RIA mergers and acquisitions continued to be strong overall for the first quarter of 2020 — though activity slowed in Q1 after a strong start, industry data show.
However, the economic slowdown due to the COVID-19 pandemic is expected to have a negative impact on this M&A activity at least in the near future, according to the latest M&A reports by DeVoe & Co., Echelon Partners and Fidelity.
These three firms don’t agree on what’s behind the slowdown seen in February and March, which came after January’s robust activity. In addition (and as usual), their respective M&A transaction data varied significantly as they each use different systems for including and excluding RIAs.
DeVoe & Co
DeVoe & Co. reported Monday there were 34 transactions in the first quarter, which it said was the third successive quarter with the same level of activity and maintained the record of 34 set in Q3 2019.
Buyer categories remained stable, with RIAs accounting for 41% of Q1 M&A transactions, maintaining their lead and essentially remaining flat in share, as they have for the past several years, according to the Q1 DeVoe & Co. Deal Book.
Consolidators followed close behind, at 38% of Q1 transactions, it said. However transactions by other buyers — including private equity firms, asset managers and other types of firms — spiked in Q1, representing 21% of volume, up from 15% for all of 2019.
After four years of a downward trend, the average seller size reversed course and neared the $1 billion mark, with assets under management coming in at $941 million, the firm pointed out.
Among the RIA buyers in Q1, “large seasoned acquirers made up a bulk of the list,” DeVoe pointed out. Creative Planning, Savant Capital, Cresset Capital and Frontier Wealth Management each had one transaction. (DeVoe represented Frontier in the purchase of Highwater Wealth Management.)
Franklin Templeton subsidiary Fiduciary Trust Co. International made two acquisitions in the quarter: Athena Capital ($6 billion) and The Pennsylvania Trust Co. ($4 billion), the report noted.
Among the consolidators, meanwhile, several firms made two acquisitions each in the quarter. They included:
- Mercer Advisors buying First Ohio Planning ($350 million) and CCP Inc. ($140 million);
- EP Wealth acquiring Guidant Wealth Advisors ($261 million) and International Research & Asset Management ($394 million);
- Cerity Partners purchasing EMM Wealth ($3 billion) and Sullivan & Serwitz ($1 billion); and
- Captrust acquiring Fountain Financial Associates ($654 million) and Welch Hornsby ($1.8 billion).
Echelon Partners reported Monday there were 46 transactions recorded in its M&A Deal Tracker in Q1, down from 53 in the fourth quarter of 2019.
Like DeVoe, Echelon said RIAs were the most active acquirers in Q1 and were responsible for 19 transactions, or 41%, of the total deals in Q1, according to Echelon.
Strategic acquirers/consolidators were the second most active, accounting for 15 transactions, or 33% of Q1 activity, Echelon said. Although banks and private equity firms were again among the least active in total deals, they were responsible for six of the top 10 acquisitions that took place in the quarter, according to Echelon.
During Q1, there were 17 deals of $1 billion or greater, with over 80% of those transactions announced in January and February, it said.
The top M&A transaction overall in terms of AUM picked up during Q1 was Morgan Stanley’s acquisition of E-trade, which delivered Morgan Stanley $360 billion in AUM, Echelon said.
On Friday, Fidelity said there were 23 RIA deals in Q1, totaling $29.9 billion in client assets, down 26% in the number of transactions, but up 35% in client assets compared with the year-ago quarter.
Of the deals, 35% were $1 billion-plus, representing 81% of total Q1 AUM. The largest Q1 RIA transaction under Fidelity’s system was Fiduciary Trust Co.’s acquisition of Athena Capital Advisors with $5.8 billion in client assets.
The “breakneck pace” of M&As that started the quarter in January, with 18 transactions for the month, “was followed by a steep drop-off to nine transactions” in February and just seven in March, DeVoe noted.
“Although the emergence of COVID-19 in the period was not the culprit for the slowdown,” DeVoe predicted the crisis would “have profound implications on future activity,” adding: “RIA businesses of all shapes and sizes will be directly and indirectly affected by this evolving situation.”
The “deceleration” from January through March was “just a natural anomaly,” according to David DeVoe, managing director and founder of DeVoe & Co. “The ebbs and flows of trend lines” were to blame, he told ThinkAdvisor, stressing it was still a “very strong quarter overall.”
However, Fidelity said that after Q1 M&A activity started off strong, with 20 RIA transactions in the first two months of the year, the COVID-19 pandemic and March’s market volatility were “reflected in the month’s slowed M&A transaction activity.”
Just three RIA transactions totaling $1.2 billion were announced in March, the “lowest level of monthly activity since December 2018 and one of the smallest monthly totals since 2016,” it said.
Meanwhile, Echelon said that “while deal momentum carried over from 2019 into Q1 2020, the sudden drop in markets and the abrupt slowdown in economic conditions — which began in late February — caused global M&A activity to slow in March.”
However, Echelon predicts total 2020 deal activity will be strong. Meanwhile, according to Fidelity, “active buyers and bankers indicate that they expect most already-negotiated deals to be completed, while deals in their earlier stages could see delays throughout this period of volatility.”
Fidelity estimated: “Many firms will likely take time to assess market direction, with sellers staying focused on serving clients and buyers focused on evaluating their overall strategy. In the months ahead, buyers may be in a stronger position to negotiate transactions and as a result become more selective in the quality of firms they seek.”
DeVoe & Co. expects there will be four phases for RIA M&As following the coronavirus crisis, including periods in which:
- Live transactions get completed.
- There is a lull in activity.
- There is a surge of activity.
- We return to some degree of normalcy.
Although the pandemic and accompanying market decline have been a “shock to the system, which affects the psychology of both buyers and sellers,” DeVoe & Co., like Fidelity, said it expected “most transactions that are currently in a later stage of the process will be signed and closed.”
However, “many transactions currently in earlier stages of negotiation will likely stall,” DeVoe said, predicting that those retreats will contribute to a “noticeable slowdown in M&A activities” during Phase 2.
Despite the expected decrease in signed deals, DeVoe predicted early- and mid-stage M&A activity “will be at heightened and intensive levels” during the second phase.
“The seeds planted in the second phase are likely to be vast, and they will be setting the stage for a bumper crop of transactions” during the third stage and then a “return to normalcy,” the report said.
DeVoe & Co. predicted that RIA M&As will “eventually return toward the steady upward trajectory that the industry has seen for the last six years” and that the “trend will continue for several years to come.”
— Check out Switching BDs in a Pandemic: How One Team Did It on ThinkAdvisor.