The undiminished lure of RIA firms

Registered investment advisory firms provide a service that customers understand, demand and are willing to pay a good price for, in good times and bad.

After a years-long run, the red-hot market for RIA firms seems to be cooling. According to reports by firms that track mergers and acquisitions in the registered investment advisory business, higher interest rates and their tempering effect on equity values are largely to blame. Looking ahead, it would seem that if the Federal Reserve keeps raising rates to douse inflation, as it says it will, the feverish pace of acquisitions may not return anytime soon.

But a less frenzied market is a far cry from a dormant one, and there is every reason to believe that regardless of how interest rates, valuation multiples and other financial ratios wax and wane over the next few years, successful registered investment advisory businesses of all sizes will continue to be in demand. That’s because RIA firms have one essential ingredient going for them that many high-tech companies and venture capital favorites often don’t: They provide a service that customers understand, demand and are willing to pay a good price for, in good times and bad.

PROVEN VALUE

Recent proof of the evergreen attractiveness of RIA firms is the news that private equity manager Clayton Dubilier & Rice is acquiring publicly owned Focus Financial Partners Inc. in a $7 billion all-cash deal. Less than five years after the RIA firm went public at $38 a share, investors will be receiving $53 a share for their stock.

Successful registered investment advisory businesses of all sizes will continue to be in demand.

Other private equity firms have profited handsomely from RIA acquisitions in the past. Press coverage of the recent death of investor Thomas H. Lee noted his most prominent deal — the 1992 purchase of Snapple Beverage Corp. for $135 million and its sale two years later to Quaker Oats Co. for $1.7 billion. But the advisory business was probably equally impressed by Lee’s involvement with Edelman Financial Group, which had gone public in 2005. Lee’s firm took the RIA private in 2012 at $8.85 per share in cash, or around $265 million. Lee continued to hold a stake in Edelman after selling a large portion of his holdings for an undisclosed sum in 2015 to Hellman & Friedman, which eventually merged Edelman and Financial Engines, creating one of the industry’s largest RIAs.

DYNAMIC ATTRACTION

Another Recent transaction that demonstrates the dynamism of the business as well as its attractiveness is Dynasty Financial Partners’ acquisition of TruClarity Management Solutions, a platform for wirehouse brokers transitioning to independence. While Dynasty plans to grow by pursuing its breakaway strategy, One Seven Advisors, a Fort Collins, Colorado-based family office and CPA firm, intends to pursue a different growth path by acquiring TruClarity’s RIA.

Even if they’re less richly priced than a year or two ago, deals for RIA firms — large and small — are not disappearing. In fact, if the experience of canny private equity investors is any guide, buying when most others aren’t often is a smart move.