The COVID-19 outbreak has put a hold on most M&A among registered investment advisors (RIAs), but industry players expect accelerated deal flows after the dust settles as the forces behind consolidation remain strong. Deal pitches and ongoing talks have been largely interrupted with travel restrictions amid the pandemic, said a sector advisor and a sector investor.
- Deal pitches and negotiations slow down, with valuations hard to determine
- Deal flows are expected to rebound as demand remains strong from buyers and sellers alike
- Active managers and those with high amounts of equities will be attractive targets
The COVID-19 outbreak has put a hold on most M&A among registered investment advisors (RIAs), but industry players expect accelerated deal flows after the dust settles as the forces behind consolidation remain strong.
Deal pitches and ongoing talks have been largely interrupted with travel restrictions amid the pandemic, said a sector advisor and a sector investor. The recent market correction has eaten away at RIAs’ assets under management, which makes it difficult to assess valuations as the companies’ revenues are tied to asset levels, the sector advisor said.
“We get calls from investment bankers who have companies for sale and those calls have slowed down,” said Gene Needles, chairman and CEO of Resolute Investment Managers.
Both sides are having more back-and-forth conversations for deal term negotiations as the market is trying to find a bottom, said Matt Cooper, president at Beacon Pointe Advisors. The Newport Beach, California-based investment advisor announced a recapitalization by Abry Partners on 10 March.
Sales multiples haven’t changed much but deal prices are lower as sellers’ adjusted EBITDA is lower than six months ago, said Cooper, who sees RIA sales multiples in the range of 4x to 8x adjusted EBITDA. Beacon Pointe fetched around 15x EBITDA in its recent deal, according to a previous Mergermarket report.
Dealmakers need more time to understand the implications on the economy and the market to project how long the downturn will last, and RIAs may need to prepare for a long-term impact, the sector investor cautioned.
But some late-stage strategic deals are expected to get to the finish line, the sector advisor said, adding that if a deal can create strong synergies, the market move is not as relevant.
Meanwhile, many aging money managers, who experienced the last bear market 11 years ago, may want to “get their chips off the table” when deal flow bounces back, said Cooper at Beacon Pointe. “It’s going to get a lot of people off the couch and looking to sell,” he added.
“We hit the pause button but not the stop button,” said Stuart Silverman, president of Bluespring Wealth Partners, an Austin, Texas-based subsidiary of Kestra Financial. The biggest trigger that puts RIAs for sale – succession need – hasn’t changed, Silverman said, adding that many sellers are currently preoccupied with their clients, but will come back to M&A talks after the market settles.
“M&A is delayed, but once recovered, I believe it will accelerate because smaller wealth managers will not want to take the risk of going through this type of event alone again,” said Rick Buoncore, managing partner of MAI Capital Management.
This market turbulence also creates a great buying opportunity for competitive RIAs to take market share, said the sector advisor.
“It’s a great time to buy [asset managers], particularly managers who manage a lot of equities,” said Needles at Resolute. “Those assets will rebound much more quickly than the economy will rebound from this downturn.” Needles said he has seen multiples as high as 10x adjusted EBITDA for private RIA deals.
Money managers that deploy a more active strategy, such as stock pickers, market beaters and goal-based asset allocators, will stand out in this market volatility, said Cooper, Buoncore, Needles and the sector advisor. The asset and wealth management industry in the past few years was leaning towards passive investment during the decade-long bull market, and the recent correction creates more demand for active investing, they said.
The US Federal Reserve on Sunday slashed interest rates by 100 basis points to nearly zero percent as part of a wide-ranging emergency action amid the coronavirus outbreak. On 3 March, the Fed already cut its rates by 50 bps, its first emergency rate cut since the financial crisis.
Bigger RIAs that haven’t been over-leveraged are going to take advantage of this cheap financing resource and more than double their firms’ size in the next three years, Cooper said
But Buoncore and Needles cautioned that the causes of the low rates — the coronavirus and market volatility – make creditors more reluctant to lend and so borrowers may end up having relatively higher financing costs.
While the market environment has changed a lot recently, it’s still a seller’s market for RIAs, Cooper said. Sell-side advisors are working with sellers and informing the market through the auction process, which makes it hard for buyers to get bargain basement sales, said Cooper.
“Today, there are so many more well-capitalized, sophisticated buyers. The sell-side market has more options,” said Cooper. “There’s not going to be a lot of bottom-fishing going on.”