M&A Activity Poised for a Rebound
Faced with an uncertain economic outlook, inflation, rising interest rates, and persistent geopolitical risk, M&A activity was undoubtedly more restrained in 2023 than in 2022. But the picture was less straightforward when it came to M&A activity in the wealth management space. Many opportunities in the industry continued to emerge and the prospects for 2024 remain healthy.
Connect Money asked Verne Marble, CIMA, Director of Business Development, Private Advisor Group, about the current M&A landscape in the wealth management industry, his ideal deal structure when researching a potential merger or acquisition, and the firm’ plans in the space as the year unfolds.
Q: Do you anticipate the surprisingly robust wealth management M&A activity in 2023 to continue this year?
A: I do. According to Echelon’s 2023 RIA M&A Deal Report, the 5-year CAGR (2018-2023) of M&A activity is 12.1%, and I believe the trend will remain consistent.
M&A activity in 2023 started slowly over the first couple of quarters, which is consistent with the market and interest rate environments we were experiencing at the time, but then picked up steam in the back half of the year.
Overall, while I believe the total number of transactions in 2023 were down compared to 2022, I think it was among the top 2 or 3 highest years. And, given the potential for interest rates to dip slightly lower this year, that may help the M&A activity to remain steady.
Q: What does an optimal consideration mix for an M&A deal for Private Advisor Group look like and what is the ideal structure?
A: Our recent acquisitions include our 2022 acquisition of Minnesota based Investors Financial Group (see details here), as well as six internal transactions in 2023. In the former, we provided the founders and advisors with access to enhanced scale, multi-custody capabilities, additional technology and investment management resources, and solutions to assist in succession and legacy planning. In the latter, we developed a variety of creative structures targeted at meeting the needs of individual advisor practices.
That said, our preferred approach in today’s environment is to engage in minority investments with our current advisors or prospective advisors seeking to affiliate with Private Advisor Group.
We do this through a partnership program that we created almost two years ago, called the Alignment and Equity Program. This structure allows us to make a minority investment of cash and equity, and we further enhance the deal structure by providing tag-along rights to a potential Private Advisor Group monetization event.
The upfront cash provides liquidity for advisors to simply take some risk off the table but can also be the means for access to growth capital.
The tag along right creates an opportunity for a more significant monetization event because the advisor will realize an institutional-level sales multiple due their alignment and relationship with Private Advisor Group. This multiple will likely be higher than what they could receive as a stand-alone practice.
Lastly, our minority investment program serves as a baseline for us to solve more complex and specific needs that advisors have. We can tailor the program to help advisors plan for complete exits from the business, to facilitate next-generation advisors realize their dream of taking over the practice, or to co-invest with our advisors on new acquisition opportunities.
A: What are your plans for M&A expansion in 2024?
Q: Private Advisor Group will continue with our M&A expansion in 2024, particularly with our minority investment program. In particular, we will continue to offer the program to our affiliated advisors, but we will also be more proactive in highlighting it with prospective advisors who are seeking a new partner to operate their independent practices with.
Additionally, we may consider exploring a more significant acquisition that would allow us to expand and enhance some of our service offerings. We think it may be more efficient to acquire and integrate those capabilities rather than to build them out separately.
