The most in-depth public study of mergers and acquisitions among registered investment advisors (RIAs) reveals the bend of valuations toward a new equilibrium, sellers pouring into the market and buyers picking their targets carefully. Advisor Growth Strategies has published the newest edition of “The RIA Deal Room,” an annual study of the structure, trends and imperatives fueling AUM concentration in the wealth management industry.
Sponsored by BlackRock, the “2022 RIA Deal Room” draws from the largest data pool to date. Advisor Growth Strategies examined the deal structure of 51 transactions in 2021, 53% of which involved firms with more than $1 billion in managed assets. Advisor Growth Strategies research revealed an M&A market with enhanced outcomes for the firms most prepared to approach the deal table.
“2021 redefined the barriers of RIA M&A,” said John Furey, managing partner at Advisor Growth Strategies. “The increase in deal volumes and valuations may flatten as we move forward. Firm owners should take the time to understand the market and focus on M&A readiness, as it will be more challenging to differentiate in a highly competitive market.”
The most impactful findings of the “2022 RIA Deal Room” report include:
Eye-opening valuations and a flattening curve. The median valuation multiple for sellers increased for the fourth straight year to 8.99x EBITDA. However, this marks a 12% increase over the previous year, compared to the 21% increase in 2020 and 29% increase in 2019. While deal volume is likely to persist for years, valuations may soon hit their ceiling.
Cash reigns, but next-generation advisors want equity. The average transaction in 2021 included 77% cash, 21% equity and 2% contingent payments. The growing prevalence of cash shows great certainty between deal partners, but deals that promise a “second bite at the apple” are more compelling for the next-generation talent that buyers want.
Bigger, choosier buyers. Major acquisition brands accounted for 69% of all deals in 2021, but such firms aggressively pursued less than 25% of potential transactions. Buyers have more options to deploy their capital, but high prices leave little room for error. New entrants should beware as more competitors, higher valuations and a variety of deal models make standing out a difficult proposition.
Good storytelling sets firms apart. Competition and a more systematic approach to deals have forced buyers to clarify what they can offer. At the same time, sellers are compelled to answer, “What makes you different?” Deal compatibility and higher valuations depend on the ability of all parties to understand and communicate their identities.
“We are still in the early innings of a developing M&A market in the independent advisor space, and the biggest prizes are going to firms with a clear-eyed, professionalized view of the future,” said Brandon Kawal, principal at Advisor Growth Strategies. “RIA M&A will continue, and we see the ‘RIA Deal Room’ as an ideal starting point for anyone looking to stay current and differentiate themselves among the increasing competition on both sides of the market.”
Advisor Growth Strategies will host a virtual roundtable event on Thursday, April 14, featuring industry experts and their takeaways from “The RIA Deal Room.” More information and archives of past reports can be found here.