RIA Deal-making Hits Record Despite Pandemic
The pace of mergers and acquisitions hit an all-time high last year despite a significant slowdown from the coronavirus crash in March, according to a new report from advisory-firm investment bank Echelon Partners.
The second half of 2020 was “by far the most active period” in the industry’s history, with 124 deals or 61% of the total year’s transactions taking place in the third and fourth quarters, the report said. The 69 deals done in the fourth quarter were a new high-water mark for a single quarter.
Last year also saw a record 78 acquisitions of firms with $1 billion or more in assets, up from 57 in 2019 and 32 the year before. Echelon’s report attributed the activity to several aggressive and “well-capitalized” buyers who were undeterred by the pandemic and remote-work challenges.
Most $1 billion-plus RIAs have steady revenue streams and more than $3 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), as well as profit margins that can exceed 30%.
“These reliable cash flows allow financial investors to confidently and aggressively finance transactions, while still providing a significant opportunity for upside potential and growth post deal,” the report said.
CI Financial, a Canadian asset manager that recently stepped-up dealmaking in the U.S. market, led the field with nine deals completed in 2020, according to Echelon. Thomas H. Lee-backed Hightower Advisors and General Atlantic-backed Creative Planning were close behind with eight deals each.
Another aggressive buyer, Denver-based RIA rollup Mercer Global Advisors, which is owned by private equity firms Oak Hill Capital and Genstar Capital, was listed with seven RIA acquisitions in Echelon’s report, but the tally did not include another several deals that closed late in 2020, including five on December 31.
David Barton, head of M&A at Mercer, which has about $27 billion in client assets under management, said the firm completed 13 deals to add $6.2 billion in AUM in 2020.
“Covid was a massive market mover in terms of M&A in 2020,” Barton said, noting its 2020 tally was ahead of the 11 deals with $2.3 billion in client assets added in 2019 as well as its 2018 total of 11 deals and $2.6 billion in assets.
Barton said the coronavirus-induced market crash in March exposed a lot of vulnerabilities at small and mid-size RIAs with between $500 million and $800 million in assets. Many accelerated succession plans or sought a partner to help weather downturns.
“The psyche of unscaled RIAs has been challenged by Covid,” Barton said. “That fear won’t go away with a vaccine because markets can go down quickly and abruptly for other reasons. The fact that [the decline] was so sharp, so deep and so quick really woke them up.”
Given the increasing buyer demand, Barton said it’s “definitely a seller’s market” with “very aggressive offers” coming not just from serial acquirers but from new local buyers entering the marketplace. The most desirable acquisition targets–firms managing more than $800 million–are seeing a minimum of eight qualified and serious bids, Barton said.