Sluggish Q4 aside, RIA M&A on track for another record year

The rising cost of financing combined with a sluggish economy and falling equity markets have introduced uncertainty into the decade-long acceleration in consolidation among registered investment advisers. But the pace of merger and acquisition activity leading into the final weeks of the year puts 2022 ahead of last year’s 241 deals.

"The prolonged economic and market downturn combined with interest rate increases conspired to drag down M&A momentum," said David DeVoe, founder and chief executive of DeVoe & Co.

"The fourth quarter is tracking at a 34% drop from the same period in 2022,” DeVoe said. “The slowdown to date seems to be do-it-yourself sellers, as major buyer pipelines continue to be strong."

According to DeVoe’s data, there have been 242 deals announced this year through Tuesday, which compares to 241 transactions for all of last year. But 2022’s late-year rush to close deals is lagging behind the year-end effort in 2021 to get deals done before the tax hikes that were expected under the Biden administration.

Thirty-nine transactions have been posted in the fourth quarter through Dec. 6, which compares to 59 transactions over the same period last year.

“While this is a 34% decline, the current tally is far higher than what the October and November numbers indicated,” DeVoe said.

By month, fourth-quarter deals include 15 in October, 18 in November, and 6 through Dec. 6. To put the recent period in context for the year, the average monthly volume through September was 23 transactions.

DeVoe is now predicting that 2022 will wrap up with 260 announced RIA acquisitions, which would represent another record year.

While some analysts had anticipated that the market and economic conditions would be a drag on 2022 M&A activity, the pace of consolidation has been kept alive with more creative financing and deal structures.

“The structures are starting to look like they did three or four years ago, with both buyers and sellers sharing the risk,” John Furey, managing partner at Advisor Growth Strategies, said speaking Tuesday at the Market Counsel Summit in Las Vegas.

Brandon Kawal, principal at Advisor Growth Strategies, said that “the foundation of M&A is different than it was a decade ago and it's different than it was five years ago.” He is seeing more creativity around deal structures to help sellers justify doing a sale with the price pegged to assets under management during a down market cycle.

Kawal said closing payments are still high, but consideration is being pushed out further to allow sellers to recoup some proceeds in the event of a market recovery down the road.