel continued M&A activity, even in the face of potential macroeconomic disruption, and that investments in technology and international markets will continue to increase. While dealmaking has declined over the last two quarters relative to the end of 2021, the report’s authors believe 2022 is still on track to be another record year.
“I can’t emphasize enough how resilient the M&A market has been for RIAs,” said Nesvold. “For instance, consider the fact that M&A volume across all industries was down roughly 30% year-over-year in the first half of 2022, but it actually increased—albeit modestly—in the asset and wealth management sector. This is particularly striking given that most managers’ revenues are linked to the stock market.”
“What’s more,” he added, “we haven’t seen a material decline in valuation multiples. Buyers are definitely spending more time trying to mark-to-market firms’ EBITDA to reflect asset flows. So, EBITDA has softened but not the multiples.”
