M&A Loan Requests Spike

SkyView Partners, which matches RIAs and lenders, has seen a surge in loan requests from firm principals mostly focusing on partial sales.​

WealthManagement.com - The coronavirus may have moved many principals of registered investment advisor firms from their brick-and-mortar offices to work remotely, but that hasn’t slowed the appetite for M&A among some. 

In fact, there are signs it may be accelerating.

“We’ve seen a tremendous surge in applications” for loans, said Scott Wetzel, CEO of SkyView Partners, which connects RIAs interested in growing their businesses with several dozen banks looking to lend for RIA expansion. “Starting the week of March 16 and consistently thereafter, every week has been three times our monthly average,” said Wetzel.

As March began, SkyView had averaged a little under five applications a week from RIAs looking for an average $8.8 million. Starting the week of March 9, the average number of applications went to over 13, looking for $23 million.

According to Terry Mullen, CEO of Truelytics, an M&A valuation software company focused on the wealth management sector, some RIAs feel this will be a good opportunity to buy as the current downturn in the markets could cause older generations of owners to look to get out of the business.

On the flip side, Wetzel added that some of the trend is fueled by advisors who, faced with the need to dedicate more time with clients, are looking to get help by bringing younger advisors into the business through a partial acquisition.

Nick Arellano, CEO of valuation firm Your Legacy Partners, told WealthManagement.com his firm is seeing a spike in requests for valuations from RIAs.

“A number of these people, especially if they have gone through 2008 and want to retire, they see the uncertainty and they’ve gotten a little shove to get moving,” he said.

In addition, the government’s injection of capital into the monetary system has driven down the cost of capital, adding to the frenzy, he said. RIAs are looking to get a loan before interest rates go back up.

According to Wetzel, the most common transactions SkyView is seeing are “partial sales,” where the senior advisor and business owner keeps a portion of equity in the business.

“What we’re seeing is them bringing on a new outside advisor to the firm or bringing in a junior advisor into the equity and capital structure of the organization, which makes a ton of sense given the extremely escalated client service levels,” he said.

With the seesawing in the equity markets wreaking havoc on valuations for RIA shops, the primary way buyers and sellers are looking to protect themselves is by placing up to 25% of the purchase price into an escrow account that will trigger further payments to the seller if a certain client retention hurdle is met.

“If the seller is concerned that he or she is selling at the bottom of the market, the escrow account allows that, if revenues are low right now, they can be recaptured over the course of the next two to three years,” said Wetzel. “If the market goes back up, it enables the seller to get that full enterprise value that they may feel like they were missing out on by selling at the ‘bottom’ right now.”

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