The mergers and acquisitions market for registered investment advisers has started the year in a relative burst of calm after ending 2021 at a frantic and record-breaking pace.
Last year was a spectacular year for RIA M&A. But could 2022 be the year when a mega mega-deal between two huge RIA aggregators finally occurs? Plenty of signs point that way.
According to a report by DeVoe & Co., which tracks RIA transactions of firms with $100 million or more in client assets, more than 230 transactions occurred last year — an all-time high.
Indeed, last year ended with a bang, with plenty of private equity-backed, large RIA aggregators in the market. "The record-breaking activity over the last two years, which can be attributed to rising interest rates and accelerated 2021 announcements as sellers considered possible tax changes, had many industry M&A observers anticipating a slower pace of activity in 2022," according to a report this month by Fidelity Institutional.
The industry still has plenty of ardor, and cash, for RIA acquisitions. Well-run firms kick off plenty of cash flow, making them highly attractive to buyers. RIAs routinely have profit margins of 25%, and the better-managed ones reach 35%.
February was a very good month for RIA M&A, according to Fidelity Institutional, with 13 RIA transactions totaling $21.9 billion in assets. And while deals increased 22% over the first two months of the year when compared to a year earlier, assets under management involved in those transactions were down 11%.
Translation: This year has seen more RIA deals than last but for smaller firms.
That doesn't mean a large, strategic buyer, say one with $20 billion to $30 billion or more in assets, can't dream big in 2022. Many in the RIA industry are wondering whether this year is ripe for the long-anticipated mega-deal.
It's been the industry's white whale — when one of the 30 to 40 large strategic buyers emerges from the depths to team up with another. Two decades ago, the RIA roll-up or aggregator market started in earnest, with United Capital, Focus Financial Partners Inc. and Hightower Advisors leading the way.
Today, a mega-deal would validate the purpose and value of the intense RIA acquisition market.
Until now, the most important acquisition in the RIA industry was Goldman Sachs' purchase of United Capital in 2019 for $750 million in cash.
That was a clear validation of the RIA industry by Wall Street's largest and most important investment bank. Joe Duran's United Capital was one of the first aggregators of RIAs and showed a host of firms and outside money men how to do a successful deal.
That was Ahab hunting the white whale. Now, the whales are likely to go into business together.
A mega-deal between two strategic buyers — I don't know enough right now about the potential players to report any concrete deal-making activity — is increasingly regarded as a real possibility.
"I agree with that, and that's the question in the market right now," said Brandon Kawal, principal at Advisor Growth Strategies, an industry consultant. "But I don’t think we’re that far off. These are the firms that are characterized as large strategic buyers and there are up to 40 of them."
Valuations for firms are climbing, Kawal noted, due to more buyers in the space.
"And those same buyers are some of the big firms who are commanding the high valuations themselves," he said. "The number of RIA sellers is the highest it's ever been, but there's still more demand and lots of money chasing the same opportunities."
Not every brick in the street of mergers and acquisitions is made from gold. Valuations of RIAs have steadily risen the past decade. But the pace of that increase — as measured by a multiple of a firm's EBITDA, or earnings before interest, taxes, depreciation and amortization — appears to be decelerating.
"How much more room is there to go?" Kawal asked, referring to the rising tide of valuing an RIA.
Lots of capital, plus lots of aggregators, plus rising and potentially cresting firm valuations. That equals the opportunity for a mega, mega-deal on the horizon.
Who's ready to yell out, "Thar she blows!"
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