There were a record 132 mergers or acquisitions involving RIAs in 2019 and industry observers expect the 2020 total to be even higher. But as deal volume has steadily grown in recent years, the nature of the transactions has evolved.
RIA sellers are accepting lower multiples for their businesses and borrowers are slowly changing how they finance transactions, according to a new annual report by SkyView Partners, a Minneapolis-based company that matches RIAs with a network of banks willing to give advisors traditional loans for succession plans, mergers, and acquisitions. At the end of January, SkyView had helped generate 83 loans and a total of over $189 million in debt.
The average multiple buyers paid in transactions with financing that included a traditional loan facilitated by SkyView was 2.42-times the seller's revenue during the trailing 12-month period in 2019, down slightly from 2.47-times in 2018.
However, the range of multiples meaningfully shifted last year. The lowest multiple buyers paid in 2019 was 1.33-times, down from 1.59-times the year before, and the value of the most prized sellers took an even bigger hit.
In 2018, the highest multiple paid in transactions involving SkyView was 4.34-times but that watermark fell to 3.42-times last year. Depending on an RIA’s earnings, that gap could represent a considerable amount of money. Most RIAs charge clients a fee based on a percentage of the assets they manage. So, if a wealth manager has $100 million under management and charges clients 1%, that equates to $1 million per year in revenue. The difference between valuing that business at 4.34-times and 3.42-times is meaningful.
At the same time, buyers are leaning more on traditional bank loans to fund transactions, according to SkyView.
The average loan amount lent by the company's network of banks was $2.75 million last year, up from $2.09 million in 2018. The average loan term increased from 7.12 to 7.89 years, and the average amortization extended from 9.7 to 10.57 years over the same period.
For every $1 million in SkyView debt there was about $141 million in borrower assets under management in 2019, down from $165 million in 2018. “That number has dropped but it really is indicative of banks being a lot more comfortable in this space,” Robert Perry, chief credit officer at SkyView, told RIA Intel.
The rise in loan amount is partly attributable to more RIAs choosing bank financing over other means, said Scott Wetzel, managing partner and CEO of SkyView.
Out of all the deals SkyView played a part in last year, 63% used bank financing and their own cash to fund a transaction and 23% used bank financing exclusively.
Only 12% of deal structures included bank financing, a buyer’s cash, and a seller’s note, which advisors relied almost exclusively on to finance the transactions until only about seven years ago. A combination of just traditional debt and a seller’s note accounted for only 2% of all SkyView transactions last year.
Consequently, SkyView and its partner banks have benefitted. Wealth managers have collectively sought over $1 billion in financing though SkyView Partners since it was founded less than two years ago, a brow-raising total given the market was effectively nonexistent before 2013. But the company thinks $1 billion is only a sliver of the potential market. SkyView projects the market for loans will grow to between $70 billion and $90 billion over the next 10 years.
The wave of advisor retirements is about to break. Over the next 10 years, Cerulli Associates estimates more than 111,500 advisors will retire, representing more than one-third of the workforce and assets. But there is a broad unwillingness to sell creating some perverse circumstances in the industry.