The RIA industry is on course for another record year for mergers and acquisitions, according to the DeVoe & Co. Deal Book for the first half of 2019.
Activity for the first half of the year far outpaced deals in each of the first half years tallies that were recorded since 2013, said DeVoe, a consulting firm and investment bank based in San Francisco. Each year since then has broken the record for the annual total from the previous year and 2019 appears to be no exception.
During the first half of 2019, RIA merger and acquisition activity accelerated its momentum compared to last year, with a strong second quarter that saw 33 deals for a total of 65 for the first six months, the report said. This compares to 50 transactions that were sealed in first half of last year. The total for 2018 landed at 99.
“The industry is experiencing an unprecedented, sustained surge, which seems likely to continue,” said Brad Grubb, managing director at DeVoe & Company. “High valuations, the interest in gaining scale and the lack of succession plans will continue to contribute to the sustained pace.”
In addition, many sellers are attracted to the power of scale. Mergers and acqusitions are good for both employees and clients, said David DeVoe, managing director and founder of DeVoe & Co.
“Clients benefit from a broader set of capabilities [and] advisors are freed up to better serve the clients,” he said. “There will always be room for the small and mid-size firms, [but] there will be a shorter list of mega-firms.
“There should be even more M&As in the future than we are seeing now,” he added. This report “is a healthy check up for the industry. It indicates this is a vibrant industry. Profit margins are up and technology is makiing it more efficient.”
Valuations are a particular driving force for the merger and acquisition increases. “RIA valuations are officially at an all-time high,” DeVoe said. “Over the last several months, valuations have hit new highs and have attained levels I have not seen during the 16 years I’ve focused on RIA M&A.”
“Buyers in today’s market are not necessarily paying unjustified prices. Many acquirers are students of the industry and have learned from history. In the early stages of the industry, RIA M&A was in the low double digits per year and acquirers were using tools borrowed from the CPA and legal industry. In the early 2000s, a new wave of sophisticated buyers entered the space, bringing better valuation techniques and deeper pockets,” the report said.
The average price of the deals has experienced a sharp decline over the years. The compression has been driven by the negotiating efforts of successful buyers, the report said. The average seller size, excluding transactions over $5 billion, was $714 million for the midpoint of 2019.
Transactions for RIAs with $250 million to $500 million accounted for 27 transactions, representing 42% of all transactions in the first half of 2019. In 2018, only 22% of transactions were of the same size.