The pace of mergers and acquisitions involving registered investment advisors is going through the roof even as the country struggles with a number of crises, according to DeVoe & Company’s Capital Group/DeVoe RIA Deal Book released today.
The soaring numbers, which have been escalating for seven years, include the emergence of a number of mega-firms focused on acquisitions, the report said.
The 159 transactions in 2020 made the year another record breaker in a continuing series of record-breaking years. The M&A number was 20% higher than the previous year’s 132 deals. But even that increase obscures the recent momentum in the industry, DeVoe said. The RIA space is in the midst of a surge that represents the third of four stages of M&A activity since the start of the pandemic, the report said.
According to DeVoe, the first stage occurred early in the pandemic when deals already in the works were completed, which was followed by a lull in activity in the first half of last year. Then came the surge that was largely driven by professionally managed firms with more than $1 billion in assets under management. The activity will eventually return to a more normal level, which still will be higher than past years, the report said.
For now, DeVoe & Company said it expects "a steady increase of small and mid-sized firms to sell externally over the next several quarters, which will extend the surge, [before] a new normal trajectory will emerge.”
In 2020, the 48 transactions made in the fourth quarter topped the 44 deals done in the third quarter, which marked the first quarter with more than 40 deals. The second half of the year, with 92 transactions, was the most active six-month period on record.
There were 46 deals in 2020 that involved firms with $1 billion to $5 billion in assets under management, compared to 25 in 2019. Three acquirers stood out for the size of deals that were closed: CI Financial, Hightower and Creative Planning each completed eight acquisitions during the year, which points to an emerging trend toward mega-firms, DeVoe said.
The formation of these large firms “will shape the wealth management industry over the next decade," DeVoe said. "The majority of these roughly two dozen wealth management organizations have M&A as a core plank in their business strategy and have become leading acquirers.”
To put this into a longer-term perspective, the report noted that M&A activity was up nearly 60% from just two years ago and was four times the number of transactions in 2014.
But the activity may not be all good. “These are big jumps. This extreme amount of activity is beginning to test the limits of healthy M&A” activity, DeVoe reported. “Healthy M&A occurs within a zone of equilibrium between seller interest and buyer capacity. During the last several months, acquirers have been at full capacity. RIA M&A remains healthy, but we have entered a red zone of potential disequilibrium.
“Ideally, 2021 yields fewer than 240 transactions," the report added. "This volume is in a zone where experienced buyers can increase their staff to meet the supply. Beyond this increase, buyers will likely become strained and more selective about acquisitions, and valuations will likely decrease."