The start to 2020 was full of the unprecedented. The novel coronavirus spread into a pandemic and economies were bludgeoned as countries put in place stricter policies to contain the outbreak.
At the start of March, new cases of Covid-19 in the U.S. were reported in the dozens. Now, little more than a month later, thousands of new infections are reported each day. As of Monday afternoon, over 555,000 people had become sick and at least 22,056 had died in the U.S., according to a New York Times database tracking global confirmed cases. Over that same period, stocks sunk into the fastest-ever bear market. The consensus is that a recession has already begun.
But that scenario was not expected to halt RIA deal activity or devastate sellers’ valuations and a report published Monday confirmed those assumptions.
The first quarter of 2020 was one of the most active in history, with 46 transactions. Although there was a quarter-over-quarter decline in the number of deals, the 53 transactions in the fourth quarter of 2019 was an all-time high, according to Echelon Partners, an investment bank and consulting firm focused on wealth and investment managers.
It was the lowest total number of deals in the first quarter since 2018, when there were also 46. There were 47 first-quarter deals in both 2016 and 2017, and 49 deals at the start of last year. Echelon also acknowledged the impact of the coronavirus on U.S. markets did not meaningfully take effect until the last week of February.
The coronavirus impaired the global economy and deal volume was lower than it could have been as a result, according to Echelon’s quarterly report released Monday. Custodians to RIAs and others publish their own reports but the investment bank’s is the most inclusive.
Months of planning often leads up to deals involving wealth management firms or a financial advisor’s practice. Even the pandemic, and its fallout, didn’t undo the work that went into most deals and derail transactions in the first quarter.
Echelon expects there will be fewer deals this year than in 2019. But 2020 should be another strong year in terms of overall activity, especially considering the effects of the pandemic, Carolyn Armitage, managing director of Echelon Partners, told RIA Intel.
“The current deals that we have in the works are continuing. No one has shown any signs of slowing on either seller or buyer side,” she said.
The investment bank estimates there will be 184 deals in 2020, down from a record 203 in 2019. Prior to the pandemic, this was expected to be another banner year for deals.
“While much has changed in the world, several key dynamics have stayed the same within the RIA dealmaking economy. Most notably, the aging demographic of advisors and need for transition remains a major driver of current – and future – deal activity and deal values,” Dan Seivert, CEO and founder of Echelon Partners, wrote in a note preceding his company’s latest report.
Over the next decade, more than 111,500 financial advisors — representing one-third of the workforce and assets under management — are expected to retire and not enough people want to fill their shoes.
The average deal size, measured in terms of client assets under management related to the transaction, remained relatively steady. The average deal size in the first quarter of 2020 involved a seller managing approximately $1.3 billion in client assets, slightly down from the average of $1.47 billion for 2019, according to Echelon.
“Looking to the future, we believe that 2020 will remain an active year for M&A and that the wealth management industry will likely not experience the reduction of activity experienced by other industries. Given the strong drivers at play and well-accepted valuation methods, valuations for RIA firms, at the moment, remain strong,” Seivert said in the latest report.
Appraisers “rarely” use a single quarter to calculate the value of a wealth manager and instead typically consider the trailing 12 months of performance to assign a multiple, the report notes. In January, Armitage said deal multiples were attractive but that they could fall along with a market downturn.
In December, RIA Intel reported that some RIA owners needed to sell before it was too late. To the detriment of clients and the industry, many advisors refused to acknowledge a window of opportunity to sell their business or practice, even when valuations are high.