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Banks Gobbling Up RIAs as Consolidator Field Shrinks: DeVoe

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RIA mergers and acquisitions continue at a fervent pace, according to DeVoe & Co.’s latest Deal Book report. There were 82 transactions in the first six months of 2017 vs. 71 in the same period of 2016.

At the same time, though, there were some surprises on the downside. For instance, the number of deals in the second quarter fell to 38 from 44 in Q2’17.

Plus, banks started gobbling up RIAs, with RIA buyers dropping from 29% of acquirers to “an alarming low of 22%” in the first six months of 2017, which is “a surprising development given the number of RIAs who have capital and are focused on acquiring,” said David DeVoe, managing director of the company, whi works with Nuveen to publish and distribute the findings.

Deal Size Downtrend

Perhaps even more significant, the average size of acquired established RIAs (excluding firms with over $5 billion in assets) fell more than 30% during the first half of 2017.

“After a steady increase over the last four years to exceed $1 billion, the average AUM decreased nearly $400 million to $698 million,” according to the latest Deal Book report. “The steep drop was driven by a spike in $100 [million] to $250 million transactions during the first six months — and a similar decline in $1 billion to $5 billion transactions.”

The industry gas seen “an interesting shift” in the makeup of buyers. Banks are showing a “newfound interest in acquisitions, and RIAs moved toward the sidelines” in the first half of the year.

First Republic, for instance, continued to acquire “aggressively” and added two new teams. Meanwhile, three other banks also bought RIAs, as did industry consolidators.

Consolidator Crisis?

The ranks of consolidators though has been thinning “substantially,” according to DeVoe. Some have been sold (Washington Wealth and WealthTrust), changed business models (NFP and Boston Private) or gone bankrupt (iProOne and Mesa).

“Ten years ago, there were over 30 consolidators in the marketplace,” explained Vic Esclamado, a managing director with DeVoe & Co., in a statement. “Today, the number has shrunk to less than a dozen core players, and we expect we will see additional changes in the future.”

One of the biggest deals by a consolidator in 2017 was HighTower’s move to acquire WealthTrust for $6.4 billion in May.

Wealth Trust was first led by dealmaker Rusty Benton (now with CapTrust).

Its “cash-hungry acquisition strategy” led it to rely on private equity and debt, “with the latter ultimately undermining [its] momentum,” says DeVoe.

“Eventually private equity firm Lee Equity Partners, following up on [its] stake in Edelman, acquired WealthTrust. And after several quiet years, WealthTrust now has a new owner,” the report stated.

Meanwhile, Focus Financial Partners attracted its largest investor, KKR, which bought a majority stake of the group in partnership with Stone Point Capital. Focus’ estimated market capitalization is now $2 billion.

“Focus didn’t hesitate to deploy some of the new capital: Within a few weeks, Focus announced yet another mega-deal: the $16 billion acquisition of SCS Capital,” says DeVoe & Co.

The report concludes that “given the dynamics of the marketplace, … we haven’t seen the last of consolidators selling, nor have we seen the last of these mega-deals.”

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