Registered investment advisers (RIAs) have become one of the hottest sectors in M&A. What’s driving the action?
Deal totals in this subsector broke yet another record this past quarter, according to a recent report by DeVoe & Company. Altogether, 133 transactions were completed in the first half of 2022 – 30 percent greater than last year which was also a record-breaking year.
This growth is in sharp contrast to the rest of the M&A landscape. The dollar value of all M&A deals across the globe dropped 20 percent in the first half of 2022, according to analysts at Goldman Sachs. The demand for RIA acquisitions is off the charts.
Asset management lawyer Derek Steingarten believes there’s plenty of pressure to sell. “Starting several years ago and continuing through today, RIAs that began as small shops founded by advisors leaving large wirehouses in the 1980s have been maturing,” he says.
As the co-chair of law firm Morrison Foerster’s investment management group, Steingarten has helped several private sponsors and institutional investors close deals for RIAs. He believes the consolidation in the sector is intensifying due to economic, regulatory and demographic reasons.
“Generational shifts and regulatory pressures [are] pushing some of these companies into selling mode,” he says.
Demographic shifts are also a key underlying factor. Forty percent of all RIAs are expected to retire by 2029 and roughly one-in-four do not have a retirement plan, according to an analysis by Cerulli Associates. With so many RIAs approaching retirement, the sector is shifting from a seller’s market to a buyer’s market rapidly.
Meanwhile, regulatory pressures are intensifying making these businesses more difficult to operate solo. “The regulatory duties these RIA teams take on are certainly manageable, but I do see them increase year by year,” Steingarten says. “Ever since the 2008 financial crisis, the SEC has steadily added to the regulatory pressure from a rulemaking, enforcement and onsite (or virtual) compliance examination perspective.”
Compliance needs tend to scale with the size of the RIA, which can create an economic incentive for smaller RIAs to sell. Larger RIA platforms or consolidators may have the necessary resources, technology and expertise to manage the SEC’s growing list of regulatory requirements.
“The prospect of decreasing the marginal cost of legal, regulatory and compliance support combined with the obvious economic factors and succession planning is a factor in the more recent RIA consolidation trend,” Steingarten says.