After inflation spiked in the wake of the pandemic, the Federal Reserve raised interest rates 11 times over 16 months beginning in March 2022. Before that, rates hovered near zero as policymakers pulled every lever at their disposal to keep the economy humming after the shutdowns halted most business activity.
Fast-forward more than two years, and rates remain elevated. Even as data shows that price hikes are beginning to wane, it seems likely rate cuts won’t come for another couple of months.
Naturally, the higher cost of capital negatively impacted M&A activity across a wide variety of sectors during much of that time. Wealth management, though, has been an exception, with dealmaking continuing at a robust pace throughout last year and into 2024.
There are a few reasons why this is the case.
- Demographics. RIA founders and financial advisors are getting older, and M&A is one good way to solve the industry’s ongoing succession planning problem.
- Private equity remains a massive force, with an increasing number of firms drawn to the industry’s recurring and predictable revenue stream.
- More wealthy families and individuals are craving financial advice than ever before, creating added opportunities for the entire market.
Still, while the wealth management M&A landscape is healthy, the dynamics hovering over it are shifting somewhat. Let’s take a look:
More Mega Deals
Even though by historical standards, the total number of wealth management M&A transactions is down as of May this year compared to the same stretch in 2023, the median assets under management of RIA sellers is higher relative to the first five months of 2023 ($550 million versus approximately $425 million). Meanwhile, the average AUM of RIA sellers as of May is meaningfully higher than the same period a year ago ($4.2 billion versus $1.1 billion). That disparity, however, is skewed by five deals involving RIAs with more than $10 billion in AUM. In 2023, there was only one such deal during the same period.
More Equity Consideration
The height of the wealth management M&A boom came in 2021, when rock-bottom interest rates and a massive influx of private equity money helped to produce a record-breaking year for deals. At the time, all-cash offers were commonplace (even though many deals included the option for sellers to roll over some of their equity into the buyers’). That’s partly because buyers felt they had to—and, given the low interest rate environment, could—be more aggressive with all-cash offers. Today, buyers are less willing and able to do that. Instead, they are relying more heavily on a mixed offering of cash and equity to get deals across the finish line.
Modified Deal Structures
Besides proposing equity consideration more frequently, RIA buyers have also sought to modify deal structures in other ways. This includes offers that attempt to tie a greater percentage of the total deal value to contingent earnouts and/or trying to link earnouts to much higher growth targets relative to a few years ago. Whatever the case, this change in approach reflects the desire among buyers to balance more of the risk inherent to any transaction across both parties while allowing them to still make competitive offers. The upside for sellers? Earnouts have the potential to result in higher overall valuations depending on growth once all the dust settles.
Deals Are Taking Longer to Complete
In 2021, tax-related concerns created an urgency to get deals done before the end of the year. There is no similar catalyst today. To that end, RIA sellers are now taking more time to undertake a thoughtful sale process. Indeed, they are increasingly meeting multiple times with potential buyers in person (not just virtually) to assess the overall fit and conduct reverse due diligence, which is important when equity consideration is a part of the equation. Buyers, for their part, have also become more discerning and selective. Meanwhile, consider much of what is discussed above—analyzing and hammering out deal terms, such as earnout structures and equity consideration, can be a meticulous process, frequently involving extended negotiations and input from outside experts such as financial, legal and tax advisors. All that takes time.
Clearly, higher capital costs have impacted wealth management M&A. Yet, unlike some other industries, the landscape remains fundamentally healthy, with dealmaking still happening at a healthy clip, both in terms of size and volume. And even as buyers propose modified deal structure terms than what became the norm during the height of the boom and transaction processes move along at a more normal, prudent pace, these shifts will likely make the landscape more sustainable.
Bomy Hagopian is the Head of Berkshire Global Advisors’ Wealth Management Practice.