Could Market Volatility (or Recession) Disrupt Record M&A Activity?

For some years now, advisory firm owners have enjoyed a sellers’ market that has spurred record merger and acquisition volumes.

Scott Slater, merger and acquisition (M&A) specialist and a vice president of practice management and consulting for Fidelity Custody & Clearing Solutions, regularly speaks with PLANADVISER about the ongoing consolidation of the registered investment adviser (RIA) and independent broker/dealer (B/D) industries.

Back in January, Slater detailed how 2019 generated a record level of RIA and B/D M&A activity, based on the pressure for financial services firms to scale and the pervasiveness of prepared buyers who hold significant capital in a low interest rate environment. At the time, he suggested there was little reason to think 2020 wouldn’t continue the record-setting M&A pace.

However, with the recent bout of severely negative market volatility that has some analysts wondering whether a recession has arrived, Slater says it is a good time for advisers to step back and reassess the M&A landscape.

“It is interesting because I think people in the industry actually saw some of this volatility coming,” Slater observes. “Of course, they didn’t foresee the specific cause or timing of the volatility—the coronavirus concerns and the oil market shock. But they knew the long run of positive markets we have experienced basically since the Great Recession couldn’t last forever.”

As such, Slater says, there was something of a flurry of M&A activity leading up to this current situation. Indeed, PLANADVISER has in late 2019 and early 2020 covered several important RIA-focused transactions, along with some mega deals, including the acquisition of Legg Mason by Franklin Templeton

“At the start of 2020, I believe, sellers knew we were at peak valuations,” Slater says. “Still, even if valuations have come down a bit based on the new market environment, I don’t believe that will significantly slow or halt the M&A activity we forecasted for 2020. Just remember the age of many of the owners of these firms and the competitive pressures they are facing.”

Slater projects that, even in the case of a mild economic downturn that lasts more than a few weeks, we will remain in a sellers’ market. On the other hand, should a longer-lasting and more severe recessionary event take place, buyers will potentially grow more selective as they contemplate potential transactions.

“We can learn from what happened to M&A activity back in December of 2018, when the market declined almost 20%,” Slater says. “At the time, there were a lot of deals that were basically halfway done, and the volatility actually led sellers to feel urgent to get their deal done. Ultimately the impact was muted, but that was a one-month market swoon. This could be a more significant and lasting volatility event.”

In terms of the deals that have happened so far in 2020, Slater says he continues to be impressed by the activities of what Fidelity considers to be “strategic acquirers.” In basic terms, these are firms that already have a strong set of services and an operational infrastructure in place and which want to quickly acquire access to new markets.

“One of the things we’ve been talking about quite a lot so far in 2020 is the need for attracting and retaining the best advisers and staff,” Slater says. “There is no question that, for a lot of the large, strategic acquirers, a big part of why they are entering into so many transactions is to capture top-level talent. This theme will certainly continue to shape M&A during 2020, whatever transaction level we end up seeing.”