What’s Driving Record M&A Activity in the RIA Industry?

Increases in the number of private equity buyers and the availability of financing, along with market cycle timing and greater motivation to break away, are among the key factors driving record merger and acquisition activity, according to a new report.

Echelon Partners’ 2017 RIA M&A Deal Report finds that M&A activity in the RIA industry hit an all-time record high of 168 transactions in 2017, representing the fifth year in a row of record-setting deal volume, a 22% increase over 2016’s previous record year and a 12% compound annual growth rate since 2009.

Transactions involving sellers with greater than $1 billion in AUM also continued to surge, reaching a total of 29, up from 23 in 2016, the report notes. In addition, the average deal size exceeded $1 billion for the second straight year, with 2017 seeing an average transaction size of $1.01 billion — a 22% CAGR since 2013.

The firm projects a continued increase in M&A activity across the board. According to the report, recent tax law changes combined with record DJIA levels have fueled more confidence among sellers and buyers alike, resulting in higher activity. In turn, this increased confidence, along with advisors becoming more comfortable with debt financing and the completion of more internal succession plans, has led to higher volumes of transactions.

“The environment we are entering is creating a very bullish marketplace for M&A deal making and we fully expect to see these trends drive volumes of transactions, both in total numbers as well as in assets going into 2018,” says ECHELON Partners CEO Dan Seivert.

Private equity investments are playing a larger role in the $1 billion+ segment, and those investments are projected to continue as PE buyers seek opportunities, particularly in the wealth management space, the report notes. These firms most often are seeking well-established businesses that possess streamlined corporate structures, the opportunity for further growth and a proven track record of success, the report explains.

Several mega-transactions have underscored this activity, including KKR and StonePoint Capital’s acquisition of Focus Financials’ $100 billion in AUM. “Given wealth managers’ ability to generate consistent cash flows and high rates of growth, private equity’s interest in the industry appears here to stay and should continue to drive large scale M&A activity and consolidation,” the report suggests.

RIA breakaways also continue to maintain their momentum, despite the more “restrictive environment” stemming from major firms departing from the broker protocol, the report explains. During 2017, 423 breakaways reportedly took place, with a record 121 in the fourth quarter — an increase of 13% from the third quarter. The report further observes that the breakaway movement continues to gain momentum as the average size of breakaways increases, up 5% over 2016 AUM levels to $304 million. Raymond James and LPL Financial were reportedly the “biggest winners” in assets gained from breakaways.

Meanwhile, WealthTech has also seen significant M&A activity, with 22 deals recorded in 2017. This sector received 12% of the overall total of capital invested in FinTech, exceeding $16 billion for the first time.

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