Slowdown in M&A threatens decade-long streak of increasing RIA consolidation

The record-setting pace of consolidation across the financial advisory space apparently hit a few speed bumps in the first two months of 2023.

According to the latest data from DeVoe & Co., the number of mergers and acquisitions this year through Monday is down 22% compared to the same period last year, which breaks down to 38 transactions so far in 2023, compared to 49 over the first two months of 2022.

The drop-off started in January, when the total of 24 deals was 14% lower than the previous January's total. That slowdown carried over to February, which saw just 14 deals announced, representing a 33% drop from February 2022.

Even with the slow start, David DeVoe, founder and chief executive of the deal-tracking firm, said it’s too early to forecast a break in the long streak of record-setting M&A activity.

“It’s early innings, but 2023 is tracking toward the industry’s first down year in over a decade,” he said. “On the one hand, the drop is not a surprise. There are many pressure points that historically have suppressed RIA M&A, including a declining stock market and high interest rates. On the other hand, the pipelines of nearly all major acquirers are at very high levels.”

DeVoe cited “fatigue among potential sellers and a pullback from mid-tier buyers” as factors contributing to the slower pace of deal activity.

The drop, he added, is also “accentuated by the contrast to last year’s frenzy, as sellers aspired to complete transactions ahead of anticipated tax increases.”

And 2022 was another big year, extending the string of record-setting years to more than a decade, according to a new report from Echelon Partners.

The Echelon data show 341 transactions announced last year, representing an 11% increase over 2021, a year that saw deal activity increase by nearly 50% from 2020.

Overall deal activity was skewed somewhat in 2020 by the impact of Covid-19 and government-imposed business shutdowns, but the 205 deals in 2020 were still up from the 203 deals in 2019.

The spike to 307 deals in 2021 was largely attributed to pent-up demand in the early stages of a post-pandemic environment.

Coming out of the pandemic, deal size has also been impacted, as was illustrated by the number of deals involving firms with at least $1 billion under management.

Last year, the 118 deals involving firms with at least $1 billion represented an 18.6% drop from the 145 deals in that category in 2021. But, again as a result of Covid, that total in 2021 was up sharply from 78 such deals in 2020.

The Echelon report said of the reduced number of large deals in 2022 that a “reversion to a more normalized growth rate is to be expected given capital market volatility and possible avoidance of larger transactions by some buyers due to increasing cost of capital.”

As DeVoe has already stated, it’s too early to know if 2023 will set another record for RIA deal activity, but based on Echelon’s quarterly deal count, the trend is not your friend.

From a peak of 99 deals during the fourth quarter of 2021, the quarterly count last year unfolded as follows: 94, 91, 84 and 73.

DeVoe and Echelon use slightly different metrics to track deals, but the general concept is the same and the trend is unmistakable.

The Echelon report described the slowing deal pace in 2022 as “simply a return to more normalized growth levels in our industry.”

Along those lines, there's one source of M&A fuel that isn’t expected to evaporate anytime soon.

“Currently, buyer and seller interest in M&A remains high as sellers look to solidify succession plans and as buyers look to build economies of scale,” according to Echelon.