Despite the rush of potential sellers in the RIA M&A space, valuations remain high as private equity firms continue to enter the space.
“Private equity has entered the conversation,” according to Jessica Polito, founder of Turkey Hill Management, which provides M&A advice to sell-side wealth management firms.
Polito and others took the stage at RIA Edge, part of Wealth Management EDGE at the Diplomat Beach Resort in Hollywood Beach, Fla., on Tuesday to discuss valuations in the RIA space, one of several afternoon sessions charting a firm's longevity ( and how to make it valuable to buyers), from organic growth development to succession planning.
According to Polito, the market is currently in a cycle in which private equity dollars are finding firms that succeed in organic growth, giving them money to move into M&A and then pushing (and holding) higher valuations. .
“Private equity likes to make money on investments, so they won't sell their firms at a loss,” she said. “They will continue to pour money into them to make purchases and because there are more buyers out there, there is competition and competition requires you to pay market multiples and market multiples will remain high because there is competition.”
For Merit Financial Advisors President Kay Lynn Mayhue, valuations remained high because of supply and demand, with a marked change in the industry from 10 years ago. At the time, she said, the number of industry players funding “smart dollars” was much lower.
“Now we have strategic investors, we have PE money, and a lot of people are finally seeing our industry and our business as the noble profession that it is,” she said.
In the first quarter of 2024, private equity was involved in nearly 70% of RIA transactions and contributed over $200 billion in transacted assets, according to Echelon Partners.
According to Denitsa Balunis, a senior vice president, strategy and corporate development and chief of staff to the CEO at Edelman Financial Engines, PE's interest in the space seemed straightforward; VNRs are a “sticky business” that can generate money through fees even during market downturns.
However, PE firms want to see actual organic growth (through clients and net new assets) and second-generation succession planning when determining prospects, according to panelists on other afternoon panels.
A few months into her new role as Head of Growth at RFG Advisory, Abby Salameh said it's essential for firms to set a “quantifiable” growth target. She said RFG would even do the marketing for partner firms with them to increase lead generation because without that effort, “it can or can't be done.” She also said that many “amazing” traders at RIA firms take on this role without a title.
“I think for a firm of a certain size, that's probably appropriate, but after a certain size, you have to institutionalize and professionalize the business,” she said.
Potential buyers would also look for succession plans, but they are a “non-existent feature” in most firms; According to Mary Kate Gulick, CMO and head of marketing services and public relations at FiComm, less than 40% of firms had one, either because of the effort involved or because firm leaders don't want to consider it.
Additionally, according to Shauna Mace, head of practice management at SEI, 85% of growth at the firm is from lead advisors and founders, which she said would be problematic for the future of any firm. Still, she felt optimistic about the marketing understanding of the generations growing up in the workplace.
“We have to get out of the way and let this next generation who are going to be these leaders, let them do some of these activities,” she said. “Because they're capable of it, but they won't do it unless they have the opportunity and the support, and the expectation that it's part of their responsibilities.”
But what would actually drive firm valuations (and deals in general) down? For Polito, it would have to be something like a “sustained market decline” or a rise in interest rates that made it impossible to provide capital.
“There would have to be something monumental that would impact much more than just the wealth management space,” she said. “It must be something that depresses the country.”