Why the ‘Tweener Phenomenon’ Is Driving RIA M&A
RIA M&A data for the complete year 2023 shows it was another robust period for dealmaking despite broad economic headwinds. We at Advice Dynamics Partners believe this extended, resilient wave of consolidation means independent RIAs with between $1bn and $10bn in AUM may face increased pressure in 2024 and beyond.
We call firms within that size range 'tweeners,' in that they're almost large enough to become sustainable enterprises but haven't yet invested meaningful sums of capital to get there. We see no signs that accelerated consolidation will slow down among this cohort of RIAs. Further, our clients in this size range report that they are facing mounting pressure to consolidate or partner with larger firms to remain competitive.
A January 18, 2024 quote in Citywire from Greg Parker, Co-CEO of Engrave Wealth Partners on the rationale behind his sale to CAPTRUST sums the ‘tweener’ situation up perfectly:
“I think what we saw starting in '21 and '22 was that in order for us to continue to expand and grow, we needed a deeper bench on the investment team,' Greg Parker told Citywire. 'Our primary interest is how do you scale an RIA in today's world without having to hire 20 or 30 people?”
We are currently working with a group of clients in the $1bn-$10bn range. Early indications in 2024 show that demand --- and the resultant pricing for--- these subscale RIAs remains high, indicating confidence in their future growth prospects among both financial and strategic acquirers. EBITDA multiples have not eroded meaningfully since the peaks of 2021-22 and deal structures remain fair and favorable toward sellers. This is clearly reflected in the term sheets we're seeing for our clients currently in the marketplace.
HOW TO KNOW IF YOU’RE A TWEENER:
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You must hire numerous and expensive people over the next 1-3 years to provide the service your clients demand and to generate capacity to handle clients your firm’s founder(s) require so they can eventually retire.
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You need to double or triple in size over the next 5-10 years to remain relevant in your local market. You’ve funded growth through cash flow to-date, but you’d like someone else help with funding future growth and share the risk.
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You realize your firm has become incredibly valuable given today’s valuations versus your internal price. It’s clear your employees can’t afford to offer anything close to market value for your business.
Whether a sub-scale RIA needs investment talent, financial planning talent, tax resources or operational upgrades, the question before them is: do we build or do we merge? Like Parker, many of our clients in a similar evolutionary phase are coming to the same conclusion: the merge option can’t be ignored.
At a certain size, it becomes difficult to finance an independent wealth management company’s growth — and the need for founder liquidity — using free cash flow, so firms need to either partner with larger or similarly sized firms or take on outside capital. Currently, private equity is the most available and eager form of capital — a recent M&A report from consulting firm MarshBerry found there were 21 private equity investments in RIAs last year, a new annual record. As the number of small and mid-size RIAs in this country keeps rising, and as those RIAs keep growing, there will become more and more ‘tweeners’ that want to achieve scale but aren’t willing or able to bootstrap anymore.
So, there’s a continually renewing supply of prospective targets for PE to invest in. This, in turn, means there’ll be a continued appetite among those freshly-PE-backed RIAs to acquire subscale firms. The capital that PE brings to the table is precisely to help their partner firms scale. It’s what’s really driving the M&A activity in our industry. Per Fidelity, nearly nine-out-of-ten RIA acquirers in 2023 were well capitalized, private equity-backed buyers.
In summary, capital flows into the independent wealth advisory space from PE means there’ll be a continued interest among PE-backed RIAs to buy small and mid-sized RIAs (tweeners). And the volume of PE deals in 2023 certainly indicates a bullish sentiment among PE investors towards this business, even following a few years of heavy consolidation — just look at the $3.75bn valuation Carlyle gave Captrust in September.
We believe the consolidation of the RIA industry will continue at a brisk rate and be a very active space. Stabilized — and potential reductions in — interest rates may even accelerate deal volume in the coming quarters.
This article was written by David Selig, founder and CEO of Advice Dynamics Partners.
An edited version of this article was originally published in Citywire RIA in January 2024.
David has over twenty years of experience in M&A, management consulting and financial services. He has authored two white papers on the subject of mergers & acquisitions for Fidelity Institutional Wealth Services and Schwab Advisor Services, and he is a regularly featured speaker on mergers, acquisitions, and succession at conferences and industry events around the country.