A heretofore sleepy niche has emerged as a driving force in the RIA M&A market.
Subacquisitions, the purchase of a smaller RIA by a larger firm that itself had been previously acquired, have nearly quadrupled since 2014 and now comprise 22% of all M&A transactions by established RIAs, according to DeVoe & Co.'s latest industry report.
"RIAs who are affiliated with consolidators and private equity are taking advantage of the capital and M&A expertise now at their disposal that they didn't have before," says David DeVoe, managing partner and founder of the San Francisco-based consulting, research and transition planning firm. "They're now able to do deals with firms that have between $100 million and $300 million in AUM and the results are just starting to show up in the numbers."
DeVoe recorded 19 subacquisition deals last year, which accounted for 12% of all M&A transactions (including breakaways), but only four subacquisition deals in 2013, which covered just 7% of all transactions.
GETTING IN THE GAME
"Subacquisitions have become an important extension of many consolidators' M&A strategies," the report states, "enabling the parent to accelerate growth while engaging a segment of the market that otherwise would not have been an efficient use of time."
Two of the most prominent firms using subacquisitions have been Colony Group and Buckingham Asset Management, both affiliated with Focus Financial Partners.
"Strategic transactions have been an important part of our growth," says Michael Nathanson, Colony's president and CEO. "Each has been a means to add substantial talent to complement our team. We see these deals as an efficient means to hire people with new expertise, new skills, and new ideas. They also have enabled us to penetrate new geographic areas, as well as new client segments, including institutions, professional athletes, and family-office clients."
RIAs backed by private equity capital, including Mercer Advisors (Genstar Capital) and Wealth Enhancement Group (Lightyear Capital) have also been active in the subacquisition market, DeVoe noted.
And large firms which received infusions of private capital last year, such as Savant and Carson Wealth Management, are poised to take advantage of their newly enlarged war chest this year.
Indeed, RIAs dominated as the most active buyer category last year, acquiring 50% of established RIAs that were sold. Consolidators accounted for 24% of established RIAs sales, a steep decline from the 45% of deals they transacted in 2014.
Overall, total M&A transactions reached a record-setting 142 last year, according to the DeVoe report, up from 132 in 2015.
Sales of large RIAs with AUM over $1 billion were particularly strong, according to the report, driving the average AUM of established RIA sellers past the billion dollar mark for the first time.
Barring a 2008-like crash, DeVoe sees the record-setting pace of the RIA M&A market continuing, although he cautions that if the number of potential sellers increases dramatically, there are "not enough buyers to absorb the supply."
BRAKES ON BREAKAWAYS?
He also thinks breakaway activity may slow, noting that wirehouse brokers who got favorable seven-year forgivable loan deals after the financial crisis have probably already left their brokerage firms.
Nonetheless, the report predicts that RIA M&A activity will continue to increase and "could potentially accelerate dramatically during the next five to seven years."
DeVoe says that in the 14 years he's covered the market, "I've never seen such a high degree of openness to talking about transactions. Advisers are seeing the power of scale that they didn't see before. Strategic decisions relating to the benefits of scale have been the key driver in the M&A market, not aging adviser demographics."
The DeVoe report follows M&A studies by Fidelity Institutional, which noted that large RIA buyers are becoming more discerning, and Echelon Partners, which cited a surge in breakaway deals and billion dollar transactions.
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