Despite slightly lower volume during the last half of the year, 2017 marked a fifth straight record year for mergers and acquisitions of registered investment advisor firms, according to a new report.
ECHELON’s latest RIA M&A Deal Report shows that deal volume reached 168 transactions in 2017, representing a 21.7% increase over 2016’s record year of 138 transactions. The deal count for the fourth quarter stood at 41, which was the fourth highest quarter of deals in the past five years. In addition, three of the last five highest quarters occurred in 2017, beginning with 47 deals in the first quarter and 45 in the second.
The RIA M&A deal volume for the last five years was:
- 2013: 90
- 2014: 98
- 2015: 125
- 2016: 138
- 2017: 168
Average deal sizes also continue a trend of increasing in size. The report notes that average deal size exceeded $1 billion for the second straight year – a compound annual growth rate of 22% since 2013. In addition, there were 15 deals of $2 billion or higher during 2017. The authors observe that if trend-level growth rates continue, deal volume would reach 202 in 2018 and deal size would exceed $1.4 billion, resulting in more than $280 billion changing hands.
This increased activity has coincided with a revitalized interest from consolidators and private equity buyers, as these firms increasingly are seeking and finding established businesses that fit their investment criteria, according to the report. “With over 100 private equity firms already backing rollups, robo-advisors and traditional wealth managers, the industry is now teaming with professional financiers looking for deals and shooting for IRRs north of 20%,” the report explains.
In fact, well-capitalized strategic buyers and consolidators accounted for 44% of RIA purchases in 2017, completing a record 74 deals. This level is up 164% from 2013, when they were involved in only 28 transactions, the report notes. Meanwhile, RIAs were responsible for only 36% of RIA transactions in 2017, representing approximately 60 transactions. The authors note that this is a “precipitous decrease” from the 42% market share they held in 2016 and it’s their lowest share since 2012, likely as a result of the strategic buyers and consolidators “aggressively entering the space.”
Breakaway activity has also accelerated, likely over concerns of a looming end to the broker protocol that has been in place since 2004, as large wirehouses have discontinued their involvement in the program. “An end to the protocol would signal increased legal liability for advisors attempting to leave wirehouses as they would regain the power to seek restitution for any clients the advisor brings with them,” the report explains. It adds that, “As such, those advisors tempted to move to independence are facing increased pressure to make a decision now or face greater potential consequences in the near future.”
As a result, the fourth quarter of 2017 saw a total of 121 breakaways, up 13% from the third quarter. The report shows that there were 363 breakaways with more than $100 million in assets under management in 2017, more than double the amount in 2010. Moreover, the average breakaway in AUM transferred was $304 million in 2017, which was 5% higher than the average of $290 million in 2016. The authors note that the trend in breakaways will probably continue to develop in 2018.
