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Peter Nesvold

Industry Spotlight > Mergers and Acquisitions

Why M&A Activity for RIAs Should Be Strong in 2023

By Jane Wollman Rusoff

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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.

But if it’s in Oklahoma, and there isn’t any other activity for the buyer in that market, there’s less interest in going into a new territory.

Where does organic growth enter the picture?

Some of the small firms have struggled to grow in the last 18 months. Organic growth has been a little more challenging.

If a firm hasn’t been a strong organic grower, they’re probably not getting quite as much interest.

Please explain what has made organic growth challenging.

Certainly, the last month or two things have come back stronger. But for the most part, the market has been more or less range-bound for the last [18 months]: It’s gone up a little, but a lot of it has gone down a little.

We’re at similar levels as opposed to [recorded] history, which is 8%-type growth in the equity markets per year. That drives up AUM and gives the appearance of organic growth.

What’s the upshot?

As a result [of being range-bound), a lot of managers aren’t seeing their assets grow as fast as they had historically.

So there’s been a little bit of a dividing line emerging between firms with strong client inflows versus those that have been benefiting primarily through market appreciation.

In the last decade, a lot of growth has been because of market appreciation.

But the market has not been cooperating as much in the last year and a half. So it’s become: Which firms are growing because of new client acquisitions versus just from market appreciation?

How do interest rate increases and industry regulation figure into the deal-making mindset?

Two years ago, more M&A was driven by low-cost leverage — low interest rates. As rates went up, debt financing became more expensive.

We’ve seen some of the largest firms in the industry raise more equity capital — more expensive money — in order to continue to be an acquirer.

That will pressure their returns. But when you look at how much short-term interest rates have risen, it hasn’t had anywhere near the impact that many of us would have thought a year and a half ago.

What effect would a recession have on the wealth management M&A space?

Concerns over recession have moderated in the last couple of months or so relative to those at the beginning of the year.

But if a true recession were to hit, of course it would have an impact on our space.

Meaning that deals would go way down?

Exactly because in a recession, the buyer has a backward mentality and the seller is forward-looking.

The buyer says, “My business was worth $20 million just six months ago; now you’re telling me it’s worth $15 million. I want $20 million, or I’m just going to wait it out.”

But buyers will say, “We’re in a different environment now than we were six months ago. Your business was worth $20 million when we last spoke, but now it’s only worth $15 million.”

So there’s a valuation gap. In a recession, you don’t get the same meeting of the minds.

What’s your long-term outlook for M&A activity in the RIA arena?

I think we’re, maybe, in the bottom of the fourth inning. We’re almost halfway through the M&A cycle when it comes to wealth management.

But this cycle has already had 12 or 13 years of runway. So I think we could have another decade of this continued gradual consolidation.

The number of RIAs actually continues to go up. And that’s a big reason why I think we’ll continue to see a lot of M&A activity for [another] decade.

But, as Yogi Berra said, “It’s hard to make predictions, especially about the future.”

I try not to make predictions, but this is an area where I feel really optimistic.

Will former president Donald Trump’s legal troubles and the presidential election have any bearing on wealth management M&A?

Only if there’s some kind of shock to the system as a result. If some of the problems we’re having politically as a country have an impact globally and move us further out on the limb, then yes.

But so far, there isn’t any major issue on the table from either party that would impact the industry materially.

What could be an example, though?

If there were a campaign issue where one side wants to either heighten regulation or deregulate the industry, that would cause some uncertainty and a slowdown since a lot of investors would want to see what the rules of engagement are first:

“What’s the framework going to be before we put more money to work?”

But right now, I don’t see anything in the presidential cycle that would have an impact on our [M&A] world.

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Jane Wollman Rusoff

@jrusoff2

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