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RIA Deal Volume Hits Record High. What Does It Mean For Valuations?

There were 55 deals in the third quarter and a certain type of seller is getting an increasing amount of attention.

Wealth management merger and acquisition activity has been a rollercoaster in 2020. The early surge in Covid-19 cases in the U.S. caused stocks to plummet, forced companies to suddenly work remotely, and torpedoed deal volume.

Bankers and consultants predicted the lull in deal activity would be brief, and it was. Like the equity markets, M&A activity roared back in the third quarter.

There were only 35 deals in the second quarter (the fewest since the third quarter of 2017) but there were 55 deals involving RIAs in the recent third quarter, an all-time high, according to Echelon Partners, a boutique investment bank that publishes the industry’s most inclusive M&A report.

“The quick recovery in equity markets experienced in Q2 allowed normal deal activities and discussions to resume in Q3. Many deals that were delayed due to the sudden economic impacts of COVID-19 in February and March returned to their normal cadence, contributing to the most active quarter of M&A in the industry’s history, with a record level of 55 deals captured in the quarter,” Echelon said in its latest report.

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In April, the investment bank estimated there would be a total of 184 deals in 2020, down from a record 203 in 2019. At the end of the second quarter, the bank adjusted its forecast to 162 deals but third quarter activity warranted a fresh outlook. Echelon expects there will be 181 total deals this year.

If the latest forecast becomes reality, 2020 will still be one of the most active years in history. From 2016 through this year, deal volume will have expanded at a compound annual growth rate, or CAGR, of 7%, according to Echelon.

Valuations have remained strong, especially for large RIAs, but prices are not stopping buyers. “This is an ongoing trend that has been developing for several years, but the firms that are being acquired in 2020 are now some of the largest — with an average of over $1.7 BN in assets — and most professionally run organizations in the wealth management industry,” according to Echelon.

More than 23 firms managing at least $1 billion in assets were acquired during the third quarter, another record. September was an especially busy month, with eight deals involving sellers managing at least $2 billion, including Berkshire Partners’ investment in EP Wealth Advisors.

Similar to recent history, a short list of serial acquirers are accounting for the deal volume this year; 60% of buyers in 2020 have done more than one deal. “With heightened competition between professional buyers over high-quality sellers, we anticipate this trend will continue and that it will play an increased role in M&A activity moving forward,” the banks said in a recent report.

In 2020, Creative Planning has acquired eight firms, Hightower Advisors has acquired seven, and Mercer Advisors has bought six RIAs. Toronto-based CI Financial Corp. has acquired five other wealth managers this year.

“With strong valuations, the emergence of established buyers, access to financing, and increasing deal structure diversity, sellers have more options than ever before. We anticipate deal activity will remain near record levels, and potentially surpass 2019’s record deal volume, if economic conditions remain stable.”

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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