RIA M&A stumbles in the second quarter

Merger and acquisition activity involving registered investment advisors saw a slight dip during the second quarter even as private equity investors continue to influence deal volume and valuations.

The latest report from Echelon Partners shows 65 transactions during the three-month period ending June 30, which compares to 75 deals during the prior quarter and 91 deals during the same quarter last year.

According to the report, “the relatively low volume this quarter is consistent with historical trends as the second quarter is typically the least active quarter of the year in terms of deal announcements.”

While deal activity has seen a gradual decline since peaking at 99 in the fourth quarter of 2021, Echelon reports that the recent quarter stands out as the second-most active second quarter on record.

“The market is still very active, but sellers are selling for slightly different reasons,” said Jim Cahn, chief investment officer and chief business development officer at Wealth Enhancement Group.

Cahn said the high point that occurred at the end of 2021 resulted from sellers “taking chips off the table” by getting deals done ahead of what were expected to be higher taxes under the Biden administration.

The driving force in 2023, he said, is a pursuit of scale.

“There’s starting to be more recognition among business owners that there will be some continued consolidation, and the benefits are obvious at this point,” Cahn said, adding that RIAs with less than $2 billion in client assets “are actively looking for partners.”

“The next wave of consolidation is really about who will have that technology to provide scale,” he said.

Wealth Enhancement Group, which has $70 billion under management, has announced seven deals so far this year, and Cahn said there are three signed purchase agreements expected to close within two months.

According to Echelon, Wealth Enhancement Group was the most active acquirer during the first half, after striking 14 deals in 2022.

Hightower Advisors, which has announced eight deals this year and seven last year, is also feeling more bullish about 2023.

“It’s been a good year for us so far,” said Scott Holsopple, Hightower’s chief growth officer. “It’s maybe a bit slower than 2021, but it’s still active.”

Hightower has $120 billion under management and typically focuses on firms with between $1 billion and $3 billion worth of client assets.

Valuations “are still very competitive for the highest quality businesses,” Holsopple said. But for deals involving firms a notch below the highest quality, he said there’s more “structuring,” which ties valuations to things like client retention and organic growth rates.

Jason Gordo, president and co-founder of upstart acquirer Modern Wealth, said his firm has been focusing on RIAs with between $250 million and $750 million.

“We’re seeing a lot of opportunity in the early days of Modern Wealth,” he said. “Valuations are starting to normalize; they’re not where they were a few years ago, when rates were at zero and lot of private equity money flooding into the market.”

Modern Wealth, which has $1.5 billion under management, has announced three acquisitions since the firm was launched in April, and Gordo said to expect “another wave of announcements in coming months.”

The largest deal during the second quarter was UBS' $3.3 billion purchase of Credit Suisse.

The second-largest deal was the 20% stake in CI Private Wealth acquired by a consortium of private equity investors, representing one of the 18 minority investments by PE firms during the quarter.

In addition to representing the largest private equity transaction during the quarter, the deal, which valued CI at nearly $5.3 billion, pushed up valuation averages for the quarter. According to Echelon, the CI deal indicates a multiple of 25.6 times earnings before interest, taxes, depreciation and amortization.