Hightower Advisors chief executive Bob Oros said Thursday that a shift back to more of a buyers’ market in the RIA M&A space isn’t out of the question, even in the near future.
‘As you start to have really well formed buyers out there, who have proven to do deals, who have a very strong value proposition, I think you will start to find sellers who want certain buyers and may not be able to get them, or they may not be the highest bidder,’ Oros said during a webcast hosted by RIA investment banking firm Echelon Partners. ‘Over the next year or two, as we’re going to see acceleration of sellers coming in, you could start to see, at a minimum, situationally, buyers might have a little bit more power.’
Oros (pictured left) and CI Financial chief executive Kurt MacAlpine (pictured right), two of the industry’s most active RIA acquirers of late, talked about how ‘buyer sophistication,’ flexibility around deal structure and succession planning trends are re-shaping the M&A landscape.
The third quarter of 2020 saw 55 transactions involving firms that managed $100m or more in assets, pushing the annual transaction rate north of 200, according to Echelon. In 2020, Hightower and CI Financial have done eight and nine transactions, respectively.
Oros said even though Hightower and CI Financial might compete on certain deals, there’s plenty of opportunity out there. ‘There are still more net new RIAs being created than there are being consolidated,’ he said.
Roughly 14 months into his tenure at CI Financial’s helm, MacAlpine said that his goal is to build the Canadian firm into ‘the leading integrated private wealth platform in the US, period.’ As recently as January of this year, CI Financial had yet to close any RIA deals.
‘I can say I feel a lot better now, being nine deals in, becoming a household name in the space, acquiring scale in the US,’ MacAlpine said. ‘I think the next nine become a lot easier, and the nine after that become even easier because people have familiarity with what we’re doing.’
Oros said while MacAlpine had a blank sheet of paper to work with, he stepped into his role at Hightower in January of 2019 with a sheet of paper filled with the scribblings of previous success. He said his starting place was to get the marketplace to see Hightower’s evolution, as it was still seen as ‘the breakaway broker place.’
Oros and MacAlpine said they put as much consideration into what their businesses bring to their acquisition targets as they put into what those potential partners should be bringing to their firms. Both said sellers are looking for scale without losing the entrepreneurial feel of being independent, and that buyers are best served by having some flexibility when it comes to deal structure.
Sounding off on succession
Oros said internal succession plans are getting harder to pull off in the current environment.
‘It comes down to bottom line economics, that valuations in our industry have gotten very full,’ he said. ‘Great firms can really command a premium and that gets really challenging for internal succession. It’s rare that an internal successor would pay a full-market premium.’
Oros said it largely depends on how willing a firm’s founders are to sell at a discount, but that the second generation needs to know what exactly its risk tolerance is.
MacAlpine said sellers are generally gravitating toward platforms that can deliver scale and put them on a path to differentiate themselves. He said that CI Financial and Hightower both have the cash flow to do lots of transactions quickly, a luxury that most second generation owners of RIAs are lacking.
‘From a risk perspective, it’s challenging to grow your practice through a succession plan and then through M&A,’ MacAlpine added. ‘You’re taking on an immense amount of risk for arguably not that much incremental upside towards pairing up with a larger integration or aggregation platform.’
This article originally appeared on CityWire.
