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Will the M&A Market Stay Red Hot for Advisors in 2023?

Will M&A Market Stay Red Hot for Advisors in 2023?

For advisors, 2022 wasn’t just a year defined by high inflation and market volatility. It was also a blockbuster year for mergers and acquisitions (M&A) within the wealth management sector. In 2022, a record number of transactions were announced, according to Echelon Partners, a boutique investment bank that closely tracks M&A within the wealth and investment management industries. That’s the 10th consecutive year in which M&A reached a record.

While consistent growth has defined wealth management M&A for a decade, should registered investment advisor (RIA) firms expect more of the same in 2023 and beyond? Or are the M&A tail winds dying down?

Here are some important trends to keep in mind when surveying the wealth management industry’s M&A landscape.

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A Record Year for M&A in 2022

The wealth management industry saw a record 340 transactions announced in 2022, eclipsing the previous high (307) set only a year earlier, according to Echelon Partners’ 2022 RIA M&A Deal Report.

Pent-up demand from the COVID-19 pandemic and attractive capital markets helped fuel M&A activity in 2021, says Barnaby Audsley, vice president at Echelon Partners. That had a carryover effect in 2022, he added.

Audsley says, “2022 saw some sellers come to market for fear they might miss the ‘great times’ experienced in 2021.”

Despite the 10.7% increase in deals between 2021 and 2022, the M&A market showed some signs of slowing. After 99 transactions were announced in the fourth quarter of 2021, deal volume has since declined four quarters in a row.

“There was indeed a slowdown in quarterly volume throughout 2022, and if the trend continues, we may experience flat or slightly lower deal volume in 2023,” Audsley says. “That said, we believe that the longer-term trend is for normalized deal activity to move higher due to the secular forces driving M&A in our industry.”

Those “secular forces” include the aging of advisors, succession planning, technological change and fragmentation.

Private Equity’s Impact on M&A

Private equity continues to play a significant role in wealth management M&A. Nearly seven in 10 deals announced in 2022 involved either a private equity firm directly or a private-equity-backed buyer, according to the Echelon report.

With internal M&A teams and access to large amounts of capital, private equity firms are often well-positioned to complete lucrative deals even during times of economic uncertainty, Echelon says. In one of the largest M&A deals of 2022, Genstar Capital acquired a controlling stake in Cerity Partners, an RIA that manages more than $45 billion in assets.

But not all private equity firms are the same. Audsley says investment criteria can vary across the spectrum of private equity firms. But they generally seek out motivated sellers within the wealth management industry whose earnings before interest, taxes, depreciation and amortization (EBITDA) exceed $3 million, he said.

“If 2021 was an indication that (private equity) firms saw opportunity in the space, 2022 proved that the trend is here to stay,” the report says.

Bottom Line

The wealth management industry saw a record number of M&A deals in 2022, continuing a 10-year trend of growth. There were 340 deals announced in 2022, nearly 11% more than the previous record set in 2021.

The M&A market, however, did show signs of slight cooling as 2022 progressed. If that quarterly trend continues, M&A could be flat or down in 2023. But Echelon expects M&A activity within the wealth management space to continue to grow over the long term thanks in part to secular drivers such as an aging workforce of advisors and succession planning.

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