United Capital Financial Advisers LLC's purchase of Peak Capital Investment Services LLC yesterday is a sign of the times.
Despite the volatile markets, mergers-and-acquisitions activity in the registered investment adviser space continues to be strong this year, said David DeVoe, managing director of strategic business development for Charles Schwab Advisor Services.
“The fourth quarter is off to a strong start, so there is the potential to have a very good — and possibly record — year,” said Mr. DeVoe at The Charles Schwab Corp.'s Impact 2011 conference in San Francisco.
With national consolidators such as Focus Financial Partners LLC and private-equity firms becoming more active in the market — and RIAs increasingly looking to grow — 44 transactions were completed by the end of the third quarter this year, with a total of $38 billion in assets in play.
A record 70 deals were struck in 2010 involving assets of $62 billion. To some extent, the high number of deals last year was a result of market volatility in the previous two years, according to Mr. DeVoe. “With the decline in the markets, advisers were more focused on their clients and stepped away from negotiations. It created pent-up supply that resulted in more transactions coming to fruition last year.”
One factor contributing to the activity is that firms with a national consolidation strategy like Focus Financial's are now fostering acquisitions by their affiliated firms. “We're starting to see the affiliates make acquisitions with the national firm bringing capital to the table,” Mr. DeVoe said.
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Valuations of the deals are still off the highs set in early 2008, but they're also off the lows of 2009. The larger the firm, the higher the valuation of deals. A $100 million firm typically sells for from 4 to 6 times cash flow, while a $500 million firm gets 5 to 8 times cash flow. “As the markets demonstrate stability and the RIAs demonstrate growth, the valuations will rise,” Mr. DeVoe said.
With many aging advisers looking to plan their succession, mergers represent one of the best alternatives. Mr. DeVoe cautions that RIAs need to consider the cultural fits with other firms or large acquirers before they make the deal.
“The cultural side of the equation can often be a blind spot for RIAs. They need to be aware up front of the cultural and social aspects of a combination,” Mr. DeVoe said. “RIAs should be thinking about how their people and client bases fit with a potential merger partner from Day One.”
