RIA firm valuations climbing, but not yet back to 2008 levels

Industry consolidation continues to drive valuations higher

Oct 22, 2018 @ 3:05 pm

By Jeff Benjamin

A dearth of formal succession plans combined with record-level equity markets continues to drive consolidation among registered investment advisers.

An analysis by DeVoe & Co. of third-quarter acquisition activity shows RIAs are being purchased at a pace slightly above average levels.

The research counted 40 RIA deals during the quarter ending Sept. 30, up from 35 during the second quarter and slightly ahead of the 12-month trailing average of 36 deals per quarter.

"Our calculations indicate that the lack of succession planning is so strong that the supply of firms that will simply have to sell externally will push M&A numbers up over the next five to seven years," said David DeVoe, managing director at the investment bank.

"The importance of scale will naturally drive more and more transactions over time," he added. "The competitive landscape is evolving, and the mega-firms will be able to compete more effectively each year."

The first nine months of the year saw a total of 123 RIA deals, which compares to 120 in the first nine monthsof last year, and 109 in 2016. It will only take 25 deals during the final quarter of this year to surpass last year's total of 147.

For sellers, the news is still good. Mr. DeVoe said valuations continue to climb and have not yet reached levels seen in 2008.

Back in 2008, valuations were driven by stock market performance as well as by "eager bank buyers and certain custodians" that were willing to pay up for access to the RIA space, said Mr. Devoe.

Even though both the stock market and economy are strong, as they were leading up to the 2008 market crash, Mr. DeVoe does not believe RIA valuations will surpass the levels reached 10 years ago.

The main reason is that banks have mostly stayed on the sidelines this time around and the private-equity investors that have stepped up with deep pockets tend to be more disciplined buyers, he said.

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