Mergers and acquisitions among registered investment advisory firms that are well along are not likely to be quashed by the coronavirus crisis, but new deals are likely to slow as seller firm valuations fall, normal business processes are on hold and fears of a recession endure, according to investment bankers.
“Live transactions are unlikely to be affected if the price was already agreed to,” said David DeVoe, a former Charles Schwab M&A specialist who now runs an eponymous RIA strategy consulting firm. “We are waiting for the dust to settle in the markets, but the downturn will create a drag on earnings.”
The pandemic that has galloped into the U.S. is interrupting a deal climate that had been robust. Announced RIA mergers in 2019 were up 31% from the previous year to 132, according to San Francisco-based DeVoe & Co. The momentum continued into this January, with 18 transactions announced compared to 12 in the first 31 days of 2019 and 14 in 2018.
Weighing most heavily on future deals is the steep valuation decline that potential buyers are likely to put on RIA firms as a result of business disruptions and the steep asset value decline at seller firms.
“It is too early to tell, but if the downturn is enduring and hurts advisors’ revenue, and they do not cut expenses, it can have a dramatic decrease in their firm valuation,” said Carolyn Armitage, a managing director at Echelon Partners, a Manhattan Beach, California-based investment bank.
Liz Nesvold, managing director and head of asset and wealth management investment banking at Raymond James, said earnouts and other structuring features will become more important as buyers gain an upper hand in deal negotiations.
“It’s probably not a surprise to hear that it’s been a seller’s market over the past several years as the ratio of buyers to sellers has increased dramatically,” said Nesvold, who sold her own Silver Lane Advisors to Raymond James in January 2019. “That ratio will come down for subscale firms, as some fringe acquirers decide to take a pause.”
Private equity firms eager to expand into the wealth management industry and expansionist advisory firms are still hungry, however, while regional banks are pulling in their horns, bankers said.
“The serial acquirers that are well financed continue to be active and have no plans to slow down,” said Dan Erichson, a senior associate at Park Sutton Advisors in New York City. “Deals in progress are generally moving forward.”
He declined to detail specific transactions or discuss whether deal terms are being renegotiated.
As recently as a few weeks ago, another hot M&A year seemed to be in store for the financing planning community, supplementing pending megadeals between Schwab and TD Ameritrade Holdings and Morgan Stanley and E*Trade Financial Corp.
CAPTRUST Financial Advisors, a Raleigh, North Carolina-based RIA consortium with $5.5 billion of client assets two week ago acquired Welch Hornsby, Inc., a $1.8 billion-asset RIA in Montgomery, Alabama.
On March 9, Beacon Pointe Advisors, an $11.5 billion-asset RIA aggregator in Newport Beach, Calif., scooped up Winter Park, Fla.-based Ferrell Wealth Management, which manages $460 million. A week earlier, Overland, Kansas-based Mariner Wealth Advisors, a $28 billion-asset RIA cut its 11th deal in 14 months, purchasing $400-million-asset-under-management Wealth Health in Roseland, N.J.
Private equity firms such as Genstar Capital and Lovell Minnick Partners that have been buying cash-flow-strong advisory firms and pushing up valuations are adjusting their strategies, however.
“The level of a firm’s valuation paid at close in transactions may revert to where it was 18 months ago, around 60%, plus or minus, whereas more recently we have seen firms being offered upwards of 80-100% at close,” Erichson said.
As asset-based revenue erodes due to the coronavirus disruption, acquirers who previously focused on cashflow will focus on targets with proven ability to manage expenses as well as to attract new clients, according to Nesvold.
“The strong players…will still trade well, albeit on a lower level of EBITDA,” she said, referring to earnings before interest, taxes, depreciation and amortization. “We’re going to see who actually built good businesses and who has strong client relationships.”
If nothing else, this crisis is bearing out Warren Buffett’s famous observation about knowing who’s swimming naked when the tide goes out, she said.
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