Five years ago, private equity’s involvement in RIA channels was limited to the highest-level firms. That has changed, according to new research from Cerulli Associates.
Along with increased merger and acquisition activity, the RIA ecosystem has developed new engagement strategies, product offerings and — most important — opportunities for growth. New players, including some of the biggest private equity investors, are angling for a piece of these increasingly important channels, whose scale and growth potential have increased.
Increased market opportunity has prompted more investors to deploy capital to help RIAs grow. As a result, competition for the fastest-growing ones has increased, creating multi-bidder situations and larger deal sizes.
Valuations have remained high despite higher interest rates and the 2022 market downturn, Cerulli said. It noted that although megadeals represent still-growing significant opportunities for private capital in the RIA channels, private equity remains very active within lower tiers of assets under management.
Private equity investors are hoovering up firms as small as $2 billion to $3 billion in assets under management. With some 18,000 RIAs nationwide, the rollup strategy still has a significant runway, Cerulli said.
Private Equity’s Competitors
Heightened interest in deals puts the burden on private equity investors to deliver significant value-add to help their portfolio RIAs grow rapidly, according to Cerulli.
“The core interest in RIAs remains constant, with steady revenues backed by sticky investor relationships, a high-growth area of wealth management and a market composed predominantly of smaller, disparate players,” Stephen Caruso, the firm’s associate director of wealth management, said in a statement.
Investors must be prepared to help their portfolio RIAs, Caruso said, including by supporting subsequent M&A transactions, guiding management through periods of change or developing the brand as an acquirer.
Today, private equity firms face growing competition from minority investors and from firms that offer private credit.
“Minority investors tend to be more patient in their approach, allowing RIAs to develop without the pressure of exit-level growth,” Caruso said.
For its part, private credit provides a valuable lifeline to growth-oriented firms, which find this form of nondilutive capital increasingly attractive, he said. Moreover, the cost of capital plays into an RIA’s decision to raise debt, and as interest rates decline, firms that want to retain control can do so while still accessing capital to grow.
Cerulli noted that some lenders are willing to participate in equity transactions and can be a strong value-added partner to the growing business, providing the value that a private equity investor would provide.
“As firms weigh the cost of capital, those looking to retain control have an additional lever to pull as more providers enter the space,” Caruso said.
Because of the complexities involved in raising capital, Cerulli recommends that asset managers and strategic partners make resources available to RIA clients during their growth stage.
“With more RIAs seeking to build a platform and make acquisitions, guidance on nuanced topics becomes more pertinent ahead of working with specialized providers,” Caruso said.
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