Echelon: Investment Adviser M&A Bucks Downward Trend in Dealmaking

Mergers and Acquisitions (M&A) activity has been stymied in many sectors, but it’s still going at a good clip in the investment adviser and brokerage space in 2022, according to investment bank and management consultancy Echelon Partners.

Wealth management M&A activity was up year-over-year to 84 deals in Q3 2022 as compared to 78 deals in Q3 2021, Echelon said. Deal-making activity declined from the previous two quarters of 2022, but the firm is still forecasting a total of 345 deals in 2022, trumping 2021’s total of 307 transactions.

“Deal activity in wealth management has remained relatively resilient despite a global slowdown in M&A, which has been spurred by the rising interest rate environment and geopolitical instability,” Echelon said in its Q3 RIA M&A Deal Report released this week.

Transaction activity among registered investment advisers (RIAs) has been steadily growing since 2020, and by the end of this year, will likely hit a record since Echelon started reporting in 2016. Acquisition interest in RIAs is in large part driven by private equity capital that sees value in consolidating players in the crowded and maturing wealth management sector, says Brett Mulder, a vice president at Echelon Partners.

“It seems like those forces are going to keep propelling activity at least in the near-term,” Mulder says.

Meanwhile, market volatility may be creating an opportunity for investors, rather than being a deterrent. “They may potentially be taking advantage of any dislocation created by volatility in the markets,” Mulder says.
 
Echelon said 42% of deals through Q3 2022 have been by strategic acquirers or consolidators, and that private equity firms made direct investment of $80 billion in assets under management (AUM) in the quarter.
 
Demand for wealth technology solutions, including those by startups, has also been a driver of M&A, according to the report. Interest in tech-enabled product distribution, artificial intelligence, and automated billing are all driving deal interest.

Deals Up, AUM Down

Although the number of deals is robust, the average AUM per deal year-to-date has dropped to $1.7 billion, 17% lower than last year’s roughly $2.1 billion average, according to the report. This drop is indicative of the decline in AUM with both equities and bonds being down, Mulder says. Of the deals that were announced in Q3 2022, 43% of the acquired firms have less than $1 billion under management, and average AUM transacted in the deals was about $389 million.

The relatively small of the transactions means that rising interest rates, which makes borrowing to fund deals more expensive, is often not an issue for the acquirers, Mulder says. Many private equity firms are either funding the deals from their own credit facilities or from capital on their balance sheets, he says.

Rising interest rates is just one of the handful of challenges that is crimping M&A in the broader market, according to a mid-year report by consultancy PWC. The firm also notes headwinds such as the war in Ukraine and the drop in equity markets, saying that dealmakers are “facing arguably one of the – if not the – most uncertain and complex environments in recent memory.”

Despite these headwinds, adviser M&A and investment is continuing to make headlines in Q4. In just the past few weeks, deals have been announced including private equity firm Platform Partners LLC agreeing to invest in the growth plans of retirement provider JULY Business Services, and private equity firm Valeas agreeing to a $200 million minority stake in wealth manager Sequoia Financial Group.

CAPTRUST, a retirement solutions provider, also bought a Boston-Area adviser that oversees $900 million in assets. CAPTRUST has more acquisitions in progress, said Rick Shoff, managing director of CAPTRUST’s advisor support group.