The State Of M&A So Far In 2023, And How To Close Your Deals

Larry Roth, CEO, Wealth Solutions Report

M&A Activity Faces Headwinds, But Major Deals Are Still Happening. Insights From WSR’s Expert Sources Reveal How Buyers And Sellers Can Navigate Choppy Waters.

The financial and economic environment of 2023 may not be outright hostile to M&A dealmaking for independent wealth management firms, but it has not exactly been uplifting either.

Rising interest rates have been a hindrance for buyers as acquisitions become more expensive and free cash flow constricts. Stock market volatility hinders client portfolio growth and firm revenues, which in turn compresses EBITDA and potentially valuations.

Yet, to the extent that M&A activity can be taken as a sign of confidence from buyers in the long-term growth potential of selling firms, it is encouraging that the independent wealth management space has seen so many major and innovative deals over the past few months.

Cerity Partners merged with ARGI Financial and Ashfield Capital, gaining $6.7 billion. Cetera announced plans to acquire Securian Financial’s $47.4 billion assets under advisement retail wealth business. Atria Wealth Solutions announced plans to acquire $15 billion Grove Point Financial from Kestra Holdings. Stratos expanded into majority ownership stakes for both First Wealth Financial Group and BWM Financial. Choreo completed the acquisitions of GreerWalker Wealth, Cherry Bekaert Wealth Management and Enso Wealth Management, bringing on over $3 billion in assets.

And that’s just a small slice of the overall activity year-to-date. Dynasty Financial Partners must see additional M&A opportunities on the horizon, judging by its foray into the field with the recent launch of its new investment bank for independent wealth management firms inside and outside the Dynasty Network.

To be sure, for the first time in almost a decade, a year opened with a first quarter weaker than the prior year. M&A deal volume in Q1 2023 was 7% lower than the same quarter of 2022, according to DeVoe & Company’s RIA Deal Book. At the DeVoe Elevate Conference earlier this month, Founder and CEO David DeVoe said the average RIA organic growth rate fell from 9% in 2017 to 4% in 2022. Amid that decline in organic growth, huge consolidators have dominated the M&A landscape.

David DeVoe
David DeVoe, Founder and CEO, DeVoe & Company

“We want to see a variety of different buyers in the marketplace,” David DeVoe previously told WSR. “When I think about the RIA community, I want a firm when it’s ready to sell to have a wide variety of options. The good news is there’s a wide variety of consolidator options.”

These include “someone who’s going to integrate you into the organization, you can sell to someone who’s going to allow you to retain full independence more or less, and then there’s everything in between,” DeVoe said. “But I like to see medium and large acquirers as well. And fortunately we saw that number tick up a little bit year-to-date. We’ve seen an increase in the number of first-time acquirers.”

Private Equity

Meanwhile, according to the ECHELON Partners Q1 2023 RIA M&A Deal Report, financial sponsors such as private equity firms were involved – either directly or indirectly – in 77.3% of all transactions in Q1 2023.

PE firms active in wealth management so far this year include Emigrant Partners, Harvest Partners, Stone Point Capital, Kelso & Company, Golden Gate Capital, Audax Private Equity, Bain Capital, Flexpoint Ford, Summit Partners and Clayton, Dubilier, & Rice.

Bomy Hagopian, Partner, Berkshire Global Advisors

“Private equity sponsors continue to be very interested and active in the wealth management space. We see new entrants coming into the space looking for platforms to invest in and who believe in the consolidation strategy occurring in the space,” Bomy Hagopian, Partner at the M&A investment bank Berkshire Global Advisors, told WSR in late March.

“They tend to gravitate toward high quality platforms that have strong management teams and leaders to help drive the growth and strategy of the business,” Hagopian explained. “They’re also looking for platforms that generally have some experience with M&A and … the infrastructure and a robust offering within the platform to build upon going forward.”

Depending on whom you ask, PE firms are something of a controversial topic. Some of this has more to do with the nature of the private equity sector than anything PE firms are actually doing in wealth management. And some of the wariness is about what PE firms might inadvertently do to wealth management in the future.

I’ve read articles that worry PE firms rely on leveraged buyouts that can put burdensome pressure on an acquisition target, employ cutthroat general partners who couldn’t care less about the financial and emotional well-being of advisory clients, or that PE firms are literally run by crooks. Although there’s little evidence for those concerns in wealth management, it is worth noting a few of the more legitimate points experts have raised recently.

