Hungry private equity investors steer acquisitions toward smaller RIAs

The latest report from Echelon Partners shows a gradual slowdown in deal activity, which continues to be dominated by PE-backed buyers.

Private equity investors continue to drive consolidation across the wealth management space, and the trend is being described as here to stay.

According to the latest report from Echelon Partners, 2022 wrapped up with a record 340 acquisitions, up 10.7% from 2021. Broken down by quarter, however, the pace of deals continued to fall off throughout the year.

Coming off a peak of 99 acquisition announcements in the fourth quarter of 2021, the quarterly numbers for 2022 unfolded with 94, 91, 84, and 71 deals respectively per quarter.

The average size of deals also declined last year to $1.6 billion, down from $2.1 billion in 2021 and $1.7 billion in 2020.

The report attributed the 23% one-year drop in average deal size to buyers going after smaller-sized registered investment advisors.

“There was also a significant reduction in the number of deals involving firms with over $1 billion in assets,” the report states. “The record-setting deal activity of 2022 was particularly impressive in the face of a global slowdown in M&A and rising cost of capital, further exhibiting buyers’ interest in the wealth manager business model.”

Among the trends that hasn’t slowed is the appetite for RIAs among the private equity investors.

According to the report, nearly all of the most active buyers already have private equity backers. In 2022, almost 70% of deals involved private equity.

“If 2021 was an indication that PE firms saw opportunity in the space, 2022 proved that the trend is here to stay,” the report states. “These firms are staffed with robust M&A teams, have supreme access to capital, and substantial integration resources, allowing them to complete large deals, like Genstar’s recapitalization of Cerity Partners, in times of economic uncertainty and rising interest rates.”

Strategic consolidators continue to be the most prevalent type of RIA buyer, representing 43% of acquirers last year, down from 48% in 2021.

The second-largest category of buyers is other RIAs at 28%, up from 23% in 2021.

The largest deal announced last year was the World Insurance Associates acquisition of Pensionmark Financial Group, which had $80 billion under management.

That was followed by Royal Bank of Canada’s acquisition of Brewin Dolphin, a $65 billion firm.