M&A activity across all industries has flourished in recent years with more than $10 trillion in domestic transactions since 2013. Specifically, M&A in the wealth management industry has skyrocketed to historic highs with both strategic and financial acquirers paying top multiples and closing a record number of deals.
The economic impact of the coronavirus will likely shift the landscape of M&A in the RIA space drastically. Deals in process are likely to be completed but many deals in the early stages have been put on hold due to buyers and sellers unable to agree on a valuation in these unprecedented circumstances.
Along with a decline in the number of deals, a shift is expected to occur in the RIA marketplace from a seller’s to a buyer’s market.
Recent Cerulli Associates’ research claimed that 37% of advisors are set to retire in the next 10 years and, therefore, are in need of a succession plan. With a constrained time-horizon due to aging ownership groups, many sellers do not possess the ability to wait out a recession and see their RIA’s valuation return to its peak
With a low-interest rate environment coupled with high levels of dry powder, we expect that acquirers, many of whom are backed by private equity, will take advantage of this need for buyer liquidity. The seller’s market saw rising multiples with many deals structured with large upfront cash payments, sometimes as much as 100% of the value of the deal. We expect transaction structures to change in favor of the acquirers. If the pandemic precipitated recession is prolonged, multiples will reflect the shift in expectations, upfront payments will decrease, and contingent payments based on future performance will increase.