Is there a deal bubble in the frenzied RIA M&A market?
NEWPORT BEACH, California — Is there a deal bubble in the RIA M&A market, on pace for yet another record-setting year?
The highly charged question was posed at the opening session of Echelon Partners’ annual Deals & Dealmakers Summit by Rush Benton, senior director at Captrust Financial Advisors, one of the industry’s most active consolidators.
Judging by sheer activity alone, there’s a case to be made. Well capitalized buyers have been scouring the industry for advisory firms willing to sell and must often compete in fierce bidding wars to get deals done.
Valuations are rising. And Echelon Partners projects that by December — for the first time ever —more than 200 RIA deals will be struck in a single year.
While those factors make for a seller’s market, many executives at the conference said they aren’t concerned that the extremely competitive M&A market is over-inflating — yet.
Answering Benton’s question, top executives at firms that are major RIA buyers asserted that despite the heated marketplace, a bubble hasn’t emerged and price discipline was being maintained.
There is still discipline on the buy side
“There is still discipline on the buy-side,” said Dave Welling, CEO at Mercer Advisors, another leading aggregator. Elaborating in an interview with Financial Planning, Welling said that valuations for firms with less than $1 billion in AUM were “more reasonable” than larger RIAs.
Welling — whose own $16 billion firm is currently being shopped by its private equity owner — acknowledged that while “there was clearly a lot of demand” for available firms, the supply of RIAs for sale had “increased dramatically,” thus offsetting pressure on prices.
I don't think there's a bubble.
Kurt Miscinski, CEO of Cerity Partners, which has bought seven firms in the last nine years, agreed.
“I don’t think there’s a bubble,” Miscinski said. “There are too many deals being done on reasonable terms.”
Some M&A valuations may even be too low, argued Echelon CEO Dan Seivert. “The internal rate of return for high-quality RIAs can range between 30% and 50%,” Seivert said. “That’s high compared to many other industries, and buyers continue to see return opportunities for the value being offered.”
Other executives in attendance weren’t as sanguine.
“We’re closer to a bubble than not,” Greg Friedman, CEO of Private Ocean in San Rafael, California, told Financial Planning. “We’re definitely running into wild expectations on value in the marketplace.”
What keeps us up at night is that we don’t want to overpay.
Benton allowed that he was “a little concerned about a bubble in the high-end of the market.”
The possibility of skyrocketing prices disrupting the market particularly worried Benton and other buyers.
“What keeps us up at night is that we don’t want to overpay,” Benton said.
That may be hard to avoid.
“There’s a scarcity of good assets,” said Ed Swenson, COO of Dynasty Financial Partners, in an interview. “It’s like beachfront property. There’s only so much of it and everybody wants some. That scarcity leads to strong pricing.”
What’s more, buyers backed by private equity capital are under pressure to grow quickly and buy firms, noted Corey Kupfer, a high-profile industry attorney.
When there’s a fear of being left out, it’s tempting to buy for buying’s sake.
“Buyers are facing a lot of competition and it’s easy to be less disciplined about spending when you’re playing with other people’s money,” Kupfer told Financial Planning.
Then there’s the FOMO factor, Hoyt Stastney, CCO for Bronfman Rothschild said in an interview.
“There’s a lot of dry powder from capital sources,” Stastney said. “And when there’s a fear of being left out, it’s tempting to buy for buying’s sake.”
Indeed, buyers in a highly competitive environment must be wary of rushing into deals, cautioned Mark Tibergien, CEO of Pershing Advisor Solutions.
“What’s missing in a lot of deals is buyers taking the time to determine if an acquisition target is really additive to their culture,” Tibergien said. “Otherwise it’s like getting married after meeting someone on Tinder.”