RIA merger and acquisition activity started the year strong, but deceleration in activity and global events have created questions about future expectations, DeVoe & Company says in its first quarter 2022 RIA Deal Book.
Sixty-seven transactions were announced in the first three months of the year, which was a new high in a first quarter, but the numbers “stair-stepped” down each month, according to the report, which focuses primarily on the M&A activity of RIAs involving transactions of $100 million or more in AUM.
It appears that the record-setting year of 2021 helped fuel a strong start to 2022, as many late-year sales slipped past Dec. 31 or were announced shortly thereafter, driving the January tally to 27 transactions, DeVoe notes. Consequently, January was the fourth strongest month on record, but February and March then slowed to 23 and 17 transactions, respectively. Still, the three-month tally resulted in the second-strongest quarter in DeVoe’s history of tracking—second only to the fourth quarter of 2021, which was the highest quarter ever.
What makes the outlook a bit cloudy? DeVoe explains that it has a few transactions that clients have delayed announcing, and the firm believes there might be others in the same waiting mode. The report further observes that the implications of the Ukraine invasion and its impact on the global economy and the U.S. stock market has the potential to slow RIA M&A.
“There may be additional months of declining activity or a new normal of monthly activity in the mid-teens. However, the more likely scenario is that this slowdown is an illusion created by temporary marketing decisions. Celebrating signed deals during a global crisis is not the best PR move,” the report notes.
Buyers and Sellers
Mid-size (firms between $501 million and $1 billion) and smaller sellers (firms between $100 million and $500 million) spiked in the new year, reversing a broader trend of the last several years, DeVoe notes. According to the report, sellers with less than $1 billion in AUM increased to 70% of all transactions for the first quarter, up from 59% in 2021.
In fact, deals among smaller sellers had plummeted from 53% of all transactions in 2019 to 36% in 2021, but that free-fall has now reached a plateau, the report notes. Deals in this category remained consistent on a percentage basis, but the 25 transactions in the first quarter were greater than the group’s 2021 quarterly average of 22.
In contrast, the decline in the overall $1 billion-plus segment was “most striking” within the large seller group (firms in the $1 billion to $5 billion range). According to the report, sellers with $1 billion to $5 billion experienced the largest percentage drop during the first quarter, from 29% in 2021 to 23% for the start of this year. The report suggests that this is likely just a “natural pause” after the group’s brisk 2021 activity level.
Overall, the average AUM of sellers for the first quarter ended slightly under $1 billion. DeVoe observes that this is the effect of larger sales slowing and sub-$1 billion sales rising since mid-2021. (For data consistency, the firm excludes sellers with greater than $5 billion in AUM from the calculation to eliminate the impact of outliers.)
Consolidators continue to be the primary buyers of RIAs. “Their deep pockets and the wide range of business models continue to attract sellers and allow them to drive activity,” the report states. In addition, the pool of consolidators has expanded significantly over the last five years, as RIA management teams and private equity firms focused increased energy and investment on growing through acquisition, DeVoe observes.
According to the report, consolidators acquired 55% of RIA sellers in the first quarter, which was a slight uptick from 2021. The most active consolidators are now able to absorb multiple transactions per quarter, including:
- Beacon Pointe Advisors (6);
- Creative Planning (5);
- Mercer Advisors (5);
- Mariner Wealth Advisors (4);
- Cerity Partners (3); and
- Wealth Enhancement Group (3).
In addition, OneDigital announced three RIA acquisitions.
As part of its concluding thoughts, DeVoe emphasizes that the narrow time frame and volatility of recent events should give one pause before claiming that a sustained decline has begun. And while transactions may be delayed, RIA M&A activity, over the mid-term, is likely to continue increasing, the firm observes. Moreover, the next five years or longer will likely see heightened M&A activity, primarily due to the benefits of scale and the lack of succession planning.
Fidelity’s M&A Report
Earlier this week, Fidelity Institutional released its First Quarter 2022 M&A Report, which shows similar, but slightly different results from that of DeVoe’s. According to Fidelity, the pace of record-setting 2021 continued through the first quarter of 2022, with 58 RIA transactions—which was a 26% increase over the same period in 2021—representing $89.3 billion in AUM.
Like DeVoe, Fidelity also found that there was a marked increase in the number of transactions under $500 million, comprising 43% of first quarter deals, compared with 38% for all of 2021. Large transactions also continued with 31% above $1 billion. In addition, there was only one broker dealer transaction in the first quarter overall.
“While many projected a slowdown in M&A activity in 2022, RIA activity continued at the 2021 run rate and set record numbers not only in March, but the first quarter overall,” notes Scott Slater, M&A specialist and Fidelity Institutional Vice President of Practice Management & Consulting. “Serial acquirers continue to drive results this year, with 13 firms completing multiple transactions in Q1 that represented almost 75% of the quarter’s deals. As we continue into the second quarter, it is clear that buyers remain confident with their inorganic business plans,” adds Slater.
