The wealth management industry saw one of its most extraordinary periods for M&A activity in its history in Q2 2020.
The most-recent Echelon RIA M&A Deal Report finds that there were 35 recorded deals in Q2. That is a 20% decline in total deal volume from Q1 2020, and a 34% drop compared with Q2 2019.
However, those involved in the most recent wealth management M&A, especially the sellers, grew dramatically. To that end, the average assets under management of a firm acquired during the second quarter was a little more than $1.5 billion. This is the largest level since Echelon Partners started to monitor this data in 2014.
The decrease in deals was largely expected, particularly after the remarkable equity market declines seen in February and March. However, the surge in the size of acquisition targets was a bit of a surprise to those in the industry.
There are several sizable deals that were expected to be finalized in Q2 were delayed but are now on pace to be completed in the third quarter.
The total number of deals slowed during the second quarter, but there was a significant rush in the number of minority transactions. Echelon RIA M&A Deal Report found that there were seven minority acquisitions in Q2. That upped the number of minority deals to 13 in the first half of 2020, which is more than triple the number of minority acquisitions in the first half of last year.
Echelon RIA M&A Deal Report states that transactions generally did not fail due to the spread of COVID-19. In many instances, it was the sharp changes in market and economic conditions that began in Q1 that resulted in a delay in discussions. As such, it just took longer than usual for agreements to be completed.
The deals that were mid-stream or in advanced stages progressed, but it was at a notably slower pace than usual. Just 11 deals were recorded in April. However, M&A activity started to resume a more standard pace later in the quarter, with the markets rebounding from Q1 losses. The S&P 500 increased by 24% during Q2 and rested just 8.6% below its February 19th high.
But overall deal activity in the wealth management industry was at its lowest levels since Q3 2017.
In the last 11 days of June, there were nine deals were announced. Those deals made up about 25% of the quarter’s total activity levels.
Echelon RIA M&A Deal Report noted that there were more “Professional Buyers.” This included RIA platforms, consolidators, and aggregators. Their interest in acquiring larger RIAs firms, was behind a large amount of deal activity during Q2. These professional buyers were also a major factor as to why deal size of increased during the quarter.
These firms have become consistently more influential in wealth management M&A over the last several years because their business models are largely based on their ability to grow through acquisition. Professional buyers have established and concentrated on transaction teams that are working through dozens of potential acquisitions at any given point in time. Plus, these companies have access to capital and the ability to execute deals, even when there are market slowdowns, such as the coronavirus pandemic.
The professional buyers are also extremely interested in acquiring RIA firms that have over $1 billion in assets under management. The reason is that these companies are mature and profitable businesses, providing the buyers with the quickest route to growth and scale. These larger acquisition targets were also able to keep their focus on completing deals in the second quarter, as they typically have more dedicated leadership roles than small- to mid-size RIAs.
Echelon says that the evolution in the RIA M&A ecosystem, and the increased competition among professional buyers, will continue to play a significant part in influencing valuations, deal structure, and the composition of M&A activity in the future.