The booming pace of consolidation in the RIA space is showing a rare sign of slippage, which could position 2023 as the first year in more than a decade that doesn't set a new record for mergers and acquisitions.
According to the latest data from DeVoe & Co., the 63 deals tracked in the first quarter of this year represent a 7% drop from the same quarter in 2022.
That decline follows a 19.7% year-over-year decline in the fourth quarter of 2022, which registered 61 deals, down from 76 deals in the final quarter of 2021.
“We can’t ignore the plateau that has occurred,” said David DeVoe, chief executive of DeVoe & Co.
DeVoe initially reported the findings during last week’s RIA Lab, hosted by InvestmentNews. His company's official quarterly report won’t be published until later this month.
This is the first time since 2014 that the first-quarter deal volume has fallen below the same quarter from a year earlier. And it's the first time since 2018 that two consecutive quarters saw declines on a year-over-year basis.
Citing such persistent drivers of consolidation as an aging advisor population and the pursuit of scale, DeVoe said he doesn’t think the recent trend marks a drying up of deal activity, but it could be the start of a long-term slowdown in deals.
“M&A is down, but it’s the crest of a wave that is lower as opposed to the tide going out,” DeVoe said. “We still have a wave of transactions flowing through the industry, but this makes 2023 an interesting year. I don’t think there’s safe money that it will be another record year.”
Year-over-year comparisons are important because of the seasonal nature of deal activity, he said.
Each of the past three years, for example, wrapped up with heavy deal volume as buyers and sellers tried to complete transactions ahead of any potential tax increases from the Biden administration.
That late-year scramble tended to push some deals into the first quarter of the next year, which is why activity has been peaking in the fourth and first quarters since Joe Biden took office, DeVoe said.
But with Washington now more focused on managing inflation, the threat of a recession and another debt ceiling debate, DeVoe said concerns over tax hikes are no longer enough to drive M&A activity.
“With all the drama we’ve seen in the world and everything going on in the markets, advisory firms that don’t hire an investment banker just don’t have time to focus on finding a buyer because they’re too busy taking care of their clients,” he said.
The macroeconomic environment is also having an impact on buyers, DeVoe said.
The rising cost of capital is seen as a drag on deal activity among RIA consolidators.
In 2021, consolidators made up 54% of buyers, and that percentage dropped to 50% last year. The first quarter of 2023 shows consolidators representing just 48% of buyers.
“I think it has to do with interest rates, but I also think sellers want diversity of options,” DeVoe said. “Some sellers are finding the RIA model more attractive than a consolidator’s platform.”
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