M&A slowdown threatens ten-year streak of rising RIA consolidation

The record pace of consolidation in the financial advisory industry appears to have been hit by a few speed bumps in the first two months of 2023.

The number of mergers and acquisitions this year through Monday was down 22% year-over-year, according to the latest data from DeVoe & Co., bringing it to 38 deals in 2023 compared to 49 in the first two months of 2022.

The fall began in January, when the total number of 24 transactions was 14% less than in the previous January. That slowdown carried over into February, when just 14 deals were announced, down 33% from February 2022.

Even with a slow start, David DeVoe, founder and chief executive of the deal-tracking firm, said it was too early to predict a break in a long streak of record M&A activity.

“These are the first opportunities, but 2023 is approaching the industry’s first year of decline in more than a decade,” he said. “On the one hand, the fall is not unexpected. There are many pressure points that have historically stifled RIA mergers and acquisitions, including a falling stock market and high interest rates. On the other hand, the conveyors of almost all major buyers are at a very high level.”

DeVoe cited “potential seller fatigue and mid-range buyer abandonment” as factors contributing to the slowdown in closing deals.

The fall, he added, is also “exacerbated in contrast to last year’s frenzy as sellers raced to complete deals before expected tax hikes.”

2022 has been another big year, extending a string of record-breaking years by more than a decade, according to a new report from Echelon Partners.

Echelon data shows that 341 transactions were announced last year, up 11% from 2021, when the number of transactions increased by almost 50% compared to 2020.

Overall transaction activity in 2020 was somewhat offset by the impact of Covid-19 and government-initiated business closures, but 205 transactions in 2020 are still more than 203 transactions in 2019.

The surge to 307 deals in 2021 was largely due to pent-up demand in the early stages of the post-pandemic environment.

The exit from the pandemic has also affected deal size, as evidenced by the number of deals involving firms with at least $1 billion under management.

Last year, 118 deals involving firms worth at least $1 billion represented an 18.6% drop from 145 deals in that category in 2021. But, again, due to Covid, that total in 2021 has skyrocketed from 78 such deals in 2020. .

Echelon’s report says that the number of large deals in 2022 is declining, “a return to a more normalized pace of growth should be expected, given the volatility of the capital market and the possible avoidance of large deals by some buyers due to the increase in the cost of capital.”

As DeVoe has already stated, it’s still too early to tell if 2023 will set another record for RIA deal activity, but judging by Echelon’s quarterly deal tally, this trend is unfamiliar to you.

From a peak of 99 deals in the fourth quarter of 2021, last year’s quarterly tally turned out as follows: 94, 91, 84 and 73.

DeVoe and Echelon use slightly different metrics to track trades, but the overall concept is the same and the trend is unmistakable.

An Echelon report describes the slowdown in deal making in 2022 as “simply a return to more normalized levels of growth in our industry.”

Along with that, there is one source of M&A fuel that is not expected to evaporate anytime soon.

“At present, buyer and seller interest in M&A remains strong as sellers seek to strengthen succession plans and buyers seek economies of scale,” Echelon said in a statement.

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