Words Of Caution

“It’s important that private equity understands what they’re getting by entering into the wealth management space,” Jessica Polito, Founder and Principal at the M&A consultancy Turkey Hill Management, told WSR this month. “The successful ones understand that wealth management is all about relationships and that you can’t come in and try and change the whole structure, management, or the way that the company is run, the way that you perhaps can in other industries.”

Jessica Polito, Founder and Principal, Turkey Hill Management

Polito continued, “As long as they understand that and they’re able to provide guidance rather than bullying firms around, into making changes that might not be good for the business, I think they’ll be fine.”

A different consideration involves the unintended consequences of consolidation. One of the amazing things about living in a (largely) capitalist economy is how two fundamentally capitalist tenets – the accumulation of capital, and competition among enterprises – can push against one another in unpredictable ways.

When it comes to wealth management M&A, will private equity firms that continue to amass huge piles of capital become responsible for severely limiting competition? The sheer number of longstanding independent RIAs, and the steady stream of breakaway advisors exiting wirehouses to launch new RIAs, suggests that such a day would be quite far away, if it ever arrives. Even so, there is a certain logic to the cautionary argument.

Jodie Papike, President, Cross-Search

“Before the surge in PE ownership, a broker-dealer that gave an advisor a 90%-plus payout would not have much of a spread left over to also give that advisor a meaningful upfront bonus,” Jodie Papike, President of Cross-Search, an advisor recruiting and executive placement firm, said in April for her WSR Q&A. “Times have changed, bringing not only huge payouts and upfront bonuses but also consolidation.”

Papike warned that “as consolidation ramps up, eventually fewer firms may remain independent to compete with one another. Down the line, advisors therefore might have fewer options on where to go when they change firms. Over time, this could lead to less competition among firms that in turn have less incentive to innovate their services, back-office expertise and overall responsiveness for advisors.”

Best Practices

With all that in mind, what should wealth management firms do in order to maximize their M&A prospects throughout the rest of 2023? My own professional experience on the subject happens to align with the insights of several experts quoted in WSR this year.

The general rule for buyers is to have a cohesive story, and evidence, that demonstrates how a seller would benefit most from this particular partnership. Writing a big check is easy, and nowadays common practice despite market headwinds. Standing out requires having some combination of exceptional technology, back-office support, shared culture or like-minded leadership, financial planning or investment management capabilities, and strategic geographic positioning – that rival bidders cannot also offer on similar or better deal terms.

Louis Diamond, President, Diamond Consultants

As for sellers, Louis Diamond, President of Diamond Consultants, an industry recruiting and M&A business, said it best in February for his WSR Q&A: “Competition drives valuation – meaning you need multiple credible bids to put you in the control position and provide the most amount of leverage to negotiate.” Diamond also advised that “being organized and methodical in a due diligence process shows well, and forecasts to a firm that you are serious about doing a deal or making a transition, which could translate to superior terms.”

Of course, certain best practices apply to both buyers and sellers. I’ve observed that deal success often hinges on being honest with your potential deal partner and their representatives about your firm’s financial condition, legal situation, reasons for pursuing the transaction, broader long-term strategic goals and succession planning process. If the other side suspects they’re getting false information on any of these points before the paperwork is signed, they could pull out and be justified in doing so. Then there are the best practices for working with M&A consultants and investment bankers.

Scott Leak, Senior Consultant, FP Transitions

“At the end of the day, conflicts of interest are unavoidable. The seller’s most important task is finding an investment banker or M&A consultant who will share information on conflicts with full transparency and welcome questions,” Scott Leak, Senior Consultant at FP Transitions, a recruitment and M&A consultancy, wrote in a recent guest editorial for WSR. “If, on the contrary, the consultant shows signs of impatience or evasiveness when you ask due diligence questions, that is a red flag.”

Here are a couple of Leak’s most interesting tips for advisors working with M&A consultancies or investment banks. “The consultant needs to provide a clear and detailed explanation of the M&A process from start to finish, and in particular the communications with the seller during that process. The advisor must take the time and spend the resources required to understand all information provided, especially the engagement agreement and other legal documentation.”

Crystal Ball

Judging by all the data so far, wealth management M&A for the independent space in 2023 seems unlikely to exceed the previous year in total deal volume and total deal value. Keep in mind that we still have more than half the year to go. So if the market ends up cooling off in 2023 and then recovering in 2024, today’s dealmaking challenges will seem like a blip.

But even if other obstacles emerge, RIAs, broker-dealers and their advisors should continue to focus on serving the financial needs of clients to the best of their abilities. As long as the industry stays focused on that priority, plenty of good deals will still be found.

Larry Roth is CEO of Wealth Solutions Report and Managing Director of RLR Strategic Partners.

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