Private equity-backed M&A in the asset management industry fell sharply in 2023 even as firms buoyed dealmaking in US wealth management.
The announced value of global private equity- and venture capital-backed M&A targeting asset managers declined 50% year over year to $8.33 billion in 2023, according to S&P Global Market Intelligence data. But industry observers of deals involving registered investment advisors, or RIAs, saw only slight decline in activity in 2023, due largely to an industry consolidation trend led by private equity.
Boutique investment bank ECHELON Partners LLC estimated transactions targeting RIAs declined less than 6% in 2023 compared to 2022. Private equity was involved in 62% of all US wealth management transactions in 2023, Echelon estimated, counting both direct investments by PE firms and the much larger number of acquisitions by PE portfolio companies.
“The industry at large has grown more comfortable with private equity as a buyer and investor. It has certainly increased valuations significantly. It’s led to a more friendly market for sellers, just due to the increased demand from buyers,” said Brett Mulder, Echelon senior vice president.
Consolidation trend
The opportunity to build wealth management platforms that could consolidate market share in the highly fragmented RIA industry began to capture private equity’s attention just prior to 2020 and accelerated during the Covid-19 pandemic, Mulder said.
Private equity- and venture capital-backed investments in wealth management businesses more than doubled year over year to 24 in 2021, according to S&P Global Market Intelligence and Crunchbase data. Investments totaled 24 again in 2022 before dropping by half to just 12 in 2023.
Direct investments only capture a portion of private equity’s impact on the wealth management industry. Far more active in deals are the wealth management portfolio companies that have been making strategic acquisitions to leverage the efficiencies of scale and capture more market share.
Wealth manager Focus Financial Partners Inc. historically has been among the most active of those strategic acquirers, according to a recent report by RIA strategic advisory firm DeVoe & Co.
Last year, private equity firms Clayton Dubilier & Rice LLC and Stone Point Capital LLC partnered on a take-private deal for Focus Financial. The February 2023 acquisition remains the largest private equity- or venture capital-backed investment in the asset management industry since Jan. 1, 2023, according to S&P Global Market Intelligence data.
Succession crisis
DeVoe & Co. founder David DeVoe said the 2023 decline in deals that targeted RIAs was the first dip after nine successive years of record annual M&A in the industry, according to his firm’s data. He said the end of the streak doesn’t mean industry M&A peaked, adding that the pace of transaction activity appeared to be accelerating as 2023 transitioned into 2024.
While industry consolidation remains a driving force for RIA deal activity, what DeVoe termed a “succession-planning crisis” is often the motivation for RIA firm owners to consider a sale.
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While many aging wealth management business owners would prefer an internal succession, rising valuations in the industry are pushing that goal increasingly out of reach, he said. In a 2023 DeVoe & Co. survey of RIAs, just 18% of respondents indicated that the next generation of advisors could afford to buy out their firm’s current ownership, down from 38% in 2021.
DeVoe said that dynamic boosted his confidence that the 2023 dip in M&A activity was only temporary.
“We surely haven’t hit the peak. We still have five to seven years [ahead] of heightened M&A activity,” he predicted.