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DeVoe: COVID-19 Reveals Limitations of Smaller Players, Not Weakness in RIA M&A

Dave DeVoe, founder of San Francisco-based research outfit and investment bank DeVoe & Co., indicates RIA M&A continues to steamroll ahead, despite dropoff from smaller players.

The COVID-19 pandemic hasn't slowed RIA M&A as much as it has repositioned the players, with larger firms, armed with more elaborate organizational structures, taking the tead and accounting for the bulk of the activity.

According to DeVoe & Co.'s second quarter RIA Deal Book report, the first half of 2020 produced 64 deals, the same as last year. Although the pace of deals lurched somewhat, from 35 in the first quarter (18 in January, before COVID-19 hit) to 29 in the second quarter, the real tale of the tape was in who was doing more of them: larger players. 

These companies, which Dave DeVoe, founder of the San Francisco-based consulting firm and research outfit, described as those with $1 billion or more in AUM, saw their share of M&A deals skyrocket by 50% in the first half. By contrast, smaller RIAs, whose importance as M&A players had grown considerably in 2018 and 2019, dropped as a percentage of M&A participants by 35%.

The reason is simple, said DeVoe. Smaller firms aren’t “professionally managed” corporations like their larger peers. Indeed, small firms are almost all still run by principals who split their time between managing client relationships and managing their business. These folks, said DeVoe, dropped off the charts when the coronavirus hit because they simply didn’t have the bandwidth to do anything beyond serving clients.

“When clients need extreme support – like in a crisis – these advisors shift 100% of their time to supporting clients," DeVoe said in the report. 

Average AUM for deals announced so far this year shot up about $200 million compared to the first half of last year to reach $942 million, reaching levels last seen in 2017, before smaller players got more involved in the M&A game. 

DeVoe's crystal ball is still unclear. He believes the market is currently in a lull period, to be followed by a surge of activity when conditions return to normal, though it's unclear when that will happen. While deal count increased from seven in April to 10 and 12 in May and June, respectively, he is unsure whether the third quarter will continue to see an increase in pace.

“Each month of compressed RIA M&A activity puts additional pressure on future transaction volume,” he said. “Nearly half [of] owners [are] over 60 and only a third [have] a written succession plan. The volume of sales was already projected to steadily grow for the next five to seven years."

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