Merger and acquisition activity in registered investment adviser firms dropped dramatically during the second quarter, according to a report from DeVoe & Co.
RIA transactions dropped to 32 in the second quarter from a record 49 in the first quarter. That continues the volatility seen recently, with the strong first quarter preceded by two weak quarters at the end of 2017.
"It's been a whipsaw market," said David DeVoe, managing partner at DeVoe & Co. "We've gone from record lows to record highs, so it's a roller coaster."
The decline was driven by a drop in transactions involving established RIAs, which counted for 14 deals, or 32% lower than the three-year quarterly average. By contrast, transactions involving breakaway advisers, which are defined in the report as advisers and teams that have left wirehouses, independent broker-dealers and RIAs with more than $100 million in assets, were in line with expectations: A total of 18 breakaway deals occurred during the second quarter, versus 17 in the first quarter.
The breakaway transactions are being driven by regulatory activity, which is more likely to impact independent broker-dealers than RIAs, Mr. DeVoe said.
While the number of transactions decreased, the size of the average deal increased substantially. Eighty-one deals were signed in the first half of 2018, versus 87 in the same period last year. However, the 7% drop in transactions was offset by a 20% increase in deal size.
In fact, the shift was driven by a significant drop in transactions among firms and advisers with $100 million to $250 million in total client assets, while there was an increase in transactions involving those with $750 million to $1 billion in total client assets.
Consolidators like Mercer, United Capital and HighTower contributed to the trend by closing bigger deals. For example, HighTower acquired $4.5 billion Salient early in the second quarter. Consolidators have inched their share up to more than half, or 53%, of all transactions, which is the highest it has been in more than six years.
The shift is driven partly by months of sustained volatility in the stock market, which requires advisers and principals at smaller firms to spend more time working with clients versus moving a transaction forward.
"If there are one or two principals and 25% or more of their time is spent working with clients, they have less time to work on mergers and acquisitions," Mr. DeVoe said.
The weak second quarter could contribute to a flat 2018. Nevertheless, advisers polled in the DeVoe report are confident that M&A will continue its upward trend. This is a result of the broad number of buyer candidates, as well as an interest in the industry in scaling firms. Sixty percent of the firms polled expected to acquire a firm in the next 24 months.
"The owners of RIAs are aging and moving toward retirement," Mr. DeVoe said. "And as they do, they're going to sell companies to an external buyer."