Along with increased merger and acquisition (M&A) activity, the registered investment advisor (RIA) ecosystem has matured, developing new engagement strategies, product offerings, and, most importantly, opportunities for growth. With more than 18,000 retail-focused RIAs, scale and growth potential have increased, and new players have entered, including some of the largest private equity (PE) investors, all angling for a piece of these increasingly important channels, according to The Cerulli Edge—The Americas Asset and Wealth Management Edition.

Five years ago, PE’s involvement in the RIA channels was limited to the highest-level firms. However, with increased market opportunity, more investors are looking to deploy capital to help RIAs grow. As a result, competition for the fastest-growing RIAs has increased, creating multibidder situations and larger deal sizes.

Valuations have remained high despite higher interest rates and the 2022 market downturn. While mega-deals represent still-growing significant opportunities for private capital in the RIA channels, PE remains very active within lower assets under management (AUM) tiers, scooping up firms as small as $2 billion to $3 billion in AUM. With more than 18,000 RIAs nationwide, the roll-up strategy still has a significant runway.

With heightened interest in deals, PE investors must deliver significant value-add to help their portfolio RIAs grow rapidly.

“The core interest in RIAs remains constant, with steady revenues backed by sticky investor relationships, a high-growth area of wealth management, and a market composed predominantly of smaller, disparate players,” says Stephen Caruso, associate director. “To best appreciate the growth potential, however, investors must be prepared to help their portfolio RIAs, which can include supporting subsequent M&A transactions, guiding management through periods of change, or developing the brand as an acquirer,” he adds.

Due to the attractiveness of the RIA space, PE firms face growing competition among   minority investors and firms offering private credit. Minority investors are experienced industry practitioners with longer capital timelines.

“Minority investors tend to be more patient in their approach, allowing RIAs to develop without the pressure of exit-level growth,” says Caruso. Private credit also has jumped into the ring, providing a valuable lifeline to growth-oriented firms. “Private credit is increasingly attractive to the RIA channels as a form of nondilutive capital. As firms weigh the cost of capital, those looking to retain control have an additional lever to pull as more providers enter the space,” he adds.

Ultimately, due to the complexities involved in a capital raise, Cerulli recommends asset managers and strategic partners make resources available to their RIA clients during this growth stage.

“With more RIAs seeking to build a platform and make acquisitions, guidance on nuanced topics becomes more pertinent ahead of working with specialized providers,” concludes Caruso.

Source: Cerulli