RIA consolidation drags during COVID-19

Measured against the backdrop of a global pandemic coupled with a stock market correction, the pace of consolidation in the advisory space during the first quarter held up relatively well.

Data from three different firms tracking merger and acquisition activity among registered investment advisory firms show a slight slowdown from the record-level pace of the past several years, but didn’t see the kind of pullback that has spread across much of the economy.

Thirty-four deals were inked during the first three months of the year, which matched the final two quarters of 2019, according to data from DeVoe & Co.

The trend, however, is expected to show fewer deals as both buyers and sellers rethink valuations and deal structures.

Another factor expected to slow M&A activity in coming quarters is the reality that advisers are spending more time managing clients and overseeing portfolios, leaving less time to spend on selling a business.

“In times like this, advisers add the most value to their clients; working day and night to support them,” said David DeVoe, managing director at DeVoe & Co.

“When advisers are eventually able to shift their focus back to their business, they will be looking at the business through a different lens,” he added.

Echelon Partners counted 46 deals during the first quarter, which compares to 53 during the fourth quarter of last year and 49 during the third quarter of last year.

The specific M&A data will vary by research provider because each firm applies its own metrics for measuring and counting deals. For instance, some researchers exclude deals below a certain dollar amount.

Echelon is predicting 2020 will finish the year with 19 fewer deals than last year, which finished with 203 deals.

“The 46 transactions we saw in the first quarter was pretty evenly spread across January, February and March, and the slowdown in deal activity was nowhere near as dramatic as people where expecting,” said Mark Bruno, Echelon managing director.

While most of the deals that are now closing have been in the works for several months, Bruno said he doesn’t believe a lot of advisers are focused on starting the process of a selling their business at this point, while the financial markets are still shaky and the full impact of the coronavirus remains a wildcard.

“Conventional wisdom says a lot of new sellers will want to wait and see where this all shakes out,” he said. “There are huge unknowns but there are still deals in the pipeline moving forward, and none of the demographics have changed. There are still a lot of buyers, and lot of financing.”

Fidelity Investments counted 23 deals during the quarter, which compares to 31 during the same quarter a year ago. The company’s research counted just three deals in March, representing the lowest level of monthly deal activity since December 2018.

“Deals that are already moving towards closing will still close and we’ve seen some of that activity already in April,” said Scott Slater, vice president of practice management and consulting and Fidelity Clearing & Custody Solutions.

“I expect you will see deals that are fairly far along still get done,” he said. “But ones that are early in the pipeline, where they’re still doing due diligence and signing letter of intent, people are rethinking how they want to do it and how to value it.”

In addition to being more focused on working with clients during the time of crisis, Slater said some sellers might also want to pause due to the valuation hit their firm could suffer because of stock market decline.

While buyers are generally seen to be in the driver’s seat now, Slater said they are showing more flexibility in deal structures that includes forecasting revenue models further out to assume market recoveries.

“I think buyers are going to be creative,” he said. “You will see a slowdown for a while because sellers are working with clients, but the fundamental drivers are still there to drive deals.”