Mergers and acquisitions among registered investment advisors hit a new high this quarter, and other potential deals in the hopper could pad that number during the final week of September, according to DeVoe & Company, a consulting firm and investment bank serving the RIA market.
The company says 36 M&A transactions have occurred so far during the current quarter. That tops the 35 deals done in this year’s first quarter, which was the highest quarterly total since DeVoe & Co. began tracking this space in 2013.
In a brief notice announcing the quarterly record, the company said the deal volume was greased by high valuations, attractive deal structures and concerns about potential tax code changes if Democratic candidate Joe Biden becomes president.
In an interview, David DeVoe said the concern about taxes centers on Biden’s proposal to change the federal capital gains rate for wealthy individuals.
Specifically, Biden said he wants to treat capital gains as ordinary income for people with incomes exceeding $1 million. In addition, he wants to increase the top individual rate on ordinary income from 37% to 39.6%, which was the rate before the sweeping tax reform in 2017. In short, those affected would see their capital gains tax rate nearly double from the current 20% level.
“That could have a significant impact on the proceeds that ultimately go into a seller’s pocket,” DeVoe said.
The dealmaking in this year’s third quarter is partly a snapback from the relatively depressed levels in the prior quarter when the pandemic lockdown put a crimp on business activity across the board.
The 29 RIA M&A deals in the second quarter represented a 17% drop from this year’s first quarter. DeVoe said the slowdown was marked by a fault line in the industry where transactions weren’t a priority at firms with less than $1 billion in assets. That’s because operations of this size typically are run by principals who both manage client relationships and their business, and they were more focused on their clients than on strategic initiatives during the heart of the Covid-19 outbreak.
“We’ll see that spring uncoil, but the $1 billion-plus market didn’t miss a beat for the most part because they have teams who weren’t taking care of clients and could continue working on transactions,” DeVoe said.
In its note, DeVoe & Co. said it expects M&A volume to exceed 40 announced or signed deals before the third quarter ends. It also said 2020 is on track to be the seventh consecutive year of record RIA M&A activity.