Pershing Advisor Solutions reported the results of a new study on Wednesday that found M&A activity among firms with more than $500,000 in revenue was flat in 2010 and valuations were lower than in past years. The study, Real Deals 2010: Definitive Information on Mergers and Acquisitions for Advisorsalso finds both the type of transactions and the participants continued to change significantly. However, the firm also notes an "uptrend" in deal activity is expected.
Schwab Advisor Services also released a study the same day that found a total of 23 M&A transactions involving RIAs in the first quarter of 2011, down slightly from the 25 deals reported in Q1 of 2010.The 23 total RIA transactions sold in first quarter 2011 represent approximately $20 billion in total assets under management. Of the 23 transactions, RIA firms were the most dominant acquirer category, accounting for more than 50% of acquisitions, a trend that has continued since 2009. The number of acquisitions by RIAs underscores their growing sophistication and reflects efforts to use M&A as a way to achieve business goals and objectives.
While both surveys show increased mergers and acquisition activity among RIAs, Pershing in particular notes an increase among those RIAs that appeal to those not considered high net worth.
"I've seen a lot of movement, but not a whole lot of motion," say Pershing Advisor Solutions CEO Mark Tibergien (left), when asked about surprises included in the results. "Large RIAs are asking smaller RIAs to dance, but they are not going home with them afterwards, so to speak."
Pershing’s Real Deals 2010, developed with FA Insight, builds on findings from past Pershing Advisor Solutions’ Real Deals studies published in 2006, 2008 and 2009. The report begins with a review of key developments in mergers and acquisitions since the release of the last Real Deals in 2009, and provides insight that is derived from a decade of transaction data compiled specifically for the Real Deals report series. This year, special attention is devoted to the concept of firm value—how it is measured and how owners can better influence and build value within their advisory firms.
Slower Pace of Transactions Continues, but a Rebound Is Inevitable – Both the number of deals and the time required to complete deals slowed considerably relative to the last peak in 2007. Only 41 deals involving firms with more than $100 million in assets under management (AUM) were completed in 2010, however, an up-tick by year-end suggests an imminent turnaround.
Firms Sold Shrank in Size – Firms acquired in 2010 tended to be much smaller relative to those acquired in previous years. Registered investment advisors (RIA) with less than $100 million in AUM accounted for 18% of all firms sold or merged. This is double the percentage of firms that size that were acquired each year from 2004 to 2009. The median AUM of all acquired firms in 2010 was only $400 million, the lowest median asset level observed in the last 10 years and about 15% lower than the median AUM of deals completed in 2009.
Composition of Buyers Continues to Evolve – The shift in the composition of buyers of RIA firms observed in Real Deals 2009 continued into 2010. RIA-to-RIA deals now account for about half of transaction activity. Banks, which were prominent buyers at the turn of the millennium, have faded in prominence. Serial buyers, which have captured a great deal of industry attention in recent years, have recently lost momentum.
Valuations Vary Widely – The limited number of publicly-available transaction details makes generalizing about deals challenging. However, the study suggests that valuations for premium targets are either off 10% to 15% from the perceived 2007 peak or are holding steady. Less desirable and smaller firm deals, however, are experiencing more significant value compression according to those interviewed.
Understanding Value Drivers is Critical to Creating and Realizing Value – A solid understanding of value improves an owner’s ability to create, build and ultimately realize value regardless of whether a transaction is imminent. As detailed in the study, these drivers include a combination of leading and lagging indicators of performance and a series of qualitative and quantitative firm characteristics ranging from profitability, operational efficiency and productivity to firm management and culture, client demographics, value proposition and the structure of the client service relationship.