I recently attended a mergers and acquisition conference for Registered Investment Advisors or RIAs. There’s some 15,000 RIA’s in the U.S. and they are buying each other at a brisk pace. My friends at Gladstone Associates, who arranged the conference, serve as advisors to buyers as well as sellers in the market, and they are pretty good at it.
The chatter at the conference was the impact of private equity investors who have moved in and are high profile, deep pocketed buyers of register investment advisors. Private equity investors seemed to be somewhat new on the scene and I wondered why they weren’t there earlier. The RIA business has high margins and recurring revenues, manna for private equity investors. If it had high barriers to entry too, that would be the trifecta, but alas, just about anyone can be an RIA. Still, it’s a great market.
Private equity is often called that smart money. Laden with cashed out tech entrepreneurs and bow-tied ivy leaguers, there’s certainly a large concentration of intelligence there. Still, I can’t help but wondering if they might be getting in at the top here. Remember, RIA revenues are 0.75% to 1.25% of assets (annually) under management, and it rolls in like the tide every quarter.
But what if the market gets cut in half by a black swan event, of which there are several good candidates. Almost immediately, the revenues of RIAs will be cut in half too. When that happens it will be interesting to see what the smart money does next.
I suspect they will cut their losses, but the upside in this is that the RIAs who wanted to acquire other RIAs but were priced out of the market, can make deals while there’s blood in the streets. And as these are operators, and not portfolio style investors, they can actually fix things and create real value. If that happens, who’s going to look like the smart money then?
