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The RIA Deal Room | 2019

A Rising Tide Lifts All Boats?

The RIA industry is rapidly evolving as large M&A participants seek differentiation and the industry’s support
system increases. Growth, scale, and succession are driving many RIAs to consider a transformational
transaction. AGS estimates that roughly 1.5% – 2.5% of all RIAs over $100M in AUA/AUM are entering into an
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external transaction each year. Increased transaction volume coincided with an aggregate decline in the
total RIAs, but consistent breakaway movement and low barriers to entry make near-term consolidation
unlikely.

From an AUM perspective, the RIA industry has formed a barbell. According to Cerulli & Associates, RIAs and
Hybrid RIAs greater than $1B in AUM made up 5.4% of the RIA population and controlled 63.2% of total assets
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at the end of 2017. The industry experienced an 11.3% compound annual asset growth rate from 2010 – 2017,
and the AUM compound annual growth rate was much higher for firms greater than $1B in AUM versus smaller
size segments. Size and scale benefited the largest RIAs, and they are also the firms commanding the highest
valuations.

Most of the market did not experience the same upward valuation pressure as larger firms. The pure
economics of many RIAs have never been better than 2015 – present and steady stock market returns put
many RIAs in a strong financial position. During the research analysis, it became evident that one question
deserved consideration; “Are valuations rising due to better financial results, expanded multiples, or both?”

The data suggest that valuations
increased for 90% of RIA firms due
to sustained financial performance
rather than multiple expansion.
Evaluating transactions occurring
from 2015 – 2018 provided an
opportunity to search for outliers,
and the results were telling. From
2015 – 2018, the median adjusted
EBITDA multiple was 5.1, and there
was less than 10% positive or negative
variation in the yearly median results.
While the financial results have
continued to grow cash flow models,
the median multiple on cash flow
or EBITDA was consistent.

An interesting dynamic is forming in the M&A market. Multiples are not necessarily increasing for all firms, but
more RIAs are saying yes to a transaction. The research results support the hypothesis that deals are won on
more than the multiple or valuation alone. Instead, sellers are engaging in balanced transactions, and buyers
are delivering a structure that is competitive for the firm’s size and matches the transaction’s purpose.

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