Mergers and acquisitions of RIAs were off to a roaring start in January, but that trend has begun to cool, according to the DeVoe & Company's Capital Group/DeVoe RIA Deal Book for the first quarter of 2021.
Activity began to cool in February and March, indicating the industry is moving out of the surge phase it has been experiencing, according to the report released Tuesday.
"The post-Covid surge is officially over,” DeVoe said.
There were an unprecedented 58 transactions for first quarter, the first time a single quarter has seen more than 50 mergers or acquisitions, DeVoe said. January led the quarter with 33 deals, by far the most for a single month, according to the report.
“This historic quarter opened with a spike of 33 transactions in January, far outpacing the previous single-month record of 18 transactions exactly a year earlier,” the report said. “January is typically a strong month, but this was far above the norm.”
But the firm feels the industry now is returning to a “new normal” of M&A activity. Some consultants in the industry agree. Advisory firm valuations are at a peak now, but that situation may not last long because of changing demographics in the industry, according to Todd Doherty, who heads the valuations team for Advisor Legacy, a consulting firm for the financial industry.
The January surge was led by a spike in mid-sized seller activity and continued momentum of larger sellers, the report said. Firms having between $500 million and $1 billion in assets under management represented 26% of the first quarter transactions, an increase from 17% seen in the first quarter of last year.
“Then the tide receded” for 2021 and “transactions returned to 2019 levels for the duration of the period,” DeVoe said. The average seller size remained at $1 billion or more in AUM, which is on par with the strong 2020 average.”
The report continued, “Buyer categories maintained the relative stability that we have observed for several years in a row. Consolidators represented 40% of the acquisition volume in the first quarter, a slight dip from their 42% share for 2020. Their models continue to resonate with advisors seeking to sell, largely because consolidators tend to offer a broad spectrum of options with varying characteristics.”
On a month-to-month basis, the quarter was a mixed bag, according to the report. February and March saw 12 and 13 transactions, respectively. “After redlining for eight straight months, the engine was out of gas. The industry had burned through the excess fuel created by the impact of Covid, and RIA M&A has now coasted for two months,” DeVoe said.
The report added, “Just over a year after the pandemic began, we are now moving into the new normal of RIA M&A activity—timing that seems to coincide with the glimmer of a new normal for parts of daily life as well.”
However, “the softened activity of February and March is unlikely to be sustained through the year. The continued high valuations, attractive value propositions of strong acquirers, and heightened propensity of RIAs to sell externally set the stage for another strong year.”
DeVoe predicted mid-sized and smaller firms will continue to sell at increased rates over the next several quarters, and 2021 will end as another record M&A record year.