Berkshire’s San Francisco Head Explains Best M&A Strategies for Buyers, Sellers and Private Equity
If M&A were a car, you would find it roaring down a dragstrip without brakes right now. Wealth management M&A is surging on several years of momentum and continues to attract buyers, sellers and private equity across the industry.
Buyers aim for increased footprints and economies of scale, while sellers seek the resources of the buyer and the private equity firm backing the transaction.
Private equity assembles complementary teams of firms, boosting returns and generating value.
With so many opportunities and frequent win-win situations emerging, we reached out to an industry leader to learn how a seller can gain the best valuation, how new private equity entrants can establish credibility and how both buyers and sellers can avoid common pitfalls.
A Leading Firm and Partner in Wealth Management M&A
Bomy Hagopian, Partner and Co-Head of Wealth Management Advisory at Berkshire Global Advisors, became an equity partner just five years out of Harvard, Berkshire’s youngest equity partner at the time.
With over 18 years of M&A advisory experience at Berkshire, Ms. Hagopian helms the San Francisco office and leads numerous transactions in the wealth management space, recently including the $6.4 billion AUM Columbia Pacific Wealth Management strategic sale to CI Financial, the $5.3 billion AUM Bingham, Osborn & Scarborough strategic merger with Cerity Partners, the $5.2 billion AUM QCI Asset Management strategic sale to Wealth Enhancement Group and the $5.2 billion AUM Portola Partners strategic sale to CI Financial.
With offices in New York, San Francisco, London, Sydney and Denver, Berkshire advised on 42 announced transactions in 2021 across the wealth management, investment management, FinTech and securities sectors and completed 16 deals in wealth management, ranging from below $1 billion to $35 billion in AUM.
Ms. Hagopian shares her views on wealth management M&A trends and advice on how firms can gain the best footing in M&A transactions.
WSR: Where do you believe the most M&A activities will occur in the wealth management space this year? I.e., among IBDs, RIAs, Super OSJs, FinTech businesses, BGA / IMO insurance businesses and any specific sizes of firms within these segments, etc.?
Hagopian: In 2022, the greatest M&A activity in the wealth management space will be among the fragmented RIA segment, consistent with industry trends in 2021. 2021 ended with a record 215 RIA deals, a staggering increase of 65% from 2020’s previous record of 130.
M&A activity has increased among RIA sellers with at least $1 billion in AUM. Last year, 85 deals involved RIA sellers of this size, double the 42 deals of 2020. Of these 85 deals, 45 fell between $1 billion and $2.5 billion in firm AUM size and in 40 deals, RIA sellers’ AUM exceeded $2.5 billion.
The remaining 60% of 2021 RIA deal activity involved sellers with less than $1 billion in AUM, including 49 deals involving sellers with AUM between $500 million and $1 billion, and 81 deals between $100 and $500 million.
Consolidation among sub-$1 billion AUM RIAs will continue to be robust in 2022, and the trend of increasing M&A activity for sellers over $1 billion in AUM will continue this year as it has since 2019.
WSR: What are the top five steps leaders of wealth management firms seeking to get acquired should undertake to command the highest possible valuation for their businesses?
Hagopian: To achieve a high valuation, a firm must improve organic growth, as the organic growth rate is a key factor for valuing a business. Improving operating margins is also crucial because healthy operating margins lead to higher valuations.
The firm should secure second generation talent to ensure a smooth transition if some sellers plan to retire in the near to medium term, minimizing the buyer’s risk and giving the buyer confidence that the firm has talent in place to carry the business over the long term.
Next, the firm needs an experienced M&A investment banker with completed transactions and active deal flow in the wealth management space, equipping them with real-time knowledge of market valuations, deal structures, other terms and bidding behaviors across a wide range of active buyers in the space, leading to optimal results for sellers. It’s also difficult for a business’s principals to negotiate the best deal terms themselves given the need to maintain a positive working relationship with the buyer post-closing.
Finally, high valuations result from a well-run, competitive sale process, which drives buyers to put their best foot forward on deal terms to increase their chances of winning the deal. In discussions with just one buyer, the seller reacts to a single inquiry with no other tangible proposals for comparison, limiting its strategic options and leverage in negotiations.
WSR: What can private equity firms that are new to the wealth management space do to build credibility and prove their seriousness as acquirers when competing against private equity investors who are better known within this industry as successful dealmakers?
Hagopian: A private equity firm entering the wealth management space must develop relationships with a variety of market participants, including leading wealth management firms, M&A investment bankers, legal advisors and consultants, to gain a deep understanding of the industry, broader market exposure and introductions to other players in the space.
The firm should develop a compelling value proposition and a clear differentiation from other private equity investors, display a track record of successful investments in related sectors and provide a list of references.
In addition, the firm needs to participate in several processes and submit proposals, if appropriate, building credibility and demonstrating seriousness to investment bankers and their clients, learning how to compete in this space through guidance and feedback.
The private equity firm’s perception and position in the industry largely follows the reputation and quality of their first invested wealth management firm.
WSR: What are the top three mistakes that acquirers and sellers of wealth management businesses commit that could be avoided in how they structure their deals?
Hagopian: Mistakes that sellers of wealth management businesses make in structuring their deals include excessive focus on the headline valuation, which can be misleading without analyzing the deal terms as an entire package, a lack of attention on the earn-out structure’s key metric and whether this is the ideal metric to achieve earn-out payments and a failure to critically analyze the formula and timeframe for the earn-out structure across a range of scenarios to determine if it’s optimal.
On the other side of the deal, buyers’ mistakes include failing to establish appropriate retention mechanisms for key professionals beyond the earn-out period to retain them over the long run and lacking an optimal compensation structure or incentive arrangement to motivate the team to grow the business beyond the earn-out payments.
Additionally, some buyers stick close to their standard deal structures across deals when they should consider customizing a deal structure for a specific acquisition opportunity.
Julius Buchanan, Senior Contributing Editor at Wealth Solutions Report, can be reached at jbuchanan@wealthsolutionsreport.com
