Boutique investment banks and other analysts focused on RIAs seem to unanimously agree that deal volume is on pace for a seventh straight record year. What they don’t agree on is whether the deals are getting bigger or smaller.
However, there’s a logical reason behind what looks like a miscalculation.
Unlike broad, traditional merger and acquisition reports that measure deals based on sale price, bankers focused on the wealth management industry often tally and compare transactions according to the assets under management in motion.
Bankers, undoubtedly, also pay close attention to sale prices. But the vast majority of deals are private and specific details can be challenging to collect. Assets under management data is readily available and more complete, so bankers have leaned on that to produce reports and provide analysis about the market.
Not surprisingly, they don’t all agree all the time.
DeVoe & Company highlighted overall deal activity in its latest report published Tuesday. There were already 101 deals through the first three quarters of the year, surpassing the total number of deals in all of 2018.
The firm also pointed out that average assets under management of sellers continued to fall. The average AUM of RIA sellers so far this year is $716 million, down from $920 million in 2018 and over $1 billion in both 2017 and 2016. The firm only includes RIAs with between $100 million and $5 billion assets under management.
“It’s an interesting trend. That’s a pretty steep compression,” said David DeVoe, the managing director and founder of the investment bank and consulting firm.
He attributed the change to a surge in deals involving smaller RIA sellers with less than $500 million. In the past, there were roughly 20 of those deals per year. There have been 55 so far in 2019, he said. Many of those deals involve a growing number of firms that have become prolific buyers, acquiring multiple RIAs each year.
RIAs at or approaching $500 million under management also must be more thoughtful about their firm’s future growth. To continue to grow, they often need to consider investing in their RIA or seek a larger organization that can help them grow. “There are a lot of firms in that area and it’s a stage and lifestyle where many of those are making game-changing business or strategy decisions,” DeVoe said.
Others say they have observed that same trend.
“Overall, I agree deal size is shrinking due to higher than normal valuations in the market. The delta in valuation multiples for firms over $1 billion to say $5 billion is smaller than in the past making it harder to find accretive deals for seasoned acquirers,” said Karl Heckenberg, CEO of both Emigrant Partners and Fiduciary Network.
Emigrant Partners makes non-voting minority investments in wealth, asset, and alternative asset managers.
“Smaller acquisition targets tend to offer more synergies and the valuations are more in line with what buyers feel makes sense to sell the deal internally to their unit holders.”
Echelon Partners, another investment bank and consulting firm to wealth managers, disagrees that deals are shrinking in size. Their recent third quarter RIA report, which includes sellers with between $100 million and $20 billion AUM, suggests deals are only getting bigger. Through three quarters, the average deal size in 2019 is at $1.34 billion, up from $1.269 billion and $1.01 billion the previous two years.
The simple explanation for the gap in average deal size between the reports is that they have different methodologies. Echelon’s report is more inclusive than DeVoe’s. Both argue their report is more indicative of M&A activity involving RIAs.
"Our Deal Report is much more comprehensive and our deal count is double the amount," wrote Carolyn Armitage, managing director of Echelon Partners, in an email to RIA Intel.
By Echelon's calculations, 2019 is on track to see 200 completed transactions.
“Our average AUM on transactions this year is over $2 billion and we are seeing larger and larger AUM opportunities each quarter but it is interesting that the reports conflict,” said John Langston, founder of M&A advisor firm Republic Capital Group.
“It’s also worth noting that sometimes we in our industry focus on data and don’t spend as much time understanding how to leverage all of this opportunity.”