Dealmakers in the registered investment advisory space are expected to get more creative in structuring transactions next year, according to industry-focused transaction advisory firm Advisor Growth Strategies.
AGS Managing Partner John Furey and Principal Brandon Kawal say they expect to see greater divergence in firm valuations in 2024, as ongoing market uncertainty, geopolitics and the looming presidential election cause both buyers and sellers to approach transactions with more caution and discernment.
Prices commanded by the most desirable businesses will remain high, while less attractive firms see diminishing multiples, leading to increasingly creative deal structures as the need for talent, resources and succession continue to drive sellers to the market, Furey and Kawal predict.
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“There’s always a strategic reason that doesn’t change,” Furey said during a Dec. 15 webinar. “I think there are these short-term externalities that will wobble participants a little bit, so everyone has to keep in mind why they began to start with. It’s not about ’24, it’s about the next decade.”
“We have seen a shift in tone around creativity, where firms are looking for just different things,” said Kawal, who added he expects more minority and capital raise strategies from sellers looking to monetize without giving up control.
“Not every firm will be looking for that 100% sale,” he said, pointing some buyers are only seeking minority stakes. “The bottom line is more optionality.”
And not all minority investments are non-controlling, Kawal said.
“Minority deals are very, very custom in all respects,” he said. “They’re very bespoke in the way you think about everything from governance to participation. So, if that’s a route that you think is in your future, just know that that’s less standardized than the change-of-control deals you see out there. There has to be a lot of thought linking business management to the partner, and how those two things interact is very important.”
The quest for scale and pursuit of a national brand are expected to drive up the median size of deals, according to AGS, and bring some fresh players to the board.
“You have a really well-established group of incumbents,” said Kawal. “The question is, who’s next coming behind that in that wave?
“We think investors are looking for this right now,” he said. “[Private equity firms] and family offices are looking for these firms, and we think the industry’s ripe for it—who the next firm is that’s going to be who historically did very little M&A that will do more or who historically was $5 billion, that’s now $10 [billion] or $15 [billion]. We think those platforms are coming, and we think there’s a lot of room for that in the space still to this day.”
Kawal said a lot of RIAs want to become the next $50 billion platform, while remaining brand-sustainable and independent.
Furey added independent broker/dealers are going to become more fierce competitors in the RIA M&A space.
“They’re big competitors in the space, and they’re building out capabilities and have a lot of assets,” he said. “I used to maybe think, ‘Wow, those models are broken,’ but they’re gearing up to compete.
“So, when you think of who the next acquirer is going to be, it could be very unconventional,” he said. “Could a distribution company come in and buy or want to be a platform for RIAs? Like an LPL, they’ve already started, continue to buy RIAs and build out a national RIA wealth platform, kind of like what CI [Financial] did or is trying to do. So, I think we’re going to see more unconventional M&A plays in the space.”