Merger and acquisition experts agree that dealmaking in the registered investment advisor space is booming. Still, as the market matures, the discrepancy between bid offers is widening, according to dealmakers speaking at BNY Pershing’s annual INSITE conference this week in National Harbor, Md.
The M&A bankers and consultants on the panel cited external data and their own experience to highlight that it’s currently a seller’s market for RIAs in terms of valuations. However, the “delta between the highest and lowest bids” can vary by as much as 30% depending on a buyer’s needs and how a seller presents in areas such as margins, compensation structure and organic growth, according to John Langston, founder and CEO of Republic Capital Group.
“The valuation question has become a very nuanced one,” Langston said. “I think the marketplace has this perception that the volume is creating, perhaps, efficiency and transparency that we’re just not seeing. For professional advisors, it’s crucial to understand that if you’re in one conversation, or two, or three, you may be seeing the low bids in your informal process.”
On the sidelines of the conference, Langston said that the 30% discrepancy isn’t just about low bids. Buyers sometimes purposefully bid on the high end because an RIA has a desirable niche or geography.
“Sometimes you represent the specific geographic, talent or specific solution for a buyer,” he said. “They will tell us early in the process, ‘Hey, we’re going to bid really strong on this.’ And sure enough, when the L.O.I. [letter of intent] shows up, they are 10% or 15% higher than everybody else.”
RIA sellers, however, should not only focus on big numbers but also on how the deal is structured for them and their team in the long term, said Sam Anderson, managing director and co-head of Dynasty Investment Banking.
“Structure matters a lot,” Anderson said. “You can think you’re getting a great price as a seller, but if you’re not careful in the structure, it could be a very different outcome. We’ve seen a lot of how this has played out in the market as some of these deals have progressed.”
Jimmy Zhao, a partner with McKinsey & Company, compared the RIA space to the earlier days of the M&A-heavy insurance brokerage sector.
In the early stages of such cycles, buyers are motivated by the “financial engineering” aspect of realizing the benefits of scale, Zhao said, but as the market matures, they look for more specific traits in a seller.
“As the sector becomes more professionalized, there are more sophisticated intermediaries in the space and more competition for deals,” he said. “I think in wealth management, like many other sectors, synergies will become bigger and bigger drivers, and ultimately the only motivator for deals. I think we’re right in that moment where the financial engineering aspect is largely arbitraged away.”
Paul Lally, chief of engagement at MarketCounsel, said the massive growth among RIAs has also made it challenging for what was once a large firm of $1 billion in client assets to feel they are getting a good deal for building a large organization.
“We can remember back even 10 years ago when, if you got to a billion dollars, you had made it,” Lally said. “And now you get to a billion dollars, and you’re running out of food, you’re running out of water and supplies—because now you have the complexity of running a business … but you’re still, and it’s crazy to say this, but you’re relatively small.”
Lally said clients in this size range are looking for fair value but also the ability for a buyer to “take some of the non-revenue cruising functions off my plate” so that they can focus on clients and the next generation of talent.
“They want to have a small piece of what will be a much larger pie,” he said.
When asked where valuations stand today, the group agreed that they can be as low as 5x earnings before interest, taxes, depreciation, and amortization or over 25x EBITDA—with more deals in the upper teens to 20s range.
Langston said buyers are, in large part, hunting those bigger RIAs of at least $1 billion due to the scale of the market. Lally said the ability for a firm to show real organic client growth is also a standout.
“Most firms in our industry have little, if not zero organic growth in their businesses,” he said. “The firms that are gaining the most value have demonstrated organic growth capabilities. They have methods, they have processes, they have ways to generate organic growth for the business.”
The group also pointed out the continued push from existing and new private equity players in the space to gain a foothold in the sector through controlling and minority stakes.
Lally cited a potentially new trend in which private equity firms are looking to acquire stakes in large wirehouse breakaway teams.
“We’re now starting to see a lot of interest from private equity, because what [the advisor breakaway] needs is capital, and private equity is coming in thinking they don’t have to pay the multiples because [the RIA] is coming out of the ground.”
McKinsey’s Zhao added it was important to have a “narrative” in discussing the decision with employees after the deal is completed. He cited four key areas of that storyline, with the first being “why now? Do we have missed opportunities? Do we need to compete in a different way going forward?”
The second is “why is it worth it?” Zhao said. “There are risks and opportunities here, but why is it worth it to you?”
Three, he said, is to be “really tactical” about what is going to change and when it’s going to happen. Fourth, he said, was to set expectations and be accountable for how the change will roll out and take hold.
“If you have that compelling change story …. you’re much more likely to get people to have their ears open and lean in,” he said.
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