Despite the ongoing economic uncertainties, geopolitical strife and market challenges that slowed M&A activity in other industries, the registered investment advisor channel’s transaction tally remained robust in 2022. The nation’s largest buyers, with an assist from private equity, continued a trend that has been years in the making: As of early December, 242 deals were on the books, surpassing 2021’s full year tally of 241. Direct investments from private equity firms amounted to $80 billion in the third quarter of 2022 alone.
There are motivated buyers, and sellers, out there. But will that hold in 2023 with expectations of a recession compounded by continued inflation and rising interest rates? The short answer is yes, but the dynamic between who’s doing the buying has changed.
A New Playbook
Over the last few years, many premier private equity firms have made their play in the RIA space by buying or investing in the bigger national RIA enterprises. There are only a few respected mid- to large-cap private equity firms still looking for acquisitions, and make no mistake, they know their ideal targets.
This is why the number of deals remain steady, but the sizes are declining. Transactions featuring smaller RIAs — those with assets under $500 million — are more common today and it's expected to remain this way for the near future as private equity-acquired RIAs are now the ones doing the buying. In fact, more sub-acquisitions occurred in the first three quarters of 2022 than throughout all of 2021.
Most of these buyers also have large teams—“deal machines”—fully dedicated to sourcing and acting upon M&A opportunities.
Why will M&A look different in 2023? Near the end of 2022, RIAs with under $1 billion in AUM accounted for approximately 70% of all transactions. Smaller aggregators/buyers and those without robust M&A “deal machines" must now compete against repeatable deal processes, large M&A teams and institutional capital. The pressure on balance sheets is mounting with stubborn inflation, the specter of a recession, falling revenues and rising inflation rates elevating the cost of financing.
The confluence of all those elements portends a 2023 rise in smaller aggregators merging or selling to larger enterprises. It will mark an important shift in the RIA enterprise story as the future national brands begin to cement their roles. Everyone knew consolidation was inevitable; 2023 is when it becomes reality.
What Is Important to RIA sellers
No matter the environment, and no matter the players, there are common characteristics that sellers must consider when assessing a potential buyer. RIA practices are living entities reflecting the values of their advisor-owners and powered by their vision. Sellers should have a sense of what their ideal acquirer looks like and consider the following:
- Does the advisor affiliation model — W2 employee or 1099 independent contractor — of the buyer match with the seller? It is nearly impossible to change mid-sale.
- Do the advisors’ demographics and culture fit with yours? If your average advisor is larger, look for firms with bigger advisors. If you provide services to help smaller advisors grow, look for a firm that does the same.
- All equity is not created equal. Every firm you talk to is going to say their firm will one day be worth 20 times plus EBITDA. The truth is that most will not be.
- Do you get a seat at the table, or are you primarily a tuck-in? One isn’t better than the other, but making sure you know where you sit before you close is particularly important.
- Do values align? There is growing, and there is growing the right way for both buyers and sellers.
What Does It All Mean to RIA Aggregator Sellers?
The RIA M&A buyer pool is sophisticated, large and growing. And it has deep pockets. Given the dozen-plus professional super-aggregators out there and increasing recognition of the opportunities available to buyers of all sizes, this is not likely to change.
On the sell side, even firms that have been buyers in the past are open to being acquired to help them reach the next level of growth. And there are firms out there looking for high-quality, established practices to bring into the fold and work with their existing advisors.
Wherever you fall in the RIA spectrum, there’s always an opportunity to align yourself with a partner that delivers the support you need and then gets out of the way. There is an elegance to independent advisors investing in each other and nurturing the entrepreneurial spirit that drives them both.
Alex Goss, co-Founder and co-CEO of NewEdge Advisors, leading New Orleans-based RIA supporting successful independent financial advisors nationwide.