Despite an uncertain economic environment, wealth management M&A dealmaking activity appears to have bounced back in the first quarter of 2023 after four consecutive quarterly declines, with private equity helping to lead the way.
In the first quarter, acquirers announced 75 deals involving $1.2 trillion in total assets transacted, representing a slight increase from the 73 deals announced in the fourth quarter of 2022, according to ECHELON Partners’ 1Q23 RIA M&A Deal Report.
This increase in deal volume leads the firm to estimate that deal activity will stabilize at around 70-80 deals per quarter. If the first quarter trends persist, approximately 315 transactions will be announced in 2023, representing a slight decline from the record totals experienced in 2022. Still, the 315 projected transactions would represent a 11.6% growth rate in total deals over the past five years, the report notes.
The increase in deal volume is also notable given the uncertainty created this quarter in the aftermath of Silicon Valley Bank’s collapse. “The reality is that deals have an average duration of 9 months (from start to finish) and most of the transactions announced in 1Q23 were likely started in 1H 2022. That said, it is a promising sign that there was a quarterly uptick in announcements given a backdrop of economic uncertainty,” the report states.
Private Equity Driving Activity
Financial sponsors were either directly or indirectly involved in more than 77% of all transactions announced this quarter.
In fact, five of the top 10 transactions represented a direct investment by a private equity firm in a wealth manager with another three of the top deals involving a strategic acquirer backed by one or more private equity investors. One of largest and most discussed transactions of the quarter was First Citizens acquiring Silicon Valley Bank two weeks after the bank’s collapse, the report notes.
PE firms also made notable direct investments in some of the industry’s largest RIAs. Clayton, Dubilier & Rice took Focus Financial private (with Stone Point maintaining their stake), Mercer Advisors raised equity capital for M&A, and Pathstone added an additional PE-backer.
In addition, Cetera Group, backed by Genstar Capital, made headlines with its acquisition of Securian Financial Group’s retail wealth business and Securian Trust Company. The deal adds just over $72 billion in assets to Cetera’s platform and includes a strategic partnership wherein Cetera's affiliated financial professionals will distribute Securian Financial’s individual life and annuity products, the report notes.
Billion Dollar Deals
Meanwhile, average AUM per transaction increased to $1.8 billion in the first quarter, following a modest decline in 2022. As a barometer for transaction size, this signals that many large sellers may have been waiting for improved performance in equity markets prior to finalizing pricing and announcing deals, the report further observes.
In 2022, the average assets per deal decreased for the first time since ECHELON started tracking the statistic, but this trend reversed course in the first quarter, with average assets per deal on pace to grow by nearly 12% over 2022’s level.
During the first quarter, there were 33 deals involving at least $1 billion in assets, which was a 94.1% increase relative to the fourth quarter, 2022 total of 17 $1 billion-plus deals. “Our research indicates that, in the face of rising borrowing costs and economic uncertainty, buyers are being selective in the acquisitions they consider, a fact that may favor owners of $1 BN+ wealth managers,” the report states.
Overall, ECHELON suggests that buyer demand and seller supply, propelled by sustained momentum of long-term secular trends, will continue to drive dealmaking activity. “With interest rates and the cost of capital higher we expect buyers to continue to fill any funding gap with incremental equity, earnouts, and cash on hand,” the report states, adding that an uptick in activity is expected in the second half of 2023 and the first half of 2024 to account for any sellers that may have put off a deal in 2022.
