Just how strong is the RIA M&A market, really?
Several top acquirers have said they’ve begun to see competitors slow down and valuations begin to slip from record highs.
Steven Levitt (pictured), one of the RIA industry’s most prolific investment bankers, begs to differ.
Citywire went one-on-one with the managing director of Park Sutton Advisors to find out how deal terms have changed, which sellers are beginning to have issues and what role Canadian asset manager CI Financial has played in creating the market we see today. Levitt’s answers have been edited for clarity and length.
Citywire: We’ve started to see some buyers talk about valuations coming down and that the environment is starting to become less seller-friendly. How much truth is there to what they’re saying?
Steven Levitt: What I would say is that I think there are nuances to this. In general, it’s not Park Sutton’s impression that the market is slowing down. Last year, we closed 25 deals. This year, we’re still expecting to close 20 to 25.
The fact is that it’s private equity firms who have driven the activity and the valuations up over the last 24 months. A few years ago, I think there were about 100 wealth management transactions a year. Others estimate that this year we’re likely to have about 300. We’re still seeing very significant activity. We still believe that it’s a seller’s market. Our sellers continue to get multiple offers. In some cases, over 10.
What I would say at the same time, though, is where we are seeing cracks is for sellers who have some issues. It could be that they don’t have bench strength. It could be that they don’t have advisors of a good age range. I would also say firms that don’t have organic growth or other issues, we have seen buyers step away.
We are seeing some buyers be more selective. That doesn’t mean we aren’t able to close these deals — we are — but we are starting to see more selectivity over the past couple of months from certain buyers.
CW: There’s been this narrative — I saw it from buyers last week at the panel I was moderating — that CI Financial moved super aggressively, spending a ton of money and that they had driven valuations up. CI has been notably pretty quiet for the last couple of quarters. Where do you see them fitting into this dynamic?
SL: It’s not Park Sutton’s view, nor has it been, that CI is the one who’s driven most of the activity or the valuations in the market. I think that’s demonstrated by the fact that if you look at our 25 deals last year, they fell across 17 or 18 buyers. It’s not like CI won half of them or they all particularly went to the same buyers.
I think we view CI as one of many active buyers the past two or three years. Yes, we’re aware that in some situations, they’ve been extremely competitive and offered high valuations. That said, so have lots of other groups.
I don’t think that they’re responsible for the high valuations in the market in general.
CW: What changes have you seen in terms of what sellers are looking for in a deal structure and how buyers are thinking about deal structure and earnouts?
SL: Deal terms have been incredibly seller-friendly the past one to two years. Stepping back a few years, if we look back to five years ago, a competitive offer would involve the seller receiving 50%-60% at close and contingent payments over three to five years. The tests that they would have to meet in order to get those payments could be quite aggressive.
That has changed, in our experience. Very often now, our sellers are receiving 80% or 90% at close and contingent payments over one or two years. A lot of that is linked to retention, often with market effects stripped out. When the contingent payments go longer than two years, often it’s because maybe there’s an extra growth payment in the mix, so they can get an even higher price.
In general, we think the deal terms are very seller-friendly, which must have contributed to some of this activity. We’ve witnessed firms like Dowling & Yahnke, RGT and RegentAtlantic— these are firms that I don’t know, personally, that I ever would have expected to enter into third-party transactions. I think we’ve seen a lot of firms who are just taking advantage of these very strong terms.
CW: I feel like over the past couple years I’ve heard discussions that we’re in a new normal for RIA M&A and what you’re describing is an M&A market that seems resilient to a pretty steep decline in markets. What is the new normal for RIA M&A? Do you expect us to stay at this elevated, 300 transaction per year level for the short to medium term?
SL: I don’t think I can look into a crystal ball better than anyone else and take an informed view as to what the new normal is. But what I will say is: When you use the word ‘resilient,’ I increasingly believe as a client myself of an RIA that these businesses are probably more defensive than I once appreciated.
What I mean by that is as a consumer, we don’t like the fact the market is down considerably this year, but what are we gonna do? Are we gonna run and take our money out of these RIAs? Where are you gonna go put it?
I think this is a resilient industry. Private equity realizes how attractive it is. A lot of comparisons are made with the insurance brokerage industry, where there’s been a lot of intense consolidation for over 20 years. Many folks say they view wealth management as a stronger industry. I’d say top quartile wealth managers tend to grow 20+% a year and we find wealth managers benefit from market lift, insurance brokerages don’t.
What I do think may change is we currently are seeing very strong valuations and deal terms across the spectrum of firms. That goes for high quality and lesser quality firms. It’s not a stretch to believe that may shift. Some firms are receiving offers where they don’t have the organic growth, they don’t have bench strength, they may have client concentration… I think it’s reasonable to believe that over the next few years there could be some correction in terms of what folks are willing to pay for those firms.
I think that for the best-in-class wealth managers, there’s going to be very, very strong continued M&A interest, whether we’re in a bull market or a bear market.
CW: In what ways has dealmaking gotten harder and in what ways has it gotten easier over the last couple of months?
SL: Where it’s gotten harder is that there’s a lot of seller angst. We’re seeing strong M&A activity, we’re not seeing valuations decline or deal structures erode. That doesn’t mean it’s not harder to achieve these outcomes when you have these volatile markets.
If someone’s balanced revenues are down 10% or 15%, yes, it is harder work as the seller or their advisor to continue to achieve or maintain the deal terms that may have been offered to them four months to six months ago.
I think that volatile markets make deals harder to close. It causes a lot more angst on both sides. If interest rates continue to rise, that could have an impact on what buyers are willing to offer for certain targets, given their interest cost is rising.
I think that in a market where everything sells, irrespective of quality, I think that more sellers can or think they can just get their deals done on their own. I think when you have choppier markets, you especially need to be smart and have expertise. It’s not as easy to achieve these optimal outcomes.
I think the dealmaking gets harder.