RIAs see M&A momentum gaining steam in ’22

As firms chase scale with bigger and bigger deals, RIA sellers are enjoying the ride of record-level valuations.

Eight straight years of record-breaking consolidation in the wealth management space are seen as just an onramp to more of the same this year, according to the latest research from DeVoe & Co.

The new report, which includes findings from a survey of registered investment advisers, in some respects contradicts the outlook of the firm’s managing director, David DeVoe.

In late November, in a discussion of 2021’s record-level M&A activity, DeVoe tamped down expectations for another record year in 2022.

“The next five or six-plus years, we’re going to see upward trajectory in the number of deals, but we may not see another record year in 2022,” he said about five weeks ago.

The prospect that this year’s merger and acquisition activity could break the decade-long streak of record deal volume goes back to the main drivers of activity, DeVoe said. “We saw a surge at midyear from firms looking to get deals done in 2021,” he said, referencing a rush to close deals given the Biden administration’s broad push for increased taxes.

The sweeping tax hikes failed to come to fruition in 2021, but Democrats are continuing their effort to enact tax legislation before the midterm elections this year.

According to DeVoe’s survey of financial advisers who are on the ground experiencing the growing M&A momentum, the expectations are for much more of the same.

“The recent 30%-plus year-over-year increases in M&A volume are seemingly driving expectations of a new normal trajectory, as opposed to anticipating fatigue and a slowdown,” the report states, noting that 63% of survey respondents expect activity to rise somewhat or considerably.

The drivers, according to the research, include high valuations, an aging founder demographic and the proliferation of serial acquirers.

Meanwhile, a third of adviser respondents expect M&A activity to level off in 2022, and 4% expect it to decline from prior years.

The findings represent a stark contrast from the outlook of a year ago, when 75% of advisers expected M&A activity to decline, and no respondents expected an increase in activity.

“That group seemingly assumed the pandemic would quell these strategic decisions,” the report states. “In retrospect, Covid likely drove M&A activity, as advisers reflected on their goals, mortality, and lack of succession plans.”

In terms of the outlook for valuations, advisers believe it continues to be a seller’s market, with 39% of respondents expecting valuations to increase over the next year, while 53% think valuation levels will hold steady.

Keep in mind that this bullish outlook for M&A activity comes against the backdrop of more than 230 deals last year, which was up from 159 deals in 2020 and 131 in 2019.

As one might expect, the bigger firms will continue to be the most active acquirers.

Among survey respondents representing firms with more than $1 billion under management, 74% plan to make an acquisition in the next two years. That compares to 63% last year and 74% two years ago.

By comparison, only 42% of the respondents representing firms managing between $100 million and $1 billion plan to make an acquisition in the next two years. That percentage has remained virtually unchanged over the past few years.

Of those RIAs planning to make acquisitions, the primary drivers in order are to acquire talent, grow clients and assets, expand services, expand infrastructure and expand geographies.