DeVoe Q4 Report Shows Ninth Consecutive Record Year, But Weakness In Fourth Quarter
DeVoe & Company released its latest quarterly RIA Deal Book, covering the final quarter of 2022. For the year, deal volume set a ninth consecutive record, with 264 total transactions in 2022, approximately 10% higher than 2021’s 241 deals.
However, the 61 transactions for the fourth quarter dropped 20% from the same quarter in 2021, marking the first year-over-year quarterly drop in four years. October 2022 proved especially weak – with only four transactions.
The report cites a number of factors causing the slowdown including rising interest rates, uncertain equity markets and sluggish global and domestic economies. The report states, “Buyers and sellers alike became more cautious about partnership decisions. Buyers were more selective with the opportunities they pursued. Meanwhile, some sellers paused due to valuation concerns.”
Varying Expectations
Noting its own strong pipeline of future deals, DeVoe surveyed major acquirers and learned they also have robust deal pipelines, including a third of acquirers reporting more upcoming transactions as compared to four to six months prior.
The firm found mixed views among RIAs surveyed, with a quarter expecting a decline in M&A in 2023, a third expecting no change and 42% expecting increased activity.
The deal book states that over the medium to long term, the firm expects RIA M&A to continue its upward trajectory. “With the average age of RIA owners in their early 60s, a retirement wave is a pressure point that will methodically push more owners toward a transition. If internal succession is not planned well in advance, an external sale becomes the viable alternative.”
Valuations And Deal Structures
According to DeVoe, buyers realize that the industry is resilient, so have not reduced the multiples they pay on EBITDA. However, buyers are changing deal structures, reducing upfront cash payments, adjusting the cash/equity balance for transactions and lengthening the time frame for contingent payments.
Brad Grubb, a Managing Director at the firm, notes, “Buyers are designing structures to appropriately incent RIAs who strategically ‘should’ sell today to make the move – as opposed to waiting until the stock market returns to its previous highs.”
Buyer Trends
Consolidators continue to buy most frequently, making 133 acquisitions last year, or 50% of the total number of transactions, slightly down in percentage terms from 54% in 2021, though the number of transactions still rose.
RIAs and the “other” category made up for the decline, with RIAs capturing 69 deals in 2022, for 26% of deals, and the “other” category (including private equity and insurance firms) entering 60 deals, at 23%. Despite the recent trend upward for RIAs, the report points out that the larger trend over multiple years is increased transactions by consolidators and a decrease by RIAs.
The number of sub-acquisitions, which are acquisitions by firms that were themselves previously acquired, rose significantly from 38 in 2021 to 57 last year, for a total of 22% for 2022.
DeVoe’s report also notes that almost 75% of transactions were with sellers overseeing assets under management (AUM) of less than $1 billion, with firms overseeing AUM between $100 million and $500 million accounting for half of the transaction volume. Average deal size fell to $827 million AUM, the first time under $1 billion since 2019.
Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at ContributingEd@wealthsolutionsreport.com
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