Has RIA Dealmaking Plateaued?

What You Need to Know

According to the latest DeVoe & Co. report, M&A activity was 7% lower in the first quarter of 2023 than 2022.
Consolidators, whose business models are predicated on making RIA acquisitions, are still the dominant buyers.
Midsize firms accounted for just 6% of all first-quarter sales, compared to 23% for all of 2022.

RIA merger and acquisition activity is in the doldrums, DeVoe & Co. reported Monday. With 63 transactions posted in the first quarter of 2023, M&A activity was 7% lower than the 68 transactions that marked the opening quarter of 2022 — the first time since 2014 that the year has started with a weaker first quarter than in the previous year.

The current slowdown came on the heels of the fourth quarter’s 20% decline and marks the industry’s first six-month downturn since 2018.

Several factors are driving the slowdown, DeVoe reported. The confluence of slightly compressed valuations and increased transaction expenses — brought on by a declining stock market and rising interest rates — and distracted sellers contributed to the deceleration. Even consolidators reduced their standard level of activity, with some traditional buyers not completing transactions in the first quarter.

According to DeVoe, despite the dampening effect of these factors, “M&A activity in the industry remains extremely high on a relative basis in comparison to even recent years.”

DeVoe focuses on transactions of $100 million or more in assets under management. The firm limits its tracking to $100 million-plus RIAs to optimize the statistical accuracy of its reporting and screens out the SEC-registered hedge funds, independent broker-dealers, mutual fund companies and other companies that do not operate as traditional RIA firms.

Consolidators Remain Top Buyers

Consolidators are still the dominant buyers of RIAs, notwithstanding the recent fall in their share of acquisitions. In DeVoe’s definition, these are companies whose business models are predicated on making RIA acquisitions or are active acquirers with inorganic growth as a core plank in their business strategy.

Consolidators’ share of transactions deflated to 48% in the first quarter from 50% for all of 2022 and 54% for 2021. They announced 30 transactions in the first quarter, down from 38 a year ago.

Interest rate increases indirectly contributed to consolidators’ slowdown, the report noted. These acquirers, commonly backed by private equity and leveraged with debt, are affected by rate increases in several ways. Higher rates increase the cost of financing current transactions.

Perhaps more important, debt service on the loans from their historical transactions balloon. These costs not only erode future profits but can also limit access to additional capital or even threaten debt covenants.

Buyers are also reworking deal structures to the benefit of sellers. Many firms are adding more consideration to earnouts. The new structures will enable today’s sellers to benefit from tomorrow’s expected stock market increases, which can ameliorate resistance to selling while the stock market is compressed, according to DeVoe.

RIAs as Buyers

Increased buying activity by RIAs offset the slowdown in consolidator activity. DeVoe reported that during the last three years, acquisitions made by RIAs have increased from 23% of the market to 27% in the first quarter. RIAs’ acquisition activity during the first three months of this year shot up to 17 from just eight a year ago, or a mere 12% share of the market.

The increase in activity among RIAs may indicate a rise of new consolidators, according to DeVoe. Many RIAs dip their toes into an inorganic growth strategy and then dive into it with conviction.

Buyers in DeVoe’s “other” category acquired the remaining 25% of sellers in the first quarter, executing 16 deals. This group includes private equity, insurance/benefit companies, diversified financial services, broker-dealers, asset managers, accounting firms and, in this report, banks. DeVoe noted that it had previously classified banks as a separate buyer category, but given their negligible activity as buyers in recent years, banks have been moved to “other” as a subcategory.

Big Sellers Are Back

In the first quarter of 2023, all seller size segments increased activity but one, according to DeVoe: midsize firms. Average assets under management increased to $919 million, well above the $827 million average for all of 2022.

Small firms — those with assets between $100 million and $500 million — accounted for 54% of RIA sellers in the first quarter, a 16 percentage point increase of share over last year’s first quarter: 34 transactions versus 26. Firms in this size segment often realize the greatest benefits by joining a larger partner, DeVoe noted.

The biggest change in sellers during the first quarter involved midsize firms with assets between $501 million and $1 billion. Only four midsize firms were sold, compared with 22 in the first quarter a year ago. The percentage of first-quarter sales for this group plunged to 6% from 23% for all of 2022, reversing a trend of double-digit representation among RIA sellers going back to at least 2017.

DeVoe said midsize firms’ drop in transactions is likely due in part to the increase of smaller prospective sellers and sellers that are not represented by investment bankers. These firms likely became fatigued by the implications of the unusual macro environment and chose to deprioritize a sale for the near term.

Firms with $1 billion to $5 billion in assets surged to 29% of sellers in the first quarter, compared with 21% for all of 2022. Their sales totaled 18 transactions, three more than the first quarter a year ago.

Megafirms with more than $5 billion in assets represented 11% of first-quarter sellers, nearly double their share for all of 2022 and in line with their average share in other recent years. Seven such firms sold in the first quarter versus five in the same quarter a year ago.