As financial markets dampen RIA valuations, buyers get creative with deal structures

A report from DeVoe & Co. shows dramatic drop-off in fourth-quarter deals, but the biggest buyers say they are as busy as ever.

More than a decade of record-setting acquisitions within the financial advisory space have hit a speed bump, according to the latest report from DeVoe & Co.

With just three deals during the last three weeks of October, an 81% drop from the monthly average of the last 12 months, and a similarly sluggish outlook for the November, the writing is on the wall, said David DeVoe, founder and chief executive of the research firm.

“The wheels fell off the M&A train in early October,” DeVoe said. “2022 delivered three quarters of unexpectedly strong activity, given the market environment. High interest rates, a declining stock market and a challenging economic environment typically drive down M&A. It remains to be seen if these pressure points are creating a short-term lumpiness of volume or a sustained downturn.”

DeVoe said the average monthly volume through the first nine months of 2022 was 23 announced transactions, while October and November are on pace for about 15 deals per month.

The sudden drop-off, he said, represents a “possible turning point.”

“The current dynamic will make the rest of the year interesting,” DeVoe said. “A six-week downturn cannot be ignored.”

Meanwhile, he said the pipelines of many acquirers remain strong. “The year is still expected to set a record, but it will not be a blockbuster increase over 2021’s 241 transactions.”

This year through Nov. 15, DeVoe has tracked 227 transactions.

While the hard numbers may be showing a decline in deal flow, some of the biggest buyers in the space say it’s very much business as usual.

“I would describe us as very active this year, and we haven’t seen an impact on activity or volume,” said Bob Oros, chief executive of Hightower Advisors, which has $132 billion under administration and is on track to do more than a dozen deals this year.

Oros, who said his acquisition team looks at more than 500 potential deals each year, acknowledged the current economy and market conditions have affected the structure of how some deals get done.

“Activity continues to be strong, and 2023 also looks like it’s setting up to be strong,” he said. “But closing transactions has become more difficult, because pegging value in an environment where the S&P has had some significant declines can sometimes slow deals down.”

Oros would not provide details of his “secret sauce” of how deal structures are being adjusted in a down market cycle, but insisted, “The volume of deals is really, really strong; it’s just a lot of art in getting deals done.”

Rush Benton, senior director of strategic growth at Captrust, has also not seen a slowdown in all the activity leading up to acquisitions. But he said closing deals in this market requires extra creativity for the aggregator, which oversees $750 billion.

“If we’re looking at on scale one to 10, where a year ago it was a 10, it’s still a nine right now,” he said. “We’re very busy.”

However, Benton added, the market downturn over the past couple of years has driven more creativity into deal structures.

“Now you’re seeing mechanisms that let sellers recoup some of the value that may have been lost in the last year or so as a result of the equity markets,” he said. “Nobody wants to sell and feel like they’ve sold at a low.”

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