Despite a faltering economy and tumbling financial markets, the pace for mergers and acquisitions in the financial advisory space remains solid, albeit not as spectacular as last year. Still, the industry could potentially see its fourth straight year of record dealmaking activity.
According to Schwab Institutional, 49 deals with a total value of $93 billion were done as of September 5. Based on rolling averages from the past three years, 2008 could see 85 to 90 deals by year end. Eighty deals were done in 2007, preceded by 58 and 52 in the prior two years, respectively.
"More importantly, industry fundamentals point to increased M&A activity during the next several years," says David DeVoe, director of M&A at Schwab Institutional's strategic client group.
These fundamentals include advisor demographics, increased private-equity investment in the industry, and the proliferation of holding companies.
The average age of advisor firm principals is roughly 55 years old, and about 30% are 60 years or older. Many of them are considering exit strategies, and they're willing to explore external deals when a firm's size makes it difficult to sell it to junior employees.
Private-equity firms have increasingly jumped into the advisory business, attracted by industry margins that typically reach 25% and growth rates in the independent space of about 20%. Private-equity players generally gain a foothold by backing holding companies, whose business model is predicated on making a bunch of acquisitions of advisory firms. This includes the likes of Focus Financial Partners, United Capital Financial Advisers and WealthTrust.
"Holding companies have gone from acquiring about 15% of total assets to about 45% in 2008," DeVoe says.
But valuations for completed deals have dropped from their lofty perch of recent years, due in part to decreased access to credit in the wake of the housing and credit woes of the past year.
Valuations during the past year or so were roughly four to six times EBITDA for advisory firms in the $100 million neighborhood; five to eight times for $500 million firms; and eight to 10 times for $1 billion firms.
"Valuations in 2008 are moving toward the lower end," DeVoe says.