Experienced buyers of registered investment advisor (RIA) firms seem to find the current economic environment ideal for their long-term strategy. 155 RIA deals have been completed in the first eight months of 2022. That’s 35 percent higher than the same period last year, according to a report by Fidelity.
The primary buyers are serial acquires with vast cash reserves and experience. Forces such as higher cost of capital and volatile and declining equity markets have created a challenging environment for most, but the wealthiest and most experienced acquirers see these conditions as the perfect opportunity.
“From an M&A perspective, this is going to be one of our strongest years ever,” says Lenny Chang, co-founder, senior managing director, and head of M&A at Focus Financial Partners – one of the largest consolidators in the industry. Focus has completed 14 RIA transactions as of August 2022, according to the company’s latest financial report.
Chang says current market conditions are particularly favorable for Focus’s strategy. “It’s common sense: rates are going up and they’re not going down anytime soon, so the ‘cheap capital’ is no longer out there,” he says. “Valuations have softened. It’s not as frothy as it once was. We’ve also seen a lot more malleability in negotiations.”
Increased malleability coupled with regulatory hurdles has further shifted the balance of power from sellers to buyers. “For an RIA prepping for an acquisition, it is critical to understand the economics and typical deal structure that determines how these deals get done with regard to initial sale price metrics and earnout structures,” says Derek Steingarten, co-chair of law firm Morrison Foerster’s investment management group.
“Even the deal itself will hinge on hitting the legal consent threshold for client accounts, based on revenues or AUM (assets under management), and influenced by legal terms in client contracts and other factors,” says Steingarten. “Getting expert advice about this long before the term sheet stage is critical.”
These challenges could be the reason why RIA valuations are off their peak. However, the Focus team isn’t necessarily looking for a bargain. “We seek out best-of-breed firms as targets that deserve a premium valuation,” Chang explains. “We’re only dealing with the cream of the crop.”