RIA aggregators switch from buyer to seller -Dlight News

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Despite ongoing economic uncertainties, geopolitical unrest and market challenges slowing M&A activity in other industries, the registered investment advisor channel’s transaction balance remained resilient in 2022. The country’s biggest buyers, backed by private equity, continued a years-in-the-making trend, with 242 deals on the books as of early December, surpassing 2021’s full-year figure of 241. In the third quarter of 2022 alone, direct private equity investments were high company to $80 billion.

There are motivated buyers and sellers out there. But will that hold true in 2023 with expectations of a recession compounded by persistent inflation and rising interest rates? The short answer is yes, but the dynamic between buyers has changed.

A new playbook

In recent years, many top-tier private equity firms have entered the RIA space by buying or investing in the larger national RIA companies. There are few reputable mid- to large-cap private equity firms left looking to make acquisitions, and make no mistake, they know their ideal targets.

Therefore, the number of deals remains constant, but the sizes are declining. Transactions involving smaller RIAs — those with assets below $500 million — are more common today and are expected to remain so in the foreseeable future, as RIAs acquired through private equity are now the ones buying. As a matter of fact, further partial acquisitions were made in the first three quarters of 2022 than in the whole of 2021.

Most of these buyers also have large teams — “deal machines” — fully dedicated to sourcing and executing M&A opportunities.

Why will M&A 2023 look different? Towards the end of 2022, RIAs with less than $1 billion in assets under management accounted for about 70% of all transactions. Smaller aggregators/buyers and those without robust M&A “dealing machines” now face repeatable deal processes, large M&A teams and institutional capital. Pressure on balance sheets mounts with persistent inflation, the specter of a recession, declining revenues and rising inflation interest rates raising financing costs.

The confluence of all these elements points to a rise in 2023 of smaller aggregators merging or selling off to larger companies. It will mark an important shift in RIA’s corporate history as future national brands begin to solidify their roles. Everyone knew that consolidation was inevitable; In 2023 it will become reality.

What is important for RIA sellers

Regardless of the environment and stakeholders, there are common characteristics that sellers need to consider when evaluating a potential buyer. RIA practices are living entities that reflect the values ​​of their consultant-owners and are driven by their vision. Sellers should have a sense of what their ideal buyer looks like and consider the following:

  • Does the buyer’s consultant affiliation model – W2 employee or 1099 independent contractor – match that of the seller? It’s almost impossible to switch during the sale.
  • Do the advisor demographics and culture match yours? If your average consultant is larger, look for companies with larger consultants. If you offer services to help smaller consultants grow, look for a firm that does the same.
  • Not all justice is created equal. Any company you talk to will say that one day their company will be worth 20x plus EBITDA. The truth is that most won’t be.
  • Do you get a seat at the table or are you primarily a cover-up? One isn’t better than the other, but it’s especially important that you know where you’re sitting before you close.
  • Do the values ​​match? It grows, and it grows the right way for buyers and sellers.

What does all this mean for RIA aggregator sellers?

The RIA M&A buyer pool is sophisticated, large and growing. And it has deep pockets. With over a dozen professional super aggregators out there, and growing recognition of the opportunities available to buyers of all sizes, this is unlikely to change.

On the sell side, even companies that have been buyers in the past are poised to be acquired to help them reach the next stage of growth. And there are firms out there that are looking for high quality, established practices to bring to the group and work with their existing advisors.

Wherever you fall on the RIA spectrum, there’s always an opportunity to team up with a partner who will provide the support you need and then step out of the way. Independent advisors have a certain elegance when they invest in each other and encourage the entrepreneurial spirit that drives them both.

Alex Goss, Co-Founder and Co-CEO of NewEdge Advisors, the leading New Orleans-based RIA supporting successful independent financial advisors nationwide.

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