Market conditions in 2015 are ripe for the RIA industry's two largest aggregators to cash out, according to industry expertsbut United Capital and Focus Financial insist they'll continue to hold their cards.
"There's a lot of interest in the space, and very few options in the public markets," says Michael Abelson, executive vice president of Corporate Development at AssetMark, the Concord, Calif.-based service provider and consulting firm. "For buyers, the cost of funds is very low, big companies have money in their war chest and buying now is an easy case to make. For sellers, AUM levels are high, valuations are rich and if the objective is to buy low and sell high, selling now is an easy case to make - or they can keep riding the wave."
Both United Capital, which has 50 offices around the country and more than $9 billion in assets under management, and Focus, which has 30 partner firms and approximately $41 billion in AUM (including nondiscretionary assets), say they plan on doing the latter.
"The market is very ripe for any interesting national financial platform to have an IPO," says United's chief executive officer Joe Duran, "but we want to be the first billion dollar national brand in financial guidance and we are not there yet. We want to go to market when we are at the optimal size that markets would be most interested, and that would be a market cap over $1 billion."
Rudy Adolf, Focus' founder and chief executive, says he's also holding out.
"There is no question that the market would receive a major player in the independent space with open arms," he says. "Focus absolutely has the scale and track record for such a step but we are very profitable and we have lots of flexibility from a capital perspective. We recently returned over $200 million in cash to our shareholders, we currently deploy over $500 million in capital and have all the firepower we currently need."
But the temptation to sell or go public will remain formidable, industry analysts say. "The aggregators have more momentum than ever and are arguably more valuable than ever," says Alois Pirker, research director for Boston-based Aite Group. "The IPO opportunity is certainly there next year."
'SIGNIFICANT SUPPLY/DEMAND IMBALANCE'
"There's a significant supply/demand imbalance, and not a lot of businesses to buy," says Shirl Penney, president and chief executive of Dynasty Financial Partners, the New York-based platform provider. "If anyone wanted to exit, the RIA space is a good one right now."
The favorable market conditions boosting aggregators extends to most growing RIAs thinking of selling as well.
"2014 was a record year for M&A transactions, driven by breakaways joining consolidators and other RIAs," says San Francisco-based industry consultant and mergers and acquisitions specialist David DeVoe. "The increase of breakaway broker activity is due largely to the aging forgivable loans written in 2009/2010.
The average deal size for established RIAs that sold in 2014 increased to $745 million from $681 million, according to DeVoe & Co.'s research, and consolidators acquired 51% of the established RIAs that sold last year versus 37% in 2013.
RETENTION AND RETIREMENT
DeVoe expects the trends to continue in 2015, driven by expiring retention deals for wirehouse brokers and more advisors nearing retirement age.
Firms with over $1billion in revenue will be particularly attractive to buyers, he says.
"These firms have scale, they have systems in place and they give buyers like consolidators more bang for the buck," according to DeVoe. "As a strategic play it's 1 plus 1 equals 3."
But the limited number of large firms will also mean more activity at middle and smaller firms, says AssetMark's Abelson.
"Successful RIAs want to expand, and are looking at growing their AUM by 15% to 20%," he says. "I think you'll see continued integration of firms with less than $1 billion or $500 million in assets."
CONSOLIDATORS AND CANADIANS
Industry aggregators are also vowing to remain active in 2015.
United expects to acquire 6 firms and at least $2 billion in assets, according to Duran. The company's acquisition strategy is to "be selective and be smart," he says. "Buy only firms with cultural alignment and where we can materially improve the value of the underlying firm."
Focus closed five partnership deals in 2014, oversaw 16 internal mergers and expects another "strong year" from its core RIA mergers and successions businesses in 2015, says Adolf. "Very high levels of dissatisfaction" among wirehouse brokers, along with many expiring retention deals will add up to "terrific opportunities ahead," he predicts.
Most industry observers agree with Duran that 2015 will be "a sellers' market for RIAs with lots of new well-funded entrants into the market and the return of bank purchasers." Banks or other large financial institutions from outside the U.S. may also be prime acquirers, says DeVoe, citing recent major Canadian purchasesthe purchase of Atlantic Trust by Canadian Imperial Bank of Commerce last year and investment manager Fiera Capital buying Bel Air Investment Advisors in 2012.
"The current environment has great potential for large non-U.S. players to get their footprints in this market," he says.
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