Despite the expected disruptions stemming from the Covid-19 pandemic, mergers and acquisitions activity in the RIA space not only continued but grew in number and deal size in 2020, according to ECHELON Partners’ M&A review for the year.
According to ECHELON, 205 deals were struck last year, marking the eighth year of growth in the space, and that growth (versus 203 deals in 2019) came even as the activity hit a serious bump in 2020’s second quarter, which saw a four-year quarterly low.
The deals came roaring back in last year's third and fourth quarters, more than making up for that second quarter speed bump. Sixty-one percent of the deals came in the second half, according to “2020 ECHELON RIA M&A Deal Report.”
Some 78 deals in the $1 billion-plus range were announced in 2020. The environment favored larger and more sophisticated acquirers, ECHELON said, as smaller players focused on client service and portfolio management in a year roiled by the pandemic and the subsequent market tumult.
“In total, $318 billion in assets were acquired last year, and the average seller boasted $1.8 billion in AUM,” said the report. “Both were record levels, as buyers and sellers exhibited new levels of size and sophistication.”
The total cumulative AUM transacted grew 11.8% to $318.6 billion from $285 billion in 2019. ECHELON says the number has grown 34% annually since 2013. And the average AUM per transaction rose 23.3% from 2019’s average.
Total RIA breakaway activity, on the other hand, declined 20% from 2019. But regarding breakaways with more than $1 billion, ECHELON called it a record year for such activity.
“There were 33 teams with more than $1 billion in assets that transitioned to the RIA channel in 2020, a new record for a single year,” the report said. “Like the growing numbers of $1 billion firms that sold in 2020, this development underscores the sophistication of breakaways and their interest in partners that can provide resources to accelerate growth, improve operational efficiencies, deliver improved client experiences and reward operators with equity.”
There were only seven billion-dollar-plus breakaway deals in 2019. When $1 billion-plus breakaways and M&A transactions were taken together, they rose 73% in 2020 over the previous year.
Bigger Firms Didn't Stop
Larger firms’ professional management, “effective processes,” and thick margins are attracting more sophisticated buyers into the space, including private equity and non-U.S. buyers, the ECHELON report said.
“Most $1 billion-plus RIAs have steady revenue streams, over $3 million in EBITDA and profit margins that may easily exceed 30%,” the report said. “These reliable cash flows allow financial investors to confidently and aggressively finance transactions while still providing a significant opportunity for upside potential and growth post deal.”
Among the largest deals logged by ECHELON were Morgan Stanley’s purchase of E*Trade (with $360 billion in AUM); Empower’s purchase of MassMutual’s (with $167 billion); and of DiMeo Schneider & Associates’ purchase of Fiduciary Investment Advisors (with $84 billion).