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M&A Activity Regains Footing in the Third Quarter

Business Growth Strategies

After experiencing a slower pace for the first nine months of 2023, RIA merger and acquisition (M&A) activity apparently regained its footing in the third quarter.

According to an update by DeVoe & Company, the firm expects the third quarter to be the first quarter that is higher than the same quarter in the previous year since the third quarter of 2022. As of Sept. 13, a total of 55 transactions have been posted in the quarter, which is 4% more than the 53 for the same period last year, the firm notes.  

Although a slight increase, the shift is a significant change from the 15% decline the industry has experienced during the last 12-month period, from Q3 2022 through Q2 2023.

Image: Shuterstock.comDespite this comeback, overall transaction volume is trailing behind 2022’s tally at this point of the year. On a year-to-date basis, activity is 7% lower than last year, with 175 transactions posted year-to-date versus 188 transactions for the same period last year, through Sept. 13.

What’s more, activity within the third quarter has been inconsistent across the months. “Given the steady slowdown in M&A activity over the last several quarters, this is a notable uptick,” said David DeVoe, founder and CEO of DeVoe & Company.

According to DeVoe, July and August were strong months with 23 and 27 transactions, respectively, and the highest months since January (24 transactions). In contrast, September so far has had a slower pace, with only five transactions for the month-to-date, through Sept. 13. 

The increase in activity comes after nearly 12 months of slowdown caused by high interest rates, uncertainty in the economic environment, and a volatile stock market. The slowdown took hold in the fourth quarter of 2022, which was 20% lower than the year-before quarter, while the subsequent quarters had a 7% decline (Q1 2023) and a 15% decline (Q2 2023), the update shows.  

Given the declines that built up over three quarters, DeVoe & Company forecasts that 2023’s total transaction count will be slightly lower than the 264 transactions observed in 2022.

As part of the firm’s Q2 2023 update released in July, it noted that over the previous 18 months the volume of transactions had declined from over 70 transactions in a quarter to the high 50s. That compression followed nine successive record years of M&A activity, so despite the slowdown, the RIA M&A marketplace was still very active, the update noted. 

“RIA M&A activity may continue to be volatile in the short-term; yet the mid-term and long-term should be an upward trajectory,” said DeVoe. “The aging of RIA founders and an increasing interest in scale are expected to drive increasing M&A activity for the next several years,” he further noted.   

Meanwhile, DeVoe & Company also released its preliminary findings from its 2023 RIA M&A Outlook Study at its seventh annual DeVoe M&A+ Succession Summit.

Among the key findings are that only 18% of advisors are confident that the next generation can afford to buy out the founders. This is down significantly, dropping 10 percentage points in each of the three most recent years of the firm’s survey, from 38% in 2021 to 29% in 2022 to 18% this year.

In addition, more than a third (35%) of advisors indicate that the higher interest rate environment has affected their firm’s interest in M&A. Still, nearly two-thirds of advisors (65%) expect to acquire a firm within the next two years. This expectation increased more than 10 percentage points from 54% in the 2022 survey, the firm notes.