Adviser Industry Posts Another Quarterly M&A Record

Echelon’s latest merger and acquisition research finds U.S. private equity firms and strategic acquirers are pivoting their attention overseas as the competition for assets and talent heats up.

Echelon has published its third quarter adviser industry merger and acquisition (M&A) update, finding that deal volume hit yet another record high.

According to Echelon, prospective tax code changes might have helped fuel the new record quarter, which saw 78 deals announced. The previous record was 76 deals, set in the first quarter of this year. The third quarter analysis shows large strategic acquirers, many of which are backed by private equity firms, maintained their status as the most active dealmakers in the wealth management and advisory industry.

At this rate, Echelon researchers expect the number of 2021 deals to outpace the total 2020 deal count by a significant margin. They point to strong secular trends such as overall financial services industry consolidation, growing competition and a need for broader succession planning as key drivers of the rapid pace of M&A. Adding fuel to the fire are supportive capital markets, cheap debt and heightened corporate cash balances—as well as the “transitory trend” related to potential changes in tax rates that could be included in the federal budget legislation making its way through Congress.

“Private equity interest in the wealth management sector has reached all-time levels,” the third quarter report notes. “The majority of deal activity involving private equity capital has come via their portfolio companies, such as M&A powerhouses Mariner Wealth (backed by Leonard Green) and Mercer Advisors (backed by Oak Hill). This buyer group, which we largely categorize as ‘strategics’ or ‘consolidators,’ accounted for 58 transactions during the quarter. … [These buyers] are outpacing even the most grandiose of expectations.”

Simply put, Echelon says, the strategics and consolidators are dominating total M&A activity, accounting for more than 70% of all transactions this quarter and more than 50% of all transactions in 2021 year to date. Echelon also finds average assets under management (AUM) per transaction continues to increase. There were 51 deals involving over $1 billion in assets announced during Q3 2021.

“This was a giant leap quarterly for total deals this size relative to the first two quarters of 2021, and significantly higher than the quarterly levels that were observed prior to this year,” the report explains. “The quarter’s average assets per deal of over $2.3 billion highlights the strong supply of available dealmaking capital from sophisticated buyers that is allowing demand from buyers to exceed the supply of firms looking to sell, even with the significant increase in the number of sellers that Echelon has observed in the past six to 12 months.”

According to Echelon, the growth in average assets impacted per deal can also be attributed to increases from investment performance, as major indexes continue to perform well—despite some growing concerns about a potentially cooling economy.

“Overall, we expect 2021 to be another year of record average assets under management transacted due to robust equity markets, new avenues for organic growth and feverish interest from current and emerging buyers,” the report concludes.

The Echelon research also points out a notable new trend. The researchers say some strategic buyers, spurred by opportunity as well as increasing competition, have ramped up dealmaking activity in the United Kingdom—and they have already been followed by prominent U.S. private equity firms also looking to establish a presence in the region.

“One direct private equity investment from the quarter that is worth noting was Lightyear Capital’s strategic partnership with international RIA [registered investment adviser] and U.K.-based wealth management firm Wren Sterling Financial Planning Limited,” the report notes. “This deal represents an important macro-trend that has developed throughout the year: domestic private equity firms turning their attention overseas as the U.S. M&A market becomes increasingly competitive for large-scale platforms that can support M&A. In 2021, the U.K. has seen an especially large increase in deal activity and general interest from U.S.-based financial and strategic acquirers.”