In September, the Federal Reserve cut interest rates by 50 basis points, its first rate cut in four years, and more cuts are expected. As the cost of capital decreases and debt service ratios improve, the most active players in the registered M&A investment advisor space will invest more aggressively, according to the DeVoe & Company RIA Deal Book.
Specifically, DeVoe predicts that the most well-capitalized consolidators — those backed by private equity firms — will become more active in the space over the next 12 to 18 months. These consolidators have dedicated M&A teams working to build scale, improve resources and expand geographically. These firms have historically accounted for about 70% of RIA acquisitions.
DeVoe's prediction is based on historical data showing an inverse correlation between interest rates and M&A consolidation activity. When rates fell to zero in the second quarter of 2020, M&A activity accelerated and rose to an all-time high in the fourth quarter of 2021. When the Fed began raising rates in early 2022, M&A activity started to slow down.
“Interest rates directly affect the cost of debt,” DeVoe's report said. “As the cost of acquisitions falls, the math of acquisitions improves. Falling interest rates are particularly good for firms with a high amount of debt on their books, as the cost of debt has become an important item.
The report also notes that lower rates can lead to higher valuations and different deal structures, with more cash on hand.
Overall, RIA M&A was flat in the third quarter of 2024, with DeVoe tallying 65 transactions, consistent with quarterly volume for the past three years. The first three quarters of this year had 191 deals, up from 185 in the same period last year. This year's volume is on pace to exceed 240 deals; that compares to 251 transactions in 2023.
Year-to-date, the average size of sellers has been about $1 billion in assets, up from $827 million and $819 million in the previous two years.
While consolidators have long dominated the deal landscape, acquisitive VNRs are closing the gap. In 2021, consolidators accounted for 54% of all deals, and this has fallen to 39% so far in 2024. Meanwhile, RIAs now account for 38% of deals this year, up from 23% in 2021.
“A growing number of RIAs are turning to M&A initiatives as they identify opportunities to acquire assets, acquire talent and expand services without building them from the ground up,” the report said. “With three months left in 2024, strategic RIA buyers have already matched last year's transaction numbers, bringing market share back in line with pre-pandemic levels.”