Last year, deal activity in the registered investment advisor (RIA) space experienced a slight dip, as reported by investment bank Echelon Partners. Despite a 5.6% decrease in RIA M&A deals announced, the industry displayed resilience in a challenging macro environment for mergers and acquisitions.

Enduring Appeal to Private Equity Firms

The report highlighted how RIA firms continue to attract private-equity investment, with these firms playing a significant role in funding a substantial portion of the deal activity within the sector. Echelon's analysis showcased the industry's ability to weather challenges, such as increases in the federal funds rate throughout the year.

Megadeals Drive Average Assets Per Transaction

Echelon noted a rise in average assets per transaction to $1.7 billion, partly influenced by a few large-scale deals that skewed the mean figure. Additionally, robust gains in equities contributed to an overall increase in the asset pool within the RIA space.

Consistent Trends Across Reports

Echelon's findings align closely with an earlier report by DeVoe & Co., which also documented a 5% decline in RIA transactions. This decrease marked the first slowdown in activity within the sector after a decade of continuous growth.

Private Equity Continues to Shape the Landscape

Both Echelon and DeVoe emphasized the enduring interest of private-equity firms in investing in larger RIAs to facilitate acquisitions of smaller firms. According to Echelon, PE entities were directly or indirectly involved in approximately 62% of wealth management transactions announced in 2023.

Overall, despite facing headwinds from factors like rising interest rates and geopolitical uncertainty, the RIA industry has shown its ability to adapt and thrive amidst challenging market conditions.

M&A Trends in RIA Space for 2024

Private Equity Continues to Drive M&A Activity

Most of the transactions in the RIA space involved RIA aggregators backed by private equity acquiring smaller firms. Echelon noted a slight increase in direct investments and recapitalizations by the PE firms themselves. A recapitalization involves a partial or total sale of the business and is considered a second liquidity event with the PE firm. This trend is expected to persist in 2024 as more investors seek liquidity options due to approaching the end of their holding periods.

Upcoming Trends for 2024

Despite a minor decline in deals in 2023, Echelon predicts that fundamental factors supporting increased M&A levels will continue into 2024, making it another active year. Anticipated trends include RIAs competing to recruit teams from wirehouses and PE investors, including new players like Constellation Wealth Capital and Rise Growth Partners, showing interest in purchasing minority stakes in large RIAs.

Favorable Financing Environment

Echelon forecasts a stabilization in debt markets, which will likely make it easier for potential acquirers to secure financing for deals in 2024.

Future Outlook

Echelon expects the deal count in 2024 to surpass the levels seen in 2023, remaining within the range of 300-350 total transactions. This indicates a stable and maturing market for RIAs engaging in M&A activities.