After a slightly down year in 2023 for deal-making in the registered investment advisor market, the first two months of this year saw a 20 percent increase in transactions when compared to the same time a year earlier, according to DeVoe & Co., a consulting and investment banking firm for RIAs.
Year to date, 49 transactions have been announced, versus 41 transactions during the same period last year, according to DeVoe. The increase in activity follows the full-year decline in 2023, which was the first downtick in annual M&A volume in more than a decade.
In 2023, RIAs hit their first speed bump after almost a decade of ever increasing mergers and acquisitions. There were 251 RIA mergers and acquisitions in 2023, compared to 264 in 2022, a 5 percent decline, marking the first time in a decade that the number of M&As dropped on annual basis, according to DeVoe.
High interest rates make borrowing more expensive, and global economic fears also contributed to the slowdown. But M&A activity likely will continue to be spurred by the appetite for RIA acquisitions from private equity firms and family offices, along with financial advisors' search for a succession plan.
"I didn’t see last year as a softening of M&A for the RIA industry, it was more of a leveling off," said Peter Nesvold, partner at Republic Capital Group. "I'm not surprised to hear that the volume of deals is up over last year. The number of deals ebbs and flows over 90-day windows."
"And the pieces are in place for the mergers and acquisition market to be strong in future," Nesvold added. "Wealth management deals held pretty firm last year compared to all other areas of investment banking, which were down 30 percent in 2023."
"As interest rates were going up last year, it caused some of the private equity buyers to restructure the earnouts on deals," said Larry Roth, managing partner at RLR Strategic Partners. After a specific down payment somewhere in the neighborhood of 60 percent of an RIA's asking price, the buyer and seller negotiate an "earnout," Roth said, which is an amount to be paid over a three-to-five-year period.
Buyers' caution caused by increasing interest rates makes the math in that part of the payment to the seller difficult, he added.
"All in all, the shape of the M&A market appears pretty good, and the pace will likely pick up," Roth said, noting that interest rates look stable at the moment and buyers are likely feeling more confident that the price on the acquisition won't blow up on them.
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