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Mergers and acquisitions have been on fire, with annual activity setting a sixth consecutive annual record at 132 transactions, up from 101 in 2018, according to 2019 DeVoe & Co.’s RIA Deal Book. As the report states, “This activity level is not more of the same. 2019 deal velocity accelerated to nearly three times the historic annual increase of 10-15%.”

Says David DeVoe, managing director of DeVoe & Co., in the report, “This unprecedented level of activity is good for the industry. A steady ramp toward healthy levels of activity is better than a deluge of sellers flooding the market in a given year.”

However, the DeVoe report also states that considering the size of the industry, there should be even more transactions.

“An industry with over 5,000 firms (ie. SEC registered RIAs ~$100MM + in AUM) theoretically should have 250-300 annual transactions — just for succession planning alone. And that doesn’t include the gravitational force of merging for scale, which has driven half of the transactions during the last two years.” (A recent survey by PwC found a majority of global CEOs saw M&A as a key way of growing in 2020.)

Yet buyers would be overwhelmed at that level, the report states, adding the caution that sellers should not wait too long to enter the market.

Who Is Buying?

RIAs and consolidators accounted for 83% of the buyers, according to the report. In fact, RIAs were responsible for 60 transactions, or 45% of the total, up from 41 transactions in 2018. A growing group of buyers — making 20 purchases, or 15% of the total — were private equity firms, broker-dealers and large financial institutions.

Focus Financial Partners had the most acquisitions with 19, followed by Mercer Advisors with nine.

Perhaps the biggest announcement of the year was Charles Schwab’s proposed plan to merge with TD Ameritrade. Another major move was Goldman Sachs’ purchase of United Capital, from which DeVoe sees far greater implications for the business.

Despite these two M&As, DeVoe points out that the top 10 transaction total AUM was $233 billion, down 41% from 2018’s $391 billion.

The largest deal was Charles Schwab’s purchase of USAA Investment Management, which had reportedly $90 billion AUM, followed by Goldman Sachs’ purchase of United Capital, which had $25 billion in AUM. The Schwab-TD Ameritrade deal, with a reported $21.3 billion in AUM, was third in size for 2019.

Despite these seemingly strong numbers, DeVoe found that AUM transaction volume is strong but slowing. In 2018, AUM assets transacted was $494 billion, while 2017’s was $409 billion. In 2019, total AUM assets transacted was $347 billion.

In addition, DeVoe found that the average transaction size for sellers with more than $1 billion in assets but less than $5 billion dropped by 29%, from $2.9 billion in 2018 to just over $2 billion in 2019. Notes the study, that “the convergence of these trends — a greater number of smaller sellers, and a smaller size of bigger sellers — conspired to push the average seller size down.”

DeVoe also points out two other factors: foreign interest in the U.S. advisor space is growing, and dissolution of M&As, such as Luminous Capital/First Republic Bank, can be brutal. In the first instance, advisors should expect more foreign interest, especially from Canadian firms. In the second, firms need to be cautious and thoughtful when entering into M&A agreements, which can be “game-changing” but also a “ticking time bomb” if all elements aren’t put in place.

Despite this warning, it appears M&As will continue to accelerate, at least in the near term, due to these factors:

Valuations may be at record highs but the range of prices paid has expanded, meaning sellers shouldn’t expect extremely high valuations. Although sellers can be “confident” now is the time to sell, “they should not assume that buyers are paying record valuations across the board.”

Capital proliferation and lending options have added fuel to the M&A fire, which will help expand the range of succession options for more firms. This “may release some pressure from the potential deluge of firms forced to sell.”

Investment banks used in transactions has tripled since 2015, according to DeVoe, and has affected the deal structure.

Deal structures have improved over the last several years, according to the report, which can benefit both parties — and sometimes can tilt in favor of the seller. That said, “choose your partner carefully,” DeVoe warns.

The growing power of mega firms will continue, but this shouldn’t be the “death” of midsize or small RIAs, the report states, adding that “the low barriers to entry and excellent service and advice that RIAs provide to the investing public will enable smaller firms to continue to exist and thrive.”

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