Clearly, there has been a broad slowdown in mergers and acquisitions globally. But the picture is less straightforward when it comes to M&A in the wealth management space, where a 2023 slowdown is hotly debated.
A record 340 wealth management M&A deals were made in 2022, according to Echelon Partners' 2022 RIA M&A Deal Report.
Though "the number of deals in 2023 is lower … I don't see that as a slowdown. It's [more] leveling off at very high levels. It's splitting hairs to say we're in a slowdown given that we're still at such elevated levels in relation to history," argues Peter Nesvold, a partner of Republic Capital Group and founder of Nesvold Capital Partners, in an interview with ThinkAdvisor.
"The story for 2022 and 2023 has been a pleasant surprise for a lot of people in the industry," he says, calling wealth management M&A a seller's market.
Nesvold has 25 years' experience in acquisition recruiting strategy and has advised hundreds of registered investment advisors.
In 2019, he left investment bank Silver Lane Advisors, a leading M&A advisor, of which he was chief operating officer, and opened the private investment firm Nesvold Capital Partners. Its primary mission was to take minority stakes in growth-oriented financial services firms; its other component was an advisory business. In 2021, Nesvold merged the latter with Republic.
Thus far, through his investment bank, he has acquired minority stakes in firms including Stratos Wealth Holdings and Pure Financial Advisors. He hopes to make another deal by 2025.
The continued strength of the M&A RIA market stems largely from indirect support of private equity firms, Nesvold says in the interview.
"There has never been more capital on the sidelines [of private equity] than there is today. Until we exhaust [it], I think M&A activity will remain strong," he maintains.
He also discusses qualities that make an RIA in demand — and what doesn't. When it comes to asset growth, the CFA sees "a dividing line emerging" between firms that have grown because of new client acquisitions and those simply because of market appreciation.
Before joining Silver Lane in 2013, Nesvold, an attorney, had an extensive career as an equity research analyst at Bear Stearns, Lazard Asset Management and Jefferies & Co.
ThinkAdvisor recently interviewed Nesvold, who was speaking by phone from his rural Pennsylvania summer home.
Along with many others, he believes that the likelihood of a U.S. recession has now decreased. But should one strike, the wealth advisory M&A arena would be hit hard, he says.
That's because there would be "a valuation gap" between the buyer and seller. "In a recession, you don't get the same meeting of the minds," Nesvold notes.
Here are highlights of our interview:
THINKADVISOR: Is it a seller's market in the RIA wealth management space?
PETER NESVOLD: Yes, definitely, provided you meet certain criteria — size, geography, growth, a strong second generation.
What are current trends?
There's been a lot of debate over whether we're seeing a slowdown in deal activity in the space.
Overall investment banking has had a slowdown in M&A and IPOs. But we haven't seen any kind of meaningful slowdown in wealth management [M&A].
So that's certainly bucked the trend that you're seeing more broadly.
The story for 2022 and 2023 has been a pleasant surprise for a lot of people in the industry, given that the markets haven't been cooperative and that investment banking activity globally has slowed.
But we haven't seen anything near that in our space.
It's splitting hairs to say that we're in a slowdown given that we're still at such elevated levels relative to history.
Please elaborate.
If we're taking a strict view, the number of deals is lower this year than in 2022. But because we're coming off such an incredible peak, we're still materially higher than we were four or five years ago.
I don't see that as a slowdown. It's [more] leveling off at very high levels.
Why has wealth management M&A continued to be strong?
There are probably two to three dozen legitimate buyers in the market with access to capital. There are easily two dozen sponsor-backed firms in the market. And when private equity invests in a business, they don't try to get too caught up in timing the market.
So, whereas the financial markets have leveled off in the last two years, deal activity has not to the same degree because there's so much dry power [capital] on the sidelines from lots of private equity firms looking to acquire businesses.
Thus, private equity has been critical to keeping wealth management M&A strong. Is that it?
Yes. Private equity is in the business of growing their portfolio companies regardless of what the financial markets do.
I think the push from this outside capital is indirectly supporting a lot of deal activity.
Is the push greater now than before?
Yes. There has never been more capital on the sidelines than there is today. Until we've exhausted that capital, I think M&A activity will remain strong.
Is there any category of RIA for which it's harder to make a deal?
Some smaller firms with, say, under $300 million or $400 million in assets are probably less in demand unless they're right in the middle of an existing territory that a buyer has.
So if it's a Chicago-based firm that's relatively small and the buyer has a number of people already in Chicago, that's attractive.
