After a record-setting start to the year, M&A activity in the RIA space declined in the second quarter, but 2021 is still projected to be a record-breaking year, according to ECHELON’s RIA M&A Deal Report.
The firm notes that even though the second quarter experienced a decline from a seasonality perspective, the deal count of 54 was still the highest tally of announced transactions in a second quarter. Additionally, it was the fourth highest deal count on record, which was 54.2% higher than the quarterly total just a year ago.
Yet the number of deals announced declined by nearly 29% compared with the first quarter of 2021. The decline, according to ECHELON, may be indicative that some of the stalled transactions from the height of the pandemic were announced in the first quarter and quarterly activity has normalized somewhat in the second.
The firm predicts, however, that the second half of the year will reach levels close to the fourth quarter of 2020 and first quarter of 2021, as sellers look to complete deals by year-end ahead of any possible legislative tax changes. “Looking forward we expect 2021 to outpace the total 2020 deal count as strong secular trends (consolidation, succession planning, competition), supportive capital markets (cheap debt, heightened corporate cash balances, significant private equity dry powder), and fears of potential changes in the tax legislation accelerate deal-making activity,” ECHELON states.
This would be the ninth straight year of record-breaking M&A activity in the sector. If the high M&A activity observed in the first half of the year continues, 2021 will see 260 transactions announced, compared with 205 in 2020 and 203 in 2019.
Average Deal Size
Average AUM per transaction also continues to climb. According to the report, there were 22 deals involving more than $1 billion in AUM announced during the second quarter (82% strategic and 18% financial). This is 10 fewer deals of this size than were announced in the first quarter, but is still significantly higher than the quarterly levels observed prior to 2020, ECHELON notes.
And while the second quarter average AUM per deal of $1.7 billion was significantly lower than the first quarter’s record setting level of more than $2.3 billion, it was much higher than what was observed prior to 2020. Moreover, the firm notes that many firms experienced their highest level of not only market growth but also organic growth coming out of pandemic, which supports the increased average AUM of sellers.
ECHELON further projects that 2021 will exceed 2020’s record number of 78 $1 billion-plus wealth management M&A transactions. If the first half’s level of activity in this size range continues, 2021 will see 110 $1 billion-plus wealth management transactions, which would be a 41% increase over 2020’s record total, the report notes.
Buyer Composition
Private equity interest in the wealth management sector remains high, and minority deals are currently dominating the M&A leaderboard. According to the report, 8 of the second quarter’s top 10 transactions represented direct investments by private equity firms or acquisitions by firms backed by a private equity partner.
In addition, the top three spots as measured by AUM transacted were all minority deals conducted by private equity investors: Leonard Green’s investment in Mariner Wealth Advisors, Charlesbank Capital Partners’ investment in Lido Advisors, and Pritzker’s investment in Steward Partners. These three deals alone accounted for over $50 billion in AUM transacted during the second quarter. In the retirement planning space, Aquiline Capital continued their consolidation activity, purchasing Aon Retirement Consulting for $700 million in June.
ECHELON observes that these deals illustrate three trends that it has identified in prior reports:
- increased private equity appetite for wealth managers;
- retirement asset consolidation; and
- improved liquidity options for large wealth managers.
Strategic Buyers or Consolidators are the most active type of acquirer so far in 2021, replicating a trend from 2015-2018, ECHELON notes. Since the start of the year, these buyers have announced 42% of all transactions. The average AUM across these transactions equaled $1.9 billion or nearly three and a half times the average size of the deal announced by a firm in the RIA category. Still, that level is not close to average deal size announced by Banks or those in the “Other” category (private equity, asset managers, insurance companies and independent broker dealers), the report notes.
Meanwhile, RIA-to-RIA transactions that drove deal activity in 2020 have declined significantly relative to the number of deals announced by Strategic Buyers or Consolidators. RIAs apparently have accounted for only 26% of all deals so far in 2021, marking the lowest volume for the category over the period.
ECHELON observes that the category’s overall decline is at least partially due to the increased prominence of a relatively small group of strategic acquirers that now dominate the market. RIAs also continue to engage in smaller acquisitions in 2021, averaging only $542 million in AUM transacted per deal.
