How M&A wealth management is affected by high interest rates


After inflation soared in the wake of the pandemic, the Federal Reserve raised interest rates 11 times over the 16 months starting in March 2022. Before that, rates hovered near zero as policymakers pulled every lever available to keep the economy humming after the lockdowns ended. most business activity.

Fast forward more than two years, and rates remain high. Although the data shows that price increases are beginning to decline, it appears that rate cuts will not come for several more months.

Of course, the higher cost of capital negatively impacted M&A activity across a wide range of sectors for much of that time. Wealth management, however, has been an exception, with deals continuing at a robust pace over the past year and into 2024.

There are several reasons why this is so.

  • Demographics. RIA founders and financial advisors are growing, and M&A is a good way to solve the industry's ongoing succession planning problem.
  • Private equity remains a massive force, with a growing number of firms attracted by the industry's recurring and predictable revenue stream.
  • More wealthy families and individuals are seeking financial advice than ever before, creating increased opportunities for the entire market.

However, while the wealth management M&A landscape is healthy, the dynamics hovering over it are shifting somewhat. Let's take a look:

More Mega Offers

Although by historical standards, the total number of wealth management M&A transactions has decreased since May of this year compared to the same period in 2023, the average assets under management of RIA sellers are higher compared to the five months of first of 2023 ($550 million versus about $425 million). Meanwhile, the average AUM of RIA vendors as of May is significantly higher than the same period a year ago ($4.2 billion vs. $1.1 billion). That disparity, however, is skewed by five deals involving RIAs with more than $10 billion in AUM. In 2023, there was only one such deal during the same period.

More equity consideration

The peak of the wealth management M&A boom came in 2021, when low interest rates and a massive influx of private equity money helped create a record year for deals. At the time, cash offers were common (although many deals included the option for the sellers to transfer some of their equity to the buyers). That's partly because buyers felt they had to—and, given the low interest rate environment, could be more aggressive with cash offers. Today, buyers are less willing and able to do so. Instead, they are relying more on a mixed offering of cash and equity to get deals across the finish line.

Modified deal structures

In addition to proposing equity consideration more often, RIA buyers have also sought to modify deal structures in other ways. This includes offers that attempt to tie a greater percentage of the total deal value to contingent earnings and/or attempt to tie earnings to much higher growth targets compared to a few years ago. Whatever the case, this change in approach reflects buyers' desire to balance more of the risk inherent in any transaction between both parties, while still allowing them to make competitive offers. The advantage for sellers? Earnings have the potential to result in higher overall valuations depending on growth once all the dust settles.

Deals take longer to complete

In 2021, tax concerns created an urgency to complete deals before the end of the year. There is no similar catalyst today. To that end, RIA sellers are now taking more time to undertake a thoughtful sales process. Indeed, they are increasingly meeting potential buyers multiple times in person (not just virtually) to assess the overall fit and perform proper back-to-back analysis, which is important when equity considerations are involved. part of the equation. Buyers, for their part, have also become more discerning and selective. Meanwhile, consider much of what was discussed above—analyzing and determining deal terms, such as profit structures and capital considerations, can be a painstaking process, often involving lengthy negotiations and input from experts. external, such as financial, legal and tax advisors. All this takes time.

It is clear that higher capital costs have influenced M&A in wealth management. However, unlike some other industries, the landscape remains fundamentally healthy, with deals still happening at a healthy clip, both in terms of size and volume. And, even as buyers propose modified deal structure terms from what became the norm during the peak of the boom and transaction processes move at a more normal and cautious pace, these changes are likely to make the landscape more stable.

Bomy Hagopian is the head of Berkshire Global Advisors' Wealth Management Practice.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *