Industry M&A Activity: Minority Stakes, Growing Organically, Outsourcing

By Mrinalini Krishna October 28, 2020

Dealmaking in the advisory business has picked up in the third quarter, and industry stakeholders believe M&A activity will remain strong.

The third quarter saw 44 deals, beating the quarter record of 35 transactions set two quarters ago, according to DeVoe & Co., a consulting firm and investment bank that focuses on the wealth management space. With 111 deals in the first nine months of 2020, the RIA space is likely to beat the annual record of 132 deals, set last year, DeVoe notes.

There was consensus among speakers at a session at Money Management Institute’s annual conference last week that private equity players and aggregators will continue to actively participate in the RIA deals.

Some speakers identified certain trends, such as the growing interest in taking minority stakes, and another speaker made some recommendations, such as growing organically before selling. One speaker predicted M&A activity involving bank-owned brokerages.

“There are three times as many minority acquisitions that have taken place this year already than there were in all of 2019,” Mark Bruno, managing director at Echelon Partners, said at the conference.

A minority stake sale could allow the selling advisor to offload some of the operational or technological responsibilities to the minority partner, Bruno said. Given that a big chunk of the advisor’s assets could be the practice itself, selling a minority stake could help the advisor diversify their wealth without losing control of the business, he added.

Jeremy Holly, senior vice president for advisor financing solutions at LPL Financial, previously told FA-IQ that packaging together and selling the bottom 10% to 20% of clients can help advisors unlock value and create capacity to grow their business.

Ben Cukier, partner at private equity firm Centana Growth Partners, believes organic growth is more sustainable and therefore can result in higher deal valuations.

“At some point you’ll run out of targets to buy. If you can figure out how to grow organically, the revenue multiple that you’ll get will be dramatically higher,” Cukier said at the same conference.

Cukier gave the $1 billion sale of RIA Personal Capital to retirement plan record-keeper Empower Retirement in July as an example. He noted that Personal Capital had a model that allowed for client acquisition that was net present value positive. That helped Personal Capital command a higher deal multiple compared to an RIA roll-up deal, he said, without elaborating.

Bank-owned broker-dealers

Arjun Saxena, a partner and head of wealth management, financial services at PwC, said he also expects M&A activity involving bank-owned brokerages, without giving actual projections.

Bank-owned brokerages are facing pressures — such as lower net interest income and zero trade commissions — and that could lead them to outsource some aspects of the business to third-party firms to reduce costs, Saxena said.

While not considered traditional divestitures, such arrangements could help bank-owned brokerages take advantage of the scale of the third-party firms while retaining some operational control and some degree of branding, according to Saxena.

M&T Bank joined LPL’s institutional services platform in July and is leveraging LPL’s technology and scale to serve its wealth management clients, for example. M&T — a top 25 U.S. bank with $20 billion in brokerage and advisory assets and 170 advisors — will transition its wealth business to the LPL platform.

Cetera, Raymond James, both have businesses which provide similar services, and you can expect them to be fairly active in their dialogue with these regional banks,” Saxena said.

Centana’s Cukier noted, meanwhile, that even M&A activity has gone virtual amid the Covid-19 pandemic.

“We’ve just had a portfolio company sell where the buyer never met the company in person. When can you imagine that happening a year ago?” Cukier asked.

“We’ve actually invested in companies where we have not done in-person meetings; [it's] completely virtual, and it’s at the same pace,” he added.

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