Private equity capital continues to flow into the independent wealth management space; in fact, strategic buyers (primarily private equity-backed RIAs) and financial buyers (primarily private equity firms) accounted for about 85% and 15%, respectively, of total deals done in the third quarter, according to the most recent RIA of Echelon Partners. M&A deal report.
A total of 74 RIA deals were announced in the third quarter, 63 of which were made by strategic buyers, which are “firms such as RIAs and broker/dealers that acquire firms to realize synergistic efficiencies, to enter new markets or to introduce new service offerings. “, Echelon declared. Of these 63 deals, 46% involved private equity-backed buyers. Year-to-date, Echelon tallied 241 deals, including 205 from strategic buyers and 36 from financial buyers.
Only 11 deals were made by financial buyers in the third quarter, but those deals represented $552 billion in purchased assets under management. (This excludes Bain Capital and Reverence Capital deal with Envestnet.) This includes eight minority investments, including Charlesbank taking a stake in Aprio and TPG's investment in Homrich Berg AND Creative Planning. Echelon expects transaction volume for minority deals to reach 41 by the end of 2024. This compares to 35 minority deals in 2023 and 34 in 2022.
Year to date, private equity firms have made 33 direct investments and 122 indirect investments through private equity-backed firms. This accounts for about 64% of the total deals for the first three quarters of 2024.
Overall, the third quarter saw 74 deals, compared to 75 in the second quarter and 90 in the first quarter. Although deal activity remained stagnant between quarters, Echelon found “signs for optimism,” including that large acquirers continued to raise capital, with many indicating they were closing deals at the end of the quarter to be announced later this year.
“Recent capital gains and solid 3Q24 performance are indicative of continued seller supply and buyer optimism,” the report said.
So far, Echelon is estimating the total number of M&A deals to reach 330 for the year, surpassing 2023's 321 deals. According to Echelon, part of the lower 2023 number stems from rising interest rates of the Federal Reserve over the past several years, leading to a “temporary decline in deal volume,” particularly an anemic second quarter of 2023.
“Expectations for a stable rate environment kicked in at the end of 2023, boosting buyer confidence and buying activity. Now, with the first of a series of interest rate cuts officially in place, ECHELON expects an increase in transaction volume in the fourth quarter of 24 and 2025,” the report said.
Echelon also found that deals were getting bigger compared to last year, with 33 deals totaling more than $1 billion, compared to 25 such deals in the third quarter of 2023, an increase of 32%. Echelon expects the number of deals above $1 billion to increase in the fourth quarter as well, estimating about 130 such transactions in total. That would surpass 2023 and 2022, though it's less than 2021's 145 deals exceeding $1 billion.