The total number of M&A deals in the registered investment advisor space fell to 65 in the second quarter, the lowest quarterly deal size since the second quarter of 2021, according to the latest research from Echelon Partners RIA M&A Deal Report. Echelon, the Los Angeles-based investment bank and advisory firm, attributes the decline to macroeconomic uncertainty and seasonality in the wealth management industry.
In fact, Echelon has averaged 57 deals in Q2 since 2018. And while deal volume was down 15% sequentially, according to the company, this was the second busiest second quarter in industry history, behind the second quarter of 2022, which saw a total of 91 deals.
“Buyers and sellers tend to close more deals at the beginning and end of the year, leading to seasonality in deal announcements,” says the Echelon report.
“When interest rates go up, they generally have a somewhat dampening effect on entrepreneurship, and what comes with that is business deals,” said Dan Seivert, CEO and managing partner at Echelon. “While interest rates haven’t held back buyers too much, nor impacted valuations as others might say, I think people take less risk when interest rates are higher. It includes a built-in alert element for entrepreneurs and makes them less vulnerable to doing business.”
Echelon has lowered its forecast for total deal volume in 2023 to 300, compared to 315 deals forecast in the first quarter of 2023. However, the company still expects deal activity to pick up in the second half of the year.
Additionally, Echelon expects average assets per transaction to end at the second-highest level on record, up nearly 12% year over year. Year-to-date, the average fortune per deal was about $1.8 billion, up from $1.6 billion in 2022.
“Alongside the recovery in capital markets, well-known mid-market RIAs are making deals with new financial partners, helping to increase average assets per deal,” the report said. “For example, CI Financial sold its $5.1 billion minority stake in AUM Congress Wealth Management to Audax Management Company, a Boston-based private equity firm.”
The Echelon report also highlighted the surge in private equity money flowing into the wealth management space. In the second quarter, private equity firms made direct investments in wealth managers with total assets of $350.6 billion, more than double 2022 levels.
The rebound came as some of the largest consolidators brought on new private equity partners. These included CI Private Wealth’s sale of a minority stake in Bain Capital, Abu Dhabi Investment Authority, Flexpoint Ford, Ares Management and the State of Wisconsin.
In June, Mercer Advisors signed an agreement with Toronto and New York-based Altas Partners that is expected to raise over $1 billion.
Wealth Enhancement Group also raised $250 million during the quarter in a deal with Stone Point Capital.
“These new sponsors continue to be attracted by the significant growth opportunities that remain for these companies as market forces continue to support consolidation in the industry,” the report said.
