No end in sight: Torrid RIA M&A market set to exceed 200 deals in '19

July 9, 2019 6:08 PM

The wealth management M&A market is on a white-hot streak and is poised to blast through the 200-deal barrier to hit an all-time high by year’s end, according to Echelon Partners RIA M&A Deal Report.

Already deal volume is more than halfway to a new annual high: Echelon documented a record 52 transactions in the second quarter ended June 30, following 49 deals in the first quarter. Last year there was a total of 181 M&A deals.

Fidelity Clearing & Custody Solutions, which has a narrower set of reporting criteria for RIAs, is also reporting a record volume of deals and transacted AUM for the first half of 2019.

And there’s even more to the market frenzy than meets the eye, says Carolyn Armitage, Echelon’s managing director. A “hidden market” of smaller deals, which are not publicly noted, more than doubles the number of M&A transactions recorded by firms like Echelon, Fidelity and DeVoe & Co., says Armitage.

Here’s a breakdown of key industry trends at midyear according to Echelon:

Why the M&A market is still sizzling

“It’s perceived to be easier to grow inorganically,” Armitage says. “If you can acquire $500 million in client assets at once versus winning each client individually – and if there’s a good cultural and investment philosophy fit – that’s a tremendous win.”

And private equity capital continues to pour into the independent financial advisory space.

Compared to other options in financial services, wealth management offers private equity firms “the best return for their money,” Armitage says. “Their internal rate of return for these deals is phenomenal, much better than historical norms.”

Who’s buying

Strategic buyers and one-off RIA-to-RIA acquisitions dominated the M&A market, accounting for nearly 75% of all transactions, according to Echelon.

At midyear, strategic buyers with the most RIA acquisitions were Focus Financial Partners (16), Mariner Wealth Advisors (6), Captrust Financial Advisors (5) and Mercer Advisors (4).

The biggest RIA deal of the second quarter, however, was transacted by a Wall Street giant: Goldman Sachs purchased United Capital for $750 million, at a multiple estimated to be around 18 times EBITDA.

Small ball

Average deal size for the first half of 2019 decreased to just over $1 billion in AUM, compared to an average AUM per transaction of $1.27 billion in 2018.

“The declining average AUM supports a key trend of 2019: record deal volume is being driven by smaller firms,” the Echelon Deal Report states.

Firms with less than $1 billion in AUM know they need growth and scale to increase their operating efficiency and value.

What’s more, the more deals smaller firms transact, the more experience they gain, Armitage points out. “There is an increase in buyer preparedness,” she says. “The process is not as haphazard as it used to be and the market is more efficient.”

Splitsville

The number of breakaways from wirehouses, independent broker-dealers and large RIAs more than doubled in the second quarter to 192 from 94 in the first quarter.

The headline goodbye was the staggering exodus of approximately $17 billion in client assets from First Republic’s Private Bank after the team from Luminous, which joined the bank seven years ago, left to form two new RIAs.

But a combination of factors drove many dozens of smaller teams to split from their mother ships: aging advisors, a desire for liquidity, a maturing business cycle and attempts by some wirehouses to foist onerous retention packages on their brokers.

The increasing number of firms that can help brokers transition to independence and provide financing has also spurred breakaway volume, according to Echelon.

“The break-even point for breakaways is getting shorter and shorter,” Armitage says.