The level of interest in registered investment advisers (RIAs) and family offices remains intense heading into 2014. With postcrisis regulations taking effect, trading volume has declined, and fees have compressed in fund management. As a result, wealth management, with its defensible margins, sticky assets and diversified pools of clients, is an increasingly valuable financial services segment. The result: a flurry of M&A activity. According to Pershing Advisor Solutions, the first half of 2013 saw 12 RIA acquisitions, worth more than $20 billion in combined assets under management.
“There’s a bull market for advisers right now,” says Michael Durbin, president of Fidelity Institutional Wealth Services in Boston. “The values of assets being advised or transacted upon by advisers have never been higher.”
According to Durbin, the confluence of older advisers looking to make transitions like retirement (or simply hoping to cash out) and the economies of scale achieved by adviser roll-ups means that the pace of deals will continue, although there may be more buyers than sellers. “I think the ratio of discussions to actual deals will remain pretty static, which means a lot more discussions than actual deals,” he says.
No company has been more aggressively acquisitive in the segment than Focus Financial Partners. Formed in 2006, the New York–based firm has seen its assets swell to more than $65 billion. Its annual revenues now exceed $250 million, after several mergers and partnerships with a diverse group of advisory practices throughout the U.S. and Canada. According to Focus CEO Ruediger Adolf, there might be a plateau in the number of large-scale deals, but there appears to be an uptick in smaller buyouts coming in 2014.
“We see it in three layers: There is $3 billion and above, then $300 million or $400 million to $3 billion and then the smaller firms below,” he says. “When we look at firms in the below–$200 [million] or $250 [million range], we are going to see significant acceleration.”
Adolf, who started Focus after a stint managing the global brokerage and banking division at American Express, sees increasingly onerous regulatory compliance costs as the primary factor driving smaller advisers into the arms of larger rivals. “Many of these are terrific businesses that are doing great things for their clients, but it’s sheer economics,” he says.
Aaron Dorr, who heads the asset management investment banking practice at New York–headquartered Sandler O’Neill & Partners, agrees with Adolf that deal size has likely peaked. “The volume of deals will continue to be there, but the average size of transactions will come down because a number of them in recent years have involved larger institutions exiting segments of their business.” Adds Dorr: “With the larger divestitures starting to clear out, you’ll be left with smaller independents as the remaining attractive candidates for companies looking to enter the space.”
Sandler O’Neill’s research shows that despite a pickup in the pace of acquisitions in the third quarter of 2013, median assets under management per transaction dipped below $100 million, compared with twice that amount during the third quarter of 2012. In addition to aggregators and financial sponsors, Sandler O’Neill sees smaller regional banks as potential bidders in the coming year. Investment advisers, he says, provide a natural fit for existing commercial and retail business lines, as well as firms seeking geographic diversification.
Fidelity’s Durbin believes roll-ups will reverberate through the industry for years as consolidators mature in their own right. “Most of the consolidators have third-party equity involved. Those investors at some point are going to seek a return on their money, so they are building a pipeline of larger deals to come,” says Durbin. “A lot of these models have current shareholders who are probably not going to be shareholders forever.”
Focus Financial has anticipated this trend. In July the firm took in a $216 million minority investment from private equity firm Centerbridge Partners to provide liquidity to shareholders, including earlier private equity backers Polaris Partners and Summit Partners. Although Focus considered tapping into the public markets recently, Adolf downplays the likelihood of any initial public offerings for the foreseeable future. “I believe there is nobody else in this industry that has the scale to be a viable public company right now. We have both the scale and performance, but we simply concluded, we have so much opportunity ahead of us that we would rather wait.”
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