Valuations of registered investment advisory firms have reached all-time highs over the past few years, but one M&A advisor and two seasoned RIA acquirers say prices may eventually top.
“I believe valuations are top-notch,” said John Fury, managing partner at Advisor Growth Strategies, a management consulting firm, during a webinar. “Based on the bids we’re seeing now, they are equal to or less than last year.”
Marty Bicknell, CEO and president of Mariner Wealth Advisors, an active acquirer for the firms, agreed.
“I don’t think they go very high from here, but I also don’t think they will go backwards,” he said.
Rush Benton, senior director of strategic development at Captrust, said the flatness in valuation growth would be an advantage for some, allowing firms to digest what they’ve swallowed and that companies with scale and size will be the dominating players and premiums. Will command the valuation. going forward.
“Ultimately, there’s going to be a difference between people who have it and those who don’t,” he said.
Advisory Growth Strategies’ 2022 RIA Deal Room Report noted a slowdown in valuation growth. Brandon Kawal, Principal, Advisor Growth Strategies, said the median valuation multiple for sellers grew for the fourth year in a row to 8.99x EBITDA in 2021, up just 12% from the previous year.
This compares with a 21% increase in valuations in 2020 and 29% in 2019.
“The twelve percent increase in the average adjusted EBITDA multiplier was the lowest growth rate we’ve tracked in four reports,” Kaval said. “What this really means and what sets it off is a renewed interest in premium properties to drive valuations.”
Advisor Growth Strategies says the defining theme of pursuing M&A is talent.
“The struggle for the next generation of talent is everywhere,” Kaval said. “There is a lot of evidence of tight labor markets, upward wage pressure. Some of the more scaled platforms in this space have a more efficient way of addressing and adding talent, and I think a lot of The RIA owners are trying to figure out, ‘Am I involved in this? Or do I look elsewhere for this?'”
But Fury said the high valuations in the space are making it difficult for RIAs to secure internal transactions and get equity in the hands of the next generation. This is despite the fact that there are more financing options available, and less risk involved in such transactions.
“The external valuation dynamic is fueling the inability to move equities internally, which, frankly, I think is a big problem,” he said. “With all due respect to Marty and Rush, some firms don’t want to sell. They want to move on.”
Benton pointed out that some smaller RIA companies are so eager for next-generation involvement that they allow young advisors to make decisions in M&A transactions—which, in his view, is a problem.
“You have a business that’s worth a lot of money, but you literally pass control of the decisions to your next generation, who don’t control the business,” Benton said. “As a business owner, I can tell you Captrust—we wouldn’t do that.”
The decision must lie, he argues, with the owners of the firm.
Bicknell says Mariner’s M&A strategy has always been centered around talent acquisition.
“As I sit at the table thinking about what we are trying to achieve as a firm, that is the number one objective. Whether it is through recruitment, acquisitions or traditional means—training and development—we are the organization.” We are looking to bring talent in,” he said. “We are looking for organizations that have done a good job of attracting and building the next generation of mentors, the next generation of talent, to the organization.”
With its scale, Mariner can bring better equipment for those individuals and more options for its customers, Bicknell said.
But once you’ve got talent, firms need a mechanism for the next generation to stick around, said Mark Bruno, managing director of wealth management at Informa, who moderated the virtual panel.
In June 2021, Mariner launched a program that added 120 individuals as equity owners to the firm, and in January this year it added 30 more equity owners.
“We will continue on an annual basis to add the next generation of talent to the cap table, based on things like being a good corporate citizen, doing the right thing for the client, being evolutionary for the people inside the organization, taking initiatives And helping the organization grow,” Bicknell said. “From our point of view, the better.”
Captrust has long had an equity program available to every employee, as well as new firms that fall into the fold.
“When we make an acquisition, we want the seller to take some equity in Captrust,” Benton said. “We want to share that value with people.”