The pace of mergers and acquisitions among registered investment advisors hit a speed bump during the second quarter, but it was a bifurcated slowdown that impacted smaller firms more than big firms, according to the latest quarterly report on M&A activity from DeVoe & Company, a consulting firm and investment bank serving the RIA market.

The headline number is that there were 29 RIA mergers and acquisitions in the second quarter, which was a 17% decline from this year’s first quarter and a 9% drop from the year-earlier period.

The report said the slowdown was marked by a fault line. On the one side, transactions were more likely to take a back seat at firms with less than $1 billion in assets. These RIAs typically are run by principals who both manage client relationships and their business, and at the pandemic’s peak the principals at these firms devoted their energy to serving clients rather than pursuing strategic initiatives, DeVoe & Co. said.

As such, M&A activity sank 35% at sub-$1 billion RIAs during the second quarter.

On the other side of the divide, larger firms staffed with executives who are more focused on operations kept their eyes on the prize and continued to pursue deals. According to DeVoe & Co.’s report, transactions among $1 billion-plus RIAs rose almost 50% during the quarter.

“Over the last two years, scale has been the number one reason for selling,” the report said. “Professional management is a key component of that scale. And the extreme work environment brought on by the crisis further underscored this potential value.”

The report also noted that RIA M&A activity zoomed out of the gate this year, with January the most active month since DeVoe & Co. began tracking this space in 2013. But the pace started losing steam in February and March, and then the second quarter saw the smallest number of M&A deals in nearly two years.

All told, this year’s first half saw 64 transactions, which equalled last year’s first-half numbers. Both halves represent the most first-half RIA M&A activity during the past eight years.

In addition, the report said valuations of RIA firms have been resilient this year, but that down payments—which had been rising to levels of 70% or greater in recent years—dropped to the 50% range in the aftermath of the global lockdown.

“Down payments have moved lower for good and rational reasons,” Vic Esclamado, DeVoe & Co.’s managing director, said in the report. “It allows buyers to appropriately mitigate risk—and share that risk with the seller. Smaller down payments also allow buyers to conserve cash, which can both benefit the balance sheet and provide more dry powder for future acquisitions or a sustained economic downturn.”

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