This article examines the specific details of what is driving merger and acquisition activity in the multi-family offices space, including the kind of multiples firms are paying to acquire assets. Recent activity remains brisk.
How are multi-family offices faring in the booming M&A market for RIAs in the US?
After a second quarter COVID-induced slump, mergers and acquisitions among advisory firms have rebounded sharply, and are nearing the record highs recorded last year.
“The outlook for RIA M&A activity in the second half of 2020 remains strong,” according to Echelon Partners latest Deal Report. “The demand for high quality RIA firms has not waned…and there is increased likelihood that M&A activity levels could resume their 2019 pace.”
Investment banker firm Piper Sandler is similarly optimistic.
“Despite the COVID-19 pandemic, the backdrop for transaction activity in the industry remains strong,” according to a new report on the wealth management industry by the Minneapolis-based firm.
“Competition amongst an ever-growing group of buyers, several of which are backed by private equity sponsors, has pushed valuations to new heights and created a virtuous circle of M&A activity.”
Multi-family offices are very much part of the swelling M&A wave, albeit with distinctive characteristics.
“MFOs are definitely following the RIA trend when it comes to mergers and acquisitions,” says Scott Bush, chief client officer for Geller Advisors, a large New York-based multi-family office. “MFOs are carefully considering how they spend their time and money on inorganic growth.”
Pathstone, the giant New Jersey-based firm that now has over $20 billion in AuM, has been one of the most active MFOs in the US mergers and acquisitions market.
Last week Pathstone bought Price Wealth, a $1.3 billion Austin, Texas-based wealth management firm serving UHNW clients. In late July, Pathstone acquired Cornerstone, a $4 billion Bellevue, Washington-based MFO serving 600 families.
Pathstone has used M&A to grow rapidly since its founding ten years ago after the breakup of Harris myCFO, snapping up major wealth managers including Kanaly Trust, Convergent Wealth Advisors and Federal Street Advisors. The firm was backed by capital from minority investors Fiduciary Network which last year sold its stake to private equity powerhouse Lovell Minnick Partners.
Armed with capital from its private equity partner, Pathstone made a decision early in the outbreak of the pandemic to “grow through the current environment,” said Matt Fleissig, president of the firm. The pandemic hasn’t noticeably changed valuations or deal structure, especially if deals were pending before the COVID outbreak began, Fleissig said.
What has changed since the pandemic, he noted, is the extent at which deals are now being done virtually.
“Virtual meetings have proven to be very effective,” Fleissig said. “When we were talking with Cornerstone, we had a series of small, intimate video meetings that proved to be deeper and longer than what we might have had with in-person meetings, which may have been more limited.”
Chicago-based Cresset Asset Management has also been on a buying tear this year, and in June it acquired PagnatoKarp, a well-known $2.3 billion MFO based outside Washington, DC in Reston, Virginia.
But Pathstone and Cresset’s high-profile transactions may be exceptions to the rule, according to Geller’s Bush.
MFOs like Geller, who specialize in serving ultra-high net worth families, tend to shun publicity and rely on discretion when seeking out acquisitions, he said.
“We don’t talk a lot [about] acquisitions,” Bush said. “Deals usually come from valued friends and centers of influence who bring ideas to us.”
Harris Baltch, a UBS M&A veteran who joined Dynasty Financial Partners this spring as head of its Capital Strategies division, agrees. “MFOs with high-profile families prize discretion and confidentiality,” Baltch said. “Deals are usually started by private introductions and the public doesn’t hear as much about them."
Indeed, MFO transactions are “much more on the down low,” said industry consultant Brian Hughes, president of Hughes Growth Strategies. Multi-family office deals rely “a lot more on word of mouth” than a formal bidding process through an investment banker, he added.
Why MFOs sell
What prompts a multi-family office to sell?
“Firms usually hit some inflection point such as the loss of a key employee, a key team or a generational shift,” according to Bush.
The changing needs of a wealthy family, especially if a younger generation is ascendant, is often a precursor to a sale, according to Dynasty’s Baltch, who works closely with Geller, a Dynasty partner firm.
“The next generation often wants to do things differently and will re-think the business model and how their needs are being met,” Baltch said. “A succession of ownership will often trigger a sale.”
If there’s no long-term succession plan, MFO principals may decide to “step away and take money off the table,” Hughes noted.
In addition, smaller MFOs may be looking for more scale and better technology from a larger partner, said Carolyn Armitage, managing director for Echelon. The pandemic-induced economic downturn may also be a factor she added.
“As founders of MFOs approach retirement, they don’t want to go through a recessional alone,” Armitage said. “They would rather have the resources that a larger partner can offer.”
What about buyers?
Multi-family buyers want to grow and add assets and clients, of course, but MFO executives stressed that a good cultural fit was prerequisite for a deal.
“Culture is the first thing,” said Pathstone’s Fleissig. “If you’re not aligned with the right people, there’s no point in going forward.”
Rush from Geller Advisors agreed.
“An M&A transaction is less about multiples and AUM and more about fit,” he maintained. “We’re only going to be happy if [the seller’s approach to the business] is consistent with our cultural norms.”
Buyers are also looking to fill gaps in their service offerings, executives said.
Bush described how Geller acquired an MFO team with subject matter expertise in the entertainment industry that helped the firm build it core competency in a critical area that had previously been under-represented.
Acquiring talent, especially NextGen talent, is also an important factor for Pathstone, according to Fleissig.
“There’s a shortage of talent in the industry,” he explained. “We could not have hired the level of talent [on the open market] that was already at Cornerstone. We wouldn’t have been able to find them.”
Client tenure at an MFO, organic growth and a firm’s revenue mix are also priorities for buyers, said Baltch. The “Holy Grail” for buyers, he added, is a younger generation in a wealthy family committed to staying with the MFO.
Industry observers expect the M&A market for MFOs to remain robust.
“It’s still a fairly small space,” Hughes said. “There are only a few hundred real MFOs. Not many are looking to sell and you’re seeing multiples near record highs.”
Noting buyers with “deep pockets of capital,” Piper Sandler says it expects “valuations will remain strong” for firms that can demonstrate a diverse client base, client retention, strong leadership, growth and size and scalability.
Indeed, the EBITDA (earnings before interest, taxation, depreciation and amortization) multiple for deals has increased by 40 per cent from just five years ago, according to research from Fidelity. An RIA with $5 billion in AuM or more and a healthy scale and high growth can expect a multiple today of at least 12 times EBITDA, Piper Sandler states.
But multiples decrease with less size, scale and slower growth.
An advisory firm with between $1 billion and $5 billion in AuM with lower growth and only average scale can expect a multiple range between 7x and 9x times EBITDA, according to the investment bank. A low growth and sub-scale RIA with between $250 million and $1 billion in AuM is likely to be valued at a multiple of 6x to 8x earnings.
Power of private equity
Private equity firms are clearly a major factor in the growth of the market.
The injection of PE capital into the RIA and MFO market is part of the “natural evolution of the business,” proving “an eco-system for stock,” Fleissig said. He describes Lovell Minnick, Pathstone’s private equity partner, as “professionals in growth equity” who provide guidance in “goals, budgeting and direction” as well as capital.
Both private equity firms and MFOs are becoming “more a part of the wealth management conversation,” as the industry matures, said Echelon’s Armitage.
PE firms have identified an attractive, growing market and wealth management firms “are slowly moving to MFO mode,” she said. “Firms that used to call themselves wealth managers are now branded as multi-family offices. You’ll see more and more of that over the next several years.”