COVID-19 tamps down pace of RIA consolidation

The economic fallout from COVID-19 poured cold water on an otherwise white-hot market for merger and acquisition activity in the wealth management space.

The latest data from Echelon Partners shows just 35 deals announced in the quarter ending June 30, which compares to 46 deals during the prior quarter and 52 deals during the same quarter a year ago.

Mark Bruno, Echelon managing director, attributed the sudden drop off, especially coming off a record year in 2019, to a general inability to interact in ways that buyers and sellers have historically approached deals.

“Connecting with potential buyers and sellers just takes longer now,” he said. “If you can’t meet the people you’re going to work with in person, do you really want to get involved in a deal?”

Citing the stock market’s March 23 bottom, following a rapid 30% drop from a February high, Bruno said the second quarter was hampered from the start as buyers and sellers started taking a more cautious approach to deals already in motion and potential new deals.

Even though deals can take six months to a year before any agreements are signed, Bruno said economic uncertainty, especially related to something of the magnitude of a global pandemic, will dampen deal activity.

But the S&P 500 Index, having rallied for a 40% gain off the March lows, is now seen as driving momentum into the second half of the year.

For example, nine deals were signed during the last 11 business days in June, which capped the S&P’s best quarter in more than two decades.

“We’re starting to see more normal activity now that the markets have leveled off, and people are getting more comfortable with video conferencing,” Bruno said. “And that shows you how many deals there are in the pipeline.”

While overall deal activity has slowed this year, the Echelon research shows a rise of large professional buyers leading the way. Professional buyers, defined as platforms, consolidators and aggregators, have only increased their appetite for large RIAs, Bruno said.

The four largest deals announced during the quarter included sellers managing between $14.5 billion and $45 billion.

“It’s a different world now than it was two or three years ago when you only had a handful of professional acquirers,” Bruno said. “It’s like the maturation of M&A with established firms buying really high quality RIAs.”

In essence, the bigger buyers are able to stay on track even during periods of extreme market stress because they have teams focused exclusively on M&A, whereas smaller firms are forced to dedicate more of their resources to managing clients and the overall business during times of stress.

Based on what he has seen so far this year and the way deal activity picked up at the end of June, Bruno believes the second half of 2020 could be on par with the second half of 2019.

Getting to that level would mean about 50 announced deals during each of the next two quarters.