DeVoe & Company, the San Francisco-based consulting firm and investment bank, reported in its quarterly RIA Dealbook Wednesday that M&A volume in the RIA space is up 30% over the same time period last year, and “valuations are at an all-time high."
“Over the last several months, valuations … have attained levels I have not seen during the 16 years I’ve focused on RIA M&A,” said founder and managing director Dave DeVoe.
"An RIA with $500 million in AUM would have sold five years ago at between five times and seven times cash flow," he said. Now, he said, it is common for those multiples to fall between 5.5 to 8.
Meanwhile, the company reported that in the second quarter, the pace of M&A activity “set the stage for yet another record year,” moving from a ‘spike’ to a ‘surge’ and trending toward a possible ‘new normal’ of heightened activity.
Brad Grubb, managing director at DeVoe, wrote in the report that “high valuations, the interest in gaining scale, and the lack of succession plans” at many RIAs would continue to fuel more M&A activity.
DeVoe recorded 33 transactions during the quarter and 65 in the first half of 2019, 30% higher than 2018’s 50 transactions during the same time period, the previous record.
“I expect this momentum to continue and for transactions to reach 130 or maybe 140 by year-end,” said DeVoe in an interview with Wealthmanagement.com.
He noted that today’s buyers are more sophisticated and that the valuations are “not necessarily unjustified," and will likely bring more sellers into the market.
RIAs were the buyers in more than 50% of the transactions, the company said. “A growing number of RIA owners are using M&A as a way to achieve strategic goals.” Moreover, the company said, sellers are not only attracted to the power of scale that larger RIA buyers have to offer, but like the idea of joining firms founded by like-minded individuals. “There is a level of comfort in selling to someone who has sat in the same chair and built a similar business,” DeVoe said.
And for the most part, these sellers are not trying to time the market. “Many are thinking strategically,” he said. The firm completed its second annual psychological M&A survey of 165 advisors in May and June of this year, which it will release in August. In that report, 39% of respondents said they were thinking of selling because of the valuations. Another 17% said they are looking at selling within the next couple of years out of fear that if there is a stock market decline, they may not be able to successfully sell the firms over the next five to seven years. “One view is based on aspiration, while the other is based on a risk calculation,” said DeVoe.
Despite the increase in transactions this year, DeVoe said his firm still thinks RIA M&A is “well below where we should be given the size of the industry: there are about 10,000 firms, and 5,000 firms with well over $100 million in size. We should be seeing double the transactions.”
One reason there is not as much M&A as there should be is that “succession planning is complicated, and advisors often delay some of their decisions.”
“The good news is they love running their businesses, and there is not a lot of pressure on them to retire," DeVoe said. "But many of the ones delaying these decisions will ultimately have to sell externally, and the longer you wait, the fewer choices you will have.”
Consolidators were another active buyer during the quarter. Seven of them made three or more transactions during the first half of 2019, DeVoe said.
Meanwhile, banks “were surprisingly quiet” throughout the first half of the year.
DeVoe said that he keeps expecting banks to return to the fray “with conviction,” but that it hasn’t happened yet. Why? Ten to 12 years ago banks were responsible for over 50% of RIA M&A, but that figure has dropped to the single digits today. Some banks had trouble integrating independent-minded RIAs, he said. In addition, due to the financial crisis, many banks had mortgage problems and were forced to take on TARP funds to survive, taking them out of the RIA M&A game, he said.
But DeVoe expects a number of banks to reenter the fray for RIAs. “We are in contact with several banks who seem to get it, who understand or already have an RIA culture in place, who are not seeking to cross-sell or change these businesses dramatically … who are looking to acquire.” He said that the banks in question are large regional banks who “want larger transactions to move the needle—$1 billion plus targets are the best fit.” He explained that “in many cases the light has gone off and these banks have seen that the RIA model is the best way to serve their clients—the focus on clients, the fiduciary nature, the independence and the open architecture — and many banks with a legacy brokerage model are seeking to provide better wealth management services to their high-net-worth clients.”
Meanwhile, subacquisitions, or acquisitions by buyers who were previously acquired themselves, rose, to 11 transactions, or 26% of all deals, said DeVoe.
He said that the subacquisition trend is “emerging as a key trend in the industry—and it’s a good trend—the ability of a network of acquired firms to then have the capital and M&A expertise from the central office to grow faster, it solves a critical need in the RIA space, especially for advisors who don’t have succession plans in place.” He added that this strategy is a “great selling point for prospects: come join forces with us, you’ll be able to execute M&A in a way you don’t do before. That’s a powerful message.”
Focus Financial Partners was the most active participant in M&A during the first half, with 15 transactions. Mercer Advisors and CAPTRUST Financial Advisors completed four transactions each, while HighTower Advisors, Mariner Wealth Advisors, Emigrant Partners (formerly Fiduciary Network) and Wealth Partners Capital Group each had three.
12 of Focus’ transactions in the first half and six in the second quarter were subacquisitions. Rudy Adolf, founder and CEO of the publicly traded company, told DeVoe that subacquisitions—helping his acquired firms acquire firms of their own—were a major part of Focus’ strategy.
Wealth Partners helped its affiliates acquire three firms in the second quarter, while Emigrant Partners purchased Hillview Capital Advisors for its RegentAtlantic affiliate.
The average seller size, excluding transactions over $5 billion, came in at $821 million AUM for the second quarter. The average size was $714 million for the first half of the year. That's down from a peak of over $1 billion in 2016.
DeVoe attributed the compression in deal size since 2016 to the successful strategies of firms like Mercer and Wealth Enhancement Group going after mid-size RIAs, and the compression effect of subacquirers on the lower end.
Acquisitions of RIAs with $250 million to $500 million in AUM rose to 27 in the first half of 2019, or 42% of all transactions, up from 22% in 2018’s first half.
Meanwhile, acquisitions of RIAs with $1 billion to $5 billion of assets under management still made up 11 of the first half’s transactions, or 17%, with eight in the second quarter. DeVoe said that at this pace, larger RIA M&A should still beat the 5-year average of 17 acquisitions this year.
With regard to the $750 million Goldman Sachs acquisition of United Capital, DeVoe said that “all private equity-backed firms—like HighTower, Mercer, Wealth Enhancement Group and Allworth—will likely benefit from the success story.”
“It will be fascinating to watch the moves of other players as for the past two decades the success of the independent model has slowly and methodically eroded the wirehouse market’s share of U.S. investors,” he said.
Is there a point where some of the wirehouses decide to facilitate the RIA model successfully? “It takes a long time to turn a battleship around, but once it turns you have a lot of artillery pointed at you,” he said. Meanwhile, the Goldman deal would enable the Wall Street titan to leverage its strong ultra-high-net-worth brand and start to market to the “millionaire next door,” he said.
HighTower’s partnership with Beverly Hills, Calif.-based RIA LourdMurray, with over $3.6 billion of assets, which then merged with San Diego-based Delphi Private Advisors to create a firm with $4.8 billion in AUM, struck DeVoe as “a strategic move” by the company to strengthen its capabilities in the ultra-high-net-worth segment, following upon its 2018 acquisition of Salient.
Meanwhile, Focus’ acquisition of $7.7 billion-asset Williams Jones & Associates demonstrates the former’s “multi-faceted acquisitions strategy: it is not only having success with larger firms like Williams Jones but is supporting its affiliates on small transactions as well.”