Only the roll-ups seem to have the focus, knowledge, capital and deadly intent to get results in this market
Brooke’s Note: I get pummeled for information all but constantly about RIA deals. It’s a hot topic, especially among would-be buyers. So what the hell is wrong? In my opinion, it comes down to the Mark Hurley theory about how only the tiniest handful of RIAs has enterprise value. See: What to make of Mark Hurley’s latest prophecy that most RIA firms will go out with a whimper. Buyers know this and just want the bodies of fallen soldiers so they can strip them for valuables. Sellers know this and say to themselves: I might as well just hold on another year and I’ll gain more revenue for fewer hassles — and still have something to sell when the big buyer comes calling. Then there is the matter of deals being messy, humiliating affairs that involve getting along with Huns and Vandals. As one $3 billion RIA principal said to me: “We’ve never done a deal because we’ve never found a firm we thought was as good as ours.” It seems these issues need to be addressed as much as the wonders of discounted cash flows and the art of valuation.
The RIA business continues to churn out a pitifully small number of mergers and acquisitions and to add to its monumentally long list of excuses for why it’ll have to happen next year.
It’s a problem.
“The slowdown of transactions is disconcerting in regards to the needs of the industry,” says David DeVoe, CEO of DeVoe & Co., a San Francisco-based M&A firm for RIAs. “Given the demographics of owners in this industry, literally hundreds of firms need to be sold over the next several years — just to solve for succession. The longer firms wait to create a succession plan, the fewer the options they have.” See: M&A market reaching a new normal based on RIA-driven deals, say competing reports from Pershing, Schwab.
The good news — such as it is — is that the year-to-date assets under management for M&A deal activity reached $42.3 billion at the end of the third quarter, which virtually equals 2011’s full-year M&A AUM total of $43.9 billion. There were 10 transactions completed during the three months ended Sept. 30, totaling approximately $6.1 billion in AUM. The data reflect firms’ being sold with assets under management exceeding $50 million.
The not-so-good news is that these mostly weren’t RIA deals in the pure sense, since they were executed by roll-ups and other venture-backed “national-acquiring” firms that were using capital that wasn’t generated by collecting fees from clients who paid for financial advice. Indeed, roll-ups continue to be the dominant buyer category, closing seven deals this past quarter, bringing to 19 the total of such transactions completed year-to-date. See: One of a new breed of roll-ups taking center stage, United Capital is churning out deals again.
There are good reasons why roll-ups continue dominate RIA M&A.
“Consolidators continue to demonstrate momentum, despite other buyer categories showing declines,” DeVoe says. “Consolidators are able to win new deals, partially due to their methodical approach to M&A, which eclipses the potential 'distraction factor’. Although many advisors see the strategic value of M&A, only a portion of them have created a well-thought-out plan to execute the transactions, which is ultimately required to keep the deals on track through thick and thin.” See: Roll-up-like deals back on the rise in first quarter as RIAs look for succession plans.
Jon Beatty, who oversees mergers and acquisitions for Schwab Advisor Services, says that the relative trickle of deals reflects the same factors that many see behind a sputtering stock market.
“The uncertainty in the markets and the upcoming presidential election has led to a decline in M&A activity this past quarter,” said Beatty, the unit’s senior vice president, sales and relationship management “While national acquiring firms remain dominant players, RIAs as acquirers have been sitting on the sidelines waiting for the right opportunity.”
'Too busy with growth’
But even given the hubbub of politics — which, after all, never stops — the deal pace in the RIA business is tepid.
“The third quarter had fewer M&A transactions than one would expect for an industry of over 10,000 firms and RIA owner demographics,” DeVoe says. “Given that there has been no significant change in the key drivers for M&A during the last year, the slowdown is consequently the result of advisors being distracted by other issues … Anecdotally, I’ve also seen advisors who are too busy with growth and some who continue to seek higher valuations.”
DeVoe adds that RIAs with unshakable focus are out there succeeding in M&A — notably Buckingham Asset Management LLC which recently bought Cupertino, Calif.-based Founders Financial Network LLC as a an aggressive move in building its Silicon Valley beachhead. The company is using it to bring in 40 or more fresh Facebook millionaires. See: Why sudden wealth at Facebook is gushing into a $17-billion RIA and triggered a merger of two DFA giants.
“Buckingham Asset Management is a good example of an RIA that demonstrates a methodical approach to M&A. With six deals under their belt, they have developed a methodology to help advisors stay the course through the complex process of selling a firm.” See: Giant DFA customer puts young CEO in charge to execute ambitious national plan.
Still, it’s notable that the Founders deal was not without roll-up influence, considering that Buckingham is owned by Focus Financial Partners, LLC, the $50-billion national acquirer.
Despite a track record of anemic deal flow, DeVoe says he continues to build out his capabilities for handling more transactions — hiring two investment bankers in the past five months.