Regardless of size or intention, every RIA is merely a Schrödinger cat.
Somewhere ahead of them is a fork in the road and, based on the circumstances at that moment in time, it could become a buyer or a seller. It will either live or die.
Erwin Schrödinger, the Austrian physicist who won the Nobel Prize in Physics in 1933, created the paradox that has been repeatedly referenced in pop culture. Schrödinger’s thought experiment centered on a hypothetical cat in a box that is simultaneously alive and dead, indefinitely. But if someone opens the box, they would either find a dead cat or a live one.
The quantum-superpositioned felines are an apt analogy for RIAs, according to an inaugural report published Thursday by Advisor Growth Strategies, a consulting firm to wealth managers. Like Schrödinger’s cat, any RIA, at any point in time, can become a buyer or seller, depending on their circumstances.
United Capital might be the best example. For 14 years, the RIA bought advisors' practices and folded them into itself, growing to be a national firm managing more than $22 billion. Last May, the company sold itself to Goldman Sachs for $750 million in cash.
The point AGS makes is that an RIA can’t really know whether it is a buyer or seller until it has evaluated those options in that moment of a potential deal, Brandon Kawal, principal at AGS, told RIA Intel. Circumstances can change in a flash.
Investment banks disagree on whether deals are getting bigger or smaller. But seemingly everyone is in concert that merger and acquisition activity is flourishing and believes that trend will continue. However, it’s getting more complicated to balance “short-term needs and long-term outcomes,” adding uncertainty to deals.
In recent years, the average deal involving RIAs included 47% cash, 41% equity, and 12% contingent payments, according to AGS.
“There was a time that reliable access to capital and a modest size differential were enough to differentiate. In today’s M&A market, access to capital is table stakes, and sophisticated buyers are articulating a story built on long-term success,” according to the report.
An RIA is often the life’s work of a seller and some owners fall under the illusion their company is worth more than it is. A short list of RIAs can demand a multiple like the one attached to United Capital when it sold to Goldman Sachs, reportedly for as high as 18 times Ebitda (earnings before interest, taxes, depreciation, and amortization).
AGS research suggests that between 2015 and 2018, the median adjusted Ebitda multiple for RIAs with at least $100 million under management was 5.1-times “and there was less than 10% positive or negative variation in the yearly median results.”
Buyers are also facing a new reality that could test their stomach for a transaction. On average through the same period, buyers consistently opened their wallets and paid 60% of the cash consideration in a transaction at closing.
The vast majority of RIAs don’t engage in any external transactions. AGS estimates that between 1.5% and 2.5% of all RIAs managing at least $100 million engage in one each year.
AGS gathered information, including price and terms, from over 50 M&A transactions to complete its inaugural study.