The second quarter was “one of the most unique periods for merger and acquisition activity in the history of the wealth management industry,” according to Echelon Partners, an investment bank and consulting firm.
There were a total of 35 mergers or acquisitions in the wealth management industry in the second quarter, down 20% quarter-over-quarter and down 34% compared to the second quarter of 2019, according to Echelon, which publishes the industry’s most inclusive report on deals. But that was anticipated.
“The decline in transactions was largely expected, as the Q1 market slide delayed the completion of deals that were in progress,” the investment bank’s latest report said.
The first quarter of 2020 was unprecedented. The novel coronavirus, Covid-19, spread into a pandemic and caused a historic market downturn, interest rates to plummet to effectively zero, and put millions of people out of work.
A recession began in February, but the swift market downturn in March meant the revenue of many wealth managers suddenly fell, too. Advisors often charge clients a periodic fee based on the assets they manage, typically 1%. Wealth managers were suddenly taking a hard look at their own companies and some began seeking forgivable loans through the CARES Act Payroll Protection Program, a program to help small businesses with fewer than 500 employees.
In turn, consultants to wealth managers have faced fee-haggling and pivoted their businesses to serve clients working remotely and, sometimes, with shrinking budgets.
Venture capital firms did fewer deals with fintech companies in the first quarter but invested an equal amount of money compared to the first quarter of 2019. But deal volume in the so-called wealthtech segment plummeted. There were only 20 deals in the first quarter of 2020 and deal value was down 75% year-over-year to $178 million.
Still, the virus-driven chaos wasn’t expected to halt RIA deal activity or devastate seller’s valuations. Deal volume leading up to 2020 was robust. There were a record 132 deals involving just RIAs in 2019 and industry observers forecasted that the 2020 would be even higher. Wealth management is a fast-growing segment of financial services and 2019’s deal tailwind will be present, according to Echelon.
“The notable uptick in May and June is an indicator that normal deal processes have resumed — and the demand for high quality RIA firms has not waned. With equity markets recovering, and new sellers beginning to explore opportunities in Q2, there is an increased likelihood the M&A activity levels could resume their 2019 pace in the 2H 2020,” the bank said.
Valuations remained strong in the second quarter and could stay there, even as buyers and sellers of RIAs have begun heavily favoring cash to fund deals. Valuations will also remain stable as deals get larger because the relatively bigger companies are often constructed for growth, leading to greater enterprise value and higher multiples. To date in 2020, the average seller has $1.5 billion under management, the highest average on record, according to Echelon.
“The quarter’s larger deal sizes indicate that while M&A activity may have slowed for smaller firms during the market downturn, larger firms with dedicated leadership, corporate development and integration teams are continuing their consolidation efforts. Mature, scalable platforms and well-established businesses are still in high demand and buyers are willing to look past the current economic downturn to future growth potential.”