These past few years have produced record volumes of RIA merger and acquisition volumes, both in the total number of deals and in the total amount of AUM that is changing hands. These year-over-year continued record-breaking numbers are according to every deal-tracking report, analysis, and study conducted by the leading players in the wealth management deal space.
The main drivers here are the continued aging of RIA principals looking for a succession plan, a more complex and competitive operating environment, the availability of "cheap money," and the flood of Private Equity investors entering the space. So much so that national RIAs are now emerging with the size, scale, and infrastructure to fundamentally alter the makeup of the traditionally fragmented independent wealth space through M&A deal consolidation.
However, one of those key variables in this deal recipe is about to change due to the coordinated efforts of the Fed to tame rising inflation. And that key variable is that there may not be any more "cheap money" to lubricate deal flow. According to the latest whitepaper from SS&C’s Black Diamond Wealth Platform rising interest rates may put a significant damper on the economics for both buyers and sellers as the cost of capital increases.
The whitepaper, How Rising Interest Rates Call for Fresh Approaches to Wealth Management M&A Strategies, notes:
“History shows that the Fed's monetary policy tightening could correspond to a short-lived M&A slowdown compared to 2021, according to a research report from Baird Global Investment Banking that studied the impact of Fed rate hikes and M&A activity during the past two rate hike cycles[1].”
What this means for sellers is that rising interest rates often correspond to market declines, lowering AUM and subsequent valuation multiples, implying lower prices for selling firms. Likewise, the increase in the cost of capital for buyers means that they will have to lower their offers to make their economics work. As a result, these downward pressures in business valuation may pause sellers from entering the market and buyers from continuing to pay top dollar for RIA firms.
Despite the downward pressure in valuations, industry participants continue to project that deal volumes will stay constant, if not increase, because the key drivers for consolidation are still in place, most notably the lack of succession planning in the industry and the continued aging of advisors.
Ultimately, both buyers and sellers will need to re-examine their value propositions. They must determine why they are attractive candidates to be acquired and what acquiring firms can bring to the table as it will still be a sellers' market.
Thus, going forward, firms that have an efficient infrastructure and an integrated technology stack will be the best positioned for success, whether they are a buyer or a seller, the white paper concludes. “By investing in these tools and innovations, technologically advanced wealth management firms offer a selling point to RIAs looking to merge and acquirers looking to buy.”
The Black Diamond® Wealth Platform has helped many advisory firms navigate the intricacies of a technology migration in an M&A scenario. Whether you are looking to buy, sell, or otherwise join forces, it pays to talk to our team. To learn more, request your personal demo, call 1-800-727-0605, or email info@advent.com.
[1] Positive M&A Market Fundamentals Should Offset Fed Rate Increases, Baird, March 11, 2022
