2023 saw several new players come into the registered investment advisor M&A space focused on minority deals.
Take Rise Growth Partners, former United Capital CEO Joe Duran’s new company that will take minority investments in RIAs with between $1 billion and $5 billion in AUM, for example. And late last year, Karl Heckenberg, the former CEO of Emigrant Partners, launched his new private fund management company, Constellation Wealth Capital, and has already announced his first three minority deals.
Yet, despite these new models, minority investments in RIAs continue to steadily decline from 12% of all transactions in 2021 to just 8% in 2023, according to DeVoe & Company’s RIA Deal Book for the fourth quarter 2023. The firm recorded 28 minority transactions in 2021, 23 in 2022 and 20 in 2023.
This comes during a year when overall RIA M&A volume is down for the first time in more than a decade, the report states. M&A declined 5% in 2023 from 264 transactions in 2022. That follows nine straight years of record M&A activity. Echelon Partners also reported a similar drop in activity.
While the compression in minority deals is counterintuitive given the proliferation of minority buyers, DeVoe CEO and founder David DeVoe said he expects that activity to expand. A lot of older founders are moving toward retirement, yet the younger generations can’t afford to buy them out.
In fact, DeVoe’s M&A Outlook survey found that just 18% of RIA executives are confident the next gen can afford to buy out current shareholders. That’s down from 38% two years ago.
“The ability or inability for G2 and G3 to be able to buy out the founders—that’s been in a steady state of decline, and that’s getting scary,” DeVoe said.
A lot of RIAs will likely bring in a third party capital provider to close that gap and contribute some intellectual capital as well.
But DeVoe said firms should have a degree of scale before taking on a minority investment. And even though they involve a ‘non-controlling interest,’ the buyers typically take some level of control.
“Some of these minority players encourage or even require that you use a certain ecosystem," DeVoe said. "Others have certain preferred shares or implications for how this might convert from debt to equity and things like that. They have some economic components that can be optimal or suboptimal. Then, by the way, they’re going to be a thought partner to a certain degree.”
“Some folks assume because they’re in a minority position this player has no power. They can have a lot of power in that equation.”
