Adviser M&A To Stay Strong in 2023, but Expect Delays

The dealmaking for registered investment advisers seems to have peaked in 2022 in terms of volume, but private capital is still intent on getting more acquisitions done in 2023, according to a recent report from Advisor Growth Strategies.

Of 85 advisory firms surveyed about M&A activity, a whopping 86% said a rocky 2022 did not change plans to look for a partner or pursue M&A as seller, according to the Phoenix -based consultancy. There were 225 transactions in 2022 as tracked by AGS and Fidelity Wealth Management, according to the researchers.

Forecasts of a slowdown in 2023 track with recent research from M&A watchers Echelon Partners and DeVoe & Co., the latter of which reported in February a 22% decline year-to-date versus the same period last year. Consolidation has been rampant in the past decade as an aging RIA industry meets strong demand for wealth management, including by firms with retirement advisement practices. But that began to shift amid volatile markets and rising interest rates in 2022, according to the authors of the report.

“For the first time in several years, deal expectations were not matching reality, and buyers and sellers had to collaborate to move transactions forward,” wrote AGS Managing Partner John Furey and Principal Brandon Kawal.

This year buyers may be more selective in their deals, giving a high level of scrutiny to talent amid a tight labor market, the authors wrote. Increased interest rates could also put pressure on buyers that rely heavily on debt, likely slowing down some dealmaking.

Part of what will make deals harder to hammer out is a continued shift toward less cash payment and more “collaborative” structures based on firm growth, according to the authors. In 2022, cash deals fell to 67% of transactions, as compared with 77% in 2021. Meanwhile, the percent of equity deals—based on shared outcomes—rose to 25% from 21% the year prior. Contingent deals, which are based on earnouts, jumped to 8% from 2% in 2021.

“The early shift to long-term consideration (equity) and contingent payments (earnouts) signaled the market will become more collaborative as buyers seek to conserve cash and sellers look to make transactions less point-in-time,” Kawal and Furey wrote.

Deals may also be smaller in size “than the rush of $1b+ AUM deals we saw in 2020 and 2021,” the authors wrote in an emailed response. “We also saw overall valuation (not multiple) drop for the first time in our tracking.”

The analysts are still bullish that dealmaking will happen, in part due to the continued push by private equity to find growth in consolidation.

“The influx of capital from private equity bodes well for continued M&A activity, whether investments are made directly or through other firms,” Furey said in a statement with the report. “Teams seeking enhanced resources and business continuity solutions through a transaction still have a fantastic opportunity to find a great result, but they may have to work harder to get it.”