Mergers and acquisitions activity in the registered investment advisory (RIA) business had been on a three-year run, with new records in dollar volume set each year. But, in the first quarter of this year, M&As slowed dramatically, another casualty of the credit crunch. A total of 10 RIA mergers and acquisitions were completed through March 20, 2008, with total assets under management of about $14 billion. By comparison, in March of last year, twice as many deals had been made; 80 deals were done in all of 2007, and $101 billion in assets acquired, according to data from Schwab Institutional.
"It's not Armageddon, but it's below where we were in 2007. I don't anticipate 2008 will be a record year for mergers and acquisitions," says David Devoe, director of Mergers and Acquisitions for Schwab Institutional. "The slowdown is driven by sub-prime, frozen debt markets and increased cost of capital, which drives the valuations of firms down."
In fact, Rudy Adolf, CEO of Focus Financial Partners, which has been busily acquiring RIAs, and just closed on its acquisition of a U.K.-based wealth manager on Tuesday, estimates that RIA valuations have fallen by nearly 30 percent over the past six months.
Meanwhile, without access to credit, most RIA firms can't make an outright acquisition of another firm. Unlike asset managers, an industry in which M&A activity remained strong during the first quarter, wealth managers do not typically keep a lot of cash on hand. "Asset managers stockpile cash," says Ben Phillips, managing director at Putnam Lovell, a division of Jeffries & Co. "RIAs don't typically stockpile cash. They're a lifestyle business. Cash flows are their salaries. They're not for re-investment."
Devoe says the M&A slowdown is most pronounced at the smaller end of the RIA market, partly because these kinds of firms have to use all of their resources during volatile markets just to keep clients happy. There's no extra staff time for working on M&A deals. "When the market is headed downward, you spend more time with clients, and mergers and acquisitions is something you do after hours," he says.
It doesn't help matters much that many of the biggest acquirers of RIAs lately have been mid-sized banks, which have been directly battered by the credit crisis, and have watched the value of their stock tumble. Below is a list of some of the largest buyers of late and the decline of their stock prices.
Share price decline, in percentage, October 1, 2007 through April 1, 2008.
1. E*Trade (ETFC) 102 %
2. Boston Private Financial Holdings (BPFH) 63%
3. Western Alliance Bancorporation (WAL) 45%
4. SunTrust (STI) 22%
5. Wilmington Trust Corporation (WL) 18%
6. Pacific Capital Bancorp (PCBC) 15%
7. Encore Bancshares (EBTX) 12%
8. Privatebancorp (PVTB) 6%
And yet, the era of consolidation in the RIA business is not over, says Focus' Adolf. The fundamental drivers for M&A activity are still there, he says: the need for scale to offer better service to clients due to the increasing complexity of regulation, technology and markets, as well as the aging of so many of the principals in this industry.
"We believe fundamentally this industry will continue to consolidate for many, many years to come," he says.