Total M&A deals in the registered investment advisor space fell to 65 during the second quarter, the lowest quarterly deal volume since the second quarter 2021, according to Echelon Partners’ latest RIA M&A Deal Report. Echelon, the Los Angeles–based investment bank and consulting firm, attributes the decline to macroeconomic uncertainty and seasonality in the wealth management industry.
In fact, since 2018, Echelon has recorded an average of 57 deals in the second quarter. And while deal volume was down 15% quarter over quarter, the firm says this was the second-most-active second quarter in industry history, behind the second quarter 2022, which saw 91 total deals.
“Buyers and sellers tend to close more deals at the beginning and end of the year which leads to a seasonality in deal announcements,” the Echelon report said.
“As interest rates move higher, they generally create a little bit of a dampening effect on entrepreneurship, and what goes hand-in-hand with that is deal-making activity," said Dan Seivert, CEO and managing partner at Echelon. "As much as interest rates didn’t really slow down the buyers too much and they didn’t impact the valuations, like other people might be saying, I do think that people are taking less risk when interest rates are higher. It puts a built-in cautionary element for entrepreneurs, and that makes them less prone to do deals.”
Echelon has lowered its projection for total 2023 deal volume to 300, down from 315 deals projected in the first quarter 2023. But the firm still expects second half deal activity to increase.
Further, Echelon expects average assets per deal to finish at the second-highest level recorded, ending the year up nearly 12% year over year. Year to date, average assets per deal were about $1.8 billion, up from $1.6 billion in 2022.
“Alongside the recovery in capital markets, prominent mid-sized RIAs are completing deals with new financial partners, helping to increase average assets per deal,” the report said. “For example, CI Financial sold its minority interest in $5.1 billion AUM Congress Wealth Management to Audax Management Company, a Boston based private equity firm.”
The Echelon report also highlighted the increase in private equity money coming into the wealth management space. During the second quarter, private equity firms made direct investments in wealth managers with assets totaling $350.6 billion, more than double the same figure from 2022.
The boost was due to some of the largest consolidators taking on new private equity partners. That included CI Private Wealth selling a minority stake to Bain Capital, Abu Dhabi Investment Authority, Flexpoint Ford, Ares Management and the state of Wisconsin.
In June, Mercer Advisors signed an agreement with Toronto- and New York–based Altas Partners, in a deal that’s expected to raise over $1 billion.
Wealth Enhancement Group also raised $250 million during the quarter in a deal with Stone Point Capital.
“These new sponsors remain attracted by the significant growth opportunity that still exists for these firms as market forces continue to favor consolidation in the industry,” the report said.