Most investors suffered a stomach-churning rollercoaster ride last year as market uncertainty ruled the day. But what was happening to client portfolios did little to affect the appetites of either buyers or sellers in the RIA space. When it came to merger and acquisition (M&A) activity among RIA firms, 2022 was a year of more of the same. Only more so, as new records were set in terms of volume and multiples.
It's unlikely that we’ll set new records again this year, but there’s no doubt that deals will continue, although they require additional creativity and take longer to realize than in recent years. M&A is a necessary growth tool for most buyers facilitating talent acquisition and geographic expansion. For sellers, succession planning is still a huge need. Many firm owners have hit an inflection point and require a larger partner’s resources to achieve the next level of growth. Fostering their own growth, many acquirers have built tremendous resources that independent operators would love to plug into.
Last year, as the markets suffered the first major downturn in over a decade, expectations were recalibrated as sellers began to seek scale and additional resources and more balanced deal structures began to take effect. A growing number of buyers insist on greater risk alignment but still find ways to help sellers arrive at a desired valuation. When you add it all up, it’s still a good time for M&A.
Five years ago, hundred-billion-dollar RIAs didn’t exist. In the next 10 years, we will likely see a handful of firms north of $500 billion, but most will not get there purely through organic growth. These firms will curate inorganic (M&A + recruiting) and organic growth to achieve targets never seen in the independent RIA industry.
The wealth management industry’s evolution has made many RIA firms attractive as acquisition targets for private equity or as long-term investments offering a steady return for some large multi-family offices or institutions like pension funds. The industry has matured to a place where mergers and acquisitions have moved away from being opportunistic or bespoke to a more systematic and purpose-driven approach.
If the activity was still solely driven by opportunistic buyers or sellers, the current market uncertainties would probably have put the brakes on M&A. Instead, we’re seeing buyers use M&A as an important expansion strategy that adds talent depth and service breadth. Conversely, sellers are still driven to the market for non-opportunistic reasons like succession planning, reducing costs by scaling, access to more resources, attracting talent, and a desire for continued growth.
The 5th edition of the recently released The RIA Deal Room, reported that while multiples went up a bit, absolute valuations declined somewhat last year. The factors driving sellers to market remain constant even as the valuations have evolved. The game has changed, but it’s far from over. It is still possible to negotiate a great transaction and get the desired outcome because it’s about more than the money.
Three years ago, before Covid changed the world, we saw what we called “the flight to certainty” because things were going along smoothly, and sellers could expect to get everything that was promised. The big were getting bigger and the small were looking for partners to help them reach the next level. In those days, buyers heavily favored cash and were given a lot of it upfront. Most of these deals provided certainty in deal structures through high closing payments but there was not a lot at risk based on performance after the transaction.
Those kinds of deals still exist, but now buyers are looking for sellers to take equity in their entities as part of the deal to share alignment in growth and risk. We’re also seeing more contingencies in deals. Sellers may ultimately arrive at a similar multiple, but they may have to work harder to get it with performance targets, executive retention, and other targets keeping sellers involved for a few years after the deal.
While 2021 redefined the limits of RIA M&A, 2022 reset expectations as deal structures shifted modestly to more balance, and valuations contained more risk-sharing to achieve results. All of this seems normal and seems to represent an ebb-and-flow dynamic. Demand drivers appear healthy as outside capital continues to chase the RIA industry, and supply is increasing as more sellers seek near-term resources and long-term succession solutions. It's safe to say that the future remains bright for RIA M&A and the rapid maturity in the industry indicates that the question is no longer “if” transactions will happen, but “how” creative the industry will get to execute transactions.
Brandon Kawal is principal with Advisor Growth Strategies (AGS) and co-author of its annual report, The RIA Deal Room.