The registered investment advisor market hit an inflection point for mergers and acquisitions in 2023, as the largest RIA platforms got even bigger, with some approaching $500 billion in assets and many bringing on outside capital to accelerate organic and inorganic growth. The industry “saw the shift from a gold rush mentality to an institutional arms race,” according to a new report from management consulting and transaction advisory firm Advisor Growth Strategies.
That maturity has created a new middle market in RIA M&A. Firms with less than $10 billion in client assets no longer qualify as “middle-market”, according to AGS Principal Brandon Kawal, who puts the revised ceiling for the cohort at around $30 billion.
The insight is one of several shared in AGS’ 2024 RIA Deal Room report, released Wednesday, which tracks the evolving landscape of dealmaking in the SEC-registered advisor space. M&A activity has remained surprisingly resilient, the report found, but has also matured to a point where the ground rules are changing.
New this year, AGS included a series of seller case studies in its annual advisor survey to learn what characteristics are most attractive to potential buyers.
The reclassification of market segments was driven, at least in part, by a “race to institutionalization” as firms seek increasing scale, Kawal said. He cited Creative Planning’s acquisition of the former United Capital, with some $20 billion in assets, from Goldman Sachs in the fall.
"Just by virtue of what the competition has done, you’ve got several firms past that $30 billion or $50 billion mark that have some pretty aggressive growth trajectories,” he said. “So, that’s what you’re really chasing now.”
AGS also cited the United Capital deal, along with Focus Financial’s take-private sale and CI Financial/Corient’s delay of an IPO in favor of private equity, as evidence that public markets are still industry-averse.
The AGS report found that sellers who offer equity and are aligned with the buyer around target clientele and service philosophy are likely to command the highest multiples. Geography can also be a key factor, while technology appears less important. Meanwhile, some firms are simply getting too big for many potential buyers to afford.
The cost of capital, shifting markets and lofty price tags have led buyers to revisit the use of equity in their deal structures in recent years, offering shared risk and upside without an exorbitant down payment. The increasing value those buyers are placing on firms that already have equity programs in place is being driven largely by the desire for talent and the appearance of new investors on the scene, according to Kawal.
"We’re entering a phase of the industry where you can either offer equity now or you’ll have to offer it as part of a transaction, or you’ll have to figure out something,” Kawal said. “From an industry health perspective, equity recycling is something everyone has to do. These buyers are doing it through their equity structures, and they’re going to prioritize it in the firms they buy.
“I think it could potentially lower the confidence of many buyers if you don’t have a plan because they want that team that’s engaged and around,” he added. “I think that's a huge factor moving forward for the M&A space, but it’s really something that should be on every founder’s mind.”
Kawal pointed out that industry-focused middle-market investors such as the well-established Merchant Investment Management, as well as Rise Growth Partners and Constellation Wealth Capital, both of which burst onto the scene last year with big names and fanfare, generally support equity-sharing and can be instrumental in helping expand ownership to the teams in which they make minority investments.
Specialized minority investors like Merchant, Rise and Constellation represent the largest untapped opportunity in the RIA M&A arena, the report stated, offering founders a way to achieve partial liquidity while retaining significant ownership and control.
“Ninety-eight percent of the industry has not historically had access to middle market private equity,” said Kawal. “Because they’re looking for more creative angles to invest, these investors are making it a reality for founders that still have 10 or 15 years left and don’t want to put their team in a situation where they have to try to figure out a way to buy all the ownership. An investor can help do that in stages, while still providing appropriate amounts of liquidity for them and their team.
"You can kind of have the best of both worlds,” he said. “But it's more complicated to construct.”
Advisors need to be wary of attention-grabbing multiples without understanding the structure and nuances of the underpinning deal, Kawal warned. This was the first year AGS asked firms how many times they’ve been contacted by a potential buyer, and the results “were staggering.”
“They're getting emails or calls every week on the topic of M&A,” he said. "And I think what that really means is there's just more to sort through and sellers need to be really intentional about why they’re even picking up the phone."
As buyers become more professionalized, capitalized and creative, sellers can find themselves in a disadvantaged position at the negotiation table, Kawal said. The market is expected to favor sellers in the coming year, according to AGS, but he believes it has also become critical to either bring in transaction support or take the time needed to learn about the proliferating number of options, opportunities and pitfalls.
“If we were ever selling Advisor Growth Strategies, which we’re not, but John [Furey] and I have said many times that if we were, we would not do it ourselves,” Kawal offered. “Does that mean you need a banker? Maybe not, but you need trusted people in your corner who can give you good advice. There are so many solutions out there that you might not even know about the ones that are best for you.
“Even if you do a minority or small majority like we talked about, it forever changes who's under the tent of your business. You need to do it right.”
The six case studies in the report pointed to an aversion to the combined broker/dealer and RIA option. While that model has seen the fastest reported growth, it was deemed the least attractive acquisition target by all respondents. Kawal suggested this is due to philosophical aversion to, and a broad inability to support, commission-based business, at a time when private equity interest in fee-only platforms is increasing their purchasing power.
The second-least popular option was a firm with more than $1 billion in client assets, illustrating a shift in the focus of RIA buyers amid persisting market uncertainty. Active acquirers will still pay more than their peers for sub-ideal firms with smaller price tags, said Kawal, but they’re increasingly unwilling to shell out the time and money needed for larger, more expensive opportunities that don’t check all the boxes.
Rather than chasing assets, he said, the buy-side game is now about enhancing services aimed at specific client segments and adding talent in key geographical locations.
"If you want to be the top one, two or three firm in your geography or segment, to take a page out of Mark Tibergien’s book, you have to build a lot of depth to do that,” Kawal said. “That’s what we think the territory war is really about: building deeper capabilities in client segments, but also in those geographies where you want to have the unfair advantage.”
