After a record setting start to the year, M&A activity in the wealth management industry once again reached unprecedented levels in the third quarter and is on track for another record-breaking year.
According to ECHELON’s third quarter RIA M&A Deal Report, there were 78 deals announced in the third quarter, which is a new all-time high, beating the previous quarterly record of 76 set in the first quarter. If the M&A activity observed through the first three quarters of the year continues, 2021 will see 287 transactions announced, up from a second quarter 2021 forecast of 260 annual deals. That 10.4% increase would represent another annual M&A record and the 9th straight year of projected record-breaking M&A activity in the sector.
Strong secular trends—including consolidation, competition and succession planning, in addition to supportive capital markets, including cheap debt, heightened corporate cash balances and significant private equity—continue to fuel record-setting dealmaking activity, the report explains. Potential changes in tax rates also have added fuel to the M&A surge.
“The significant jump in deal count reaffirms our gauge of market sentiment and highlights that many independent wealth managers are still seeking to transact prior to year-end,” the report states. “We view this as largely being driven by strong interest from strategic acquirers and, in the case of larger firms, deep-pocketed capital sponsors and private equity investors.”
Average AUM
Average AUM per transaction also continues to increase. As shown in the report, 51 deals involving more than $1 billion in AUM were announced during the third quarter. This was a significant leap in relation to the deal size for the first two quarters of 2021, and significantly higher than the quarterly levels observed in previous years, the report notes.
Moreover, ECHELON observes that the third quarter’s average AUM per deal of over $2.3 billion highlights the “strong supply” of dealmaking capital from sophisticated buyers that is allowing demand from buyers to exceed the supply of firms looking to sell. “The growth in average AUM per deal can also be attributed to increases from investment performance as major indices continue to perform well despite some growing concerns about a potentially cooling economy,” the report states.
Largest Platforms Dominate
As for which firms are dominating total M&A activity, strategic acquirers and consolidators are outpacing even the “most grandiose of expectations,” accounting for over 70% of all transactions in the third quarter and over 50% of all transactions year-to-date, according to the report.
In fact, eight of the third quarter’s top 10 transactions were announced by strategic acquirers or consolidators. One of the most notable of these was the Wealth Enhancement Group, which is tied with Focus Financial for the most deals of the quarter yet, and is the only buyer to appear on the list of the third quarter’s top 10 transactions twice.
“This is a good example of the ability of these large dealmakers to simultaneously participate in and ultimately win multiple M&A efforts and successfully manage the due diligence and integration processes that come with each transaction,” the report states.
The largest deal in the third quarter by AUM transacted was SageView Advisory Group’s acquisition of Arizona-based retirement consulting firm MJM401K. At $17 billion, this deal involved nearly twice the AUM as the next largest transaction and is another example of the strong M&A activity and high levels of buyer interest making their way into the retirement planning space, ECHELON observes.
Private equity interest in the sector also has reached all-time levels. ECHELON notes that there were 12 direct transactions in the third quarter, focused on building or investing in a wealth management platform, such as TA Associates investment in $7.5 billion AUM Caprock Group, Lightyear’s investment in UK-based Wren Stirling and Onex’s investment in Wealth Enhancement Group.
Additionally, most deal activity involving private equity capital has come via their portfolio companies, such as Mariner Wealth, backed by Leonard Green, and Mercer Advisors, backed by Oak Hill. This buyer group accounted for 58 transactions during the quarter.
Wealth Tech Trends
Meanwhile, with financial advisors and investors continuing to demand improved customer service and increased technology utilization, a key trend within the wealth tech space is participants positioning their firm’s technology and service offerings for the future. According to the report, the insurance sector is building wealth management platforms and human capital via the acquisition of Turnkey Asset Management Platforms (TAMPs). “Not only do TAMP acquisitions increase potential distribution channels for insurance companies but they also provide the ability to offer wealth services to registered agents who are interested in becoming IARs (Investment Advisory Representatives),” ECHELON observes.
