M&A activity continues to weather perfect storm of negative factors

Smaller RIA sellers are driving the pace of deals toward another record year, according to Devoe & Co.'s report on third-quarter activity.

Consolidation continues across the wealth management space, even if 68 deals per quarter is becoming a standard number.

The latest report from DeVoe & Co. counts 68 transactions during the third quarter, which coincidently is the number of deals in four of the last five quarters.

That consistent pace of M&A activity added up to 203 deals during the first nine months of this year, representing a 23% increase over the same period last year.

David DeVoe, founder and chief executive of the deal-tracking firm, said he remains impressed by the pace of deal flow despite what he described as a “perfect storm of factors that should be compressing valuations and dragging down M&A volume.”

He cited stock market volatility, interest rate hikes, a looming recession. employee turnover and geopolitical unrest as some of the issues that could or should be derailing deal activity.

“It’s business as usual in RIA M&A land,” DeVoe said. “2022 is on track to be yet another record year, albeit a relatively unexciting year from a volume perspective. Although some interesting subtrends continue to shift and evolve, the top-line numbers have been steady throughout the year.”

For perspective on the steady increase in the pace of deals, 2022 is only 38 deals shy of tying last year’s record. And 38 deals is two more deals than were announced in all of 2013.

One of the subplots that DeVoe sees emerging is an increased number of smaller transactions.

The number of sellers managing less than $1 billion in client assets has increased by 54% compared to the same period last year, and such sellers represented 142 of the total deals this year. Of that total, 93 of the sellers were managing between $100 million and $500 million.

DeVoe said the migration toward smaller firms representing the bulk of the deals is partially attributable to the Covid pandemic.

“After running at a sprint the last two years, sellers in the $1 billion to $5 billion range completed only 16 transactions in Q3, which is 30% lower than the high-water mark of 23 in Q3 2021,” he said.

Another post-Covid finding is an increased number of sub-acquisitions.

Over the first nine months of this year, there have been 40 acquisitions by firms that are part of larger consolidators. That compares to 38 sub-acquisitions for all of last year, and 26 in 2020.

“Most sub-acquisitions are smaller than the broader market, as the buyers are smaller themselves and target the digestible RIAs,” DeVoe said.