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Despite talk of RIA M&A activity slowing down, dealmaking will continue to thrive, driven by an influx of private equity money, industry demographics and the increasing sophistication of the RIA model, according to panelists speaking at the RIA Edge conference, part of Wealth Management EDGE in Hollywood Beach, Fla., last week.
While fluctuating capital markets may have caused buyers to become more selective, there are more seasoned buyers in the industry than ever before. At the same time, sellers have more partnership opportunities than at any time in history and appear to be taking longer to consider their options.
“There are something like 38 or 39 private equity-backed firms in our space and more that want in, so there’s a tremendous amount of pressure on the buy side,” said Allworth Financial CEO Scott Hanson. There were closer to 10 when Lightyear Capital-backed Allworth got into the M&A game six years ago, he said. Since then, the firm has rolled up 28 acquisitions into its fully integrated model.
“We consistently hear from people like Scott and other large firms like Bluespring [Wealth Partners] that they have their largest pipelines ever,” said John Langston, founder and managing partner at wealth management-focused investment bank Republic Capital Group. “So, the question is, if we have more buyers and we have more sellers, do we really expect activity to decline?”
“M&A is here to stay,” agreed Brandon Kawal, principal at Advisor Growth Strategies, a business management and transaction advisory firm serving the financial services industry.
“I do think capital markets have changed the tone a little bit,” he added. “I think buyers are being very discerning and becoming more selective.”
While shifting markets may have caused buyers to approach the table with more caution, Kawal, Langston and others agreed that valuations remain at industry highs for top-performing firms with demonstrable organic growth and next generation talent.
“We are not seeing any change in valuation,” said Langston. “We’re seeing some cases where a particularly high growth client might want a longer earn out because they feel like they’re going to capture more value, and we’re doing that in some cases.”
“Every situation is very unique,” he said. “Your own self-determination and your own strategy have the biggest impact still because you have every opportunity. There’s plenty of capital and plenty of strategies.”
The panelists agreed buyers will value prospective targets differently based on their own aims, abilities and organization, but firms with a proven process for driving organic growth, viable next-generation talent and complementary business models are likely to command the highest multiples.
Kawal noted that many potential sellers are doing so for reasons other than a liquidity event but said the proliferating menu of options is causing them to take more time deciding how to best achieve those aims.
“There’s a lot of strategic rationale driving the M&A market that’s not just valuations,” he said. “It’s not just EBITDA or revenue—it’s resourcing, it’s scale, it’s succession.”
Research from Dimensional Fund Advisors suggests as many as three-quarters of firms lack a formal succession plan, and the panelists agreed the need for continuity of service will continue to bring sellers to the space. But the characteristics and goals of the average seller are evolving, due to buyer demand and more interest from firms looking to scale, simplify and add services.
“Early on, we were talking to more people at the retirement stage who were really looking at succession planning,” Hanson said. More recently, Allworth has been investing in younger teams wishing to remain with the business and participate in the firm’s continued growth.
“They have a couple more chapters left in them, and they just get tired of running a business and want to be part of something more unique and larger,” he said.
Bluespring Wealth Partners President David Canter outlined what he views as eight overarching options available to potential sellers in the RIA market, including doing nothing; selling internally; selling a minority stake; taking on a capital provider with no platform or integration; doing a partial integration with a platform firm offering support, resources and capital; entering into a “cross-town merger” with a similar or complementary firm; selling to an integrator that will absorb the firm into its own brand and culture; or going directly to a private equity provider.
There can often be cross-over, and each of the options can take a wide variety of forms, the panelists said.
“Sometimes it’s really hard to distill all the models and the options when you have 38 coming at you,” Canter said. He suggested potential sellers look first at what they’re trying to accomplish for their clients and associates, identify the most attractive partnership model and be clear about how long they want to remain with the business. He also said a firm like Langston’s or Kawal’s can be helpful in that regard.
“There are far more options for sellers than they realize,” agreed Langston. “If you’ve had some conversations and you’re not sure about any of the big names or what you’re looking for, there are some great regional firms out there doing big things that are going to be a name in two or three years.”
That said, panelists agreed the platform partnership model is attracting a disproportionate amount of interest and likely to enjoy the lion’s share of inorganic growth opportunities as those firms continue to get more sophisticated, provide more benefits and improve existing services.
Kawal said eight in 10 deals AGS has seen over the past few years have been done by full or partial platform integrators, pointing out that the variety of options within that subset of acquirers alone is becoming increasingly varied.
“Institutional capital, they love this space,” he said. “Private equity and family offices, they love the independent wealth management space. So, they’re going to do new and unique things around platforms they invest in and the types of business models they’re trying to create and, I think overall, it’s very, very healthy.”
Both buyers and sellers are becoming more market-savvy, but ongoing education will be needed as the landscape continues to evolve and consolidate, the panelists said.
Kawal and Langston expect to see dealmaking continue in “ebbs and flows” as RIAs adjust to new economic realities and operational possibilities.
“Frankly, my message is the window is wide open,” said Langston. “If you want to accomplish a transaction, whether it’s on the buy side or sell side, there’s every opportunity.”
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