Driven by increased mergers and acquisitions (M&A) activity, the ecosystem of Registered Investment Advisor (RIA) firms has matured, developing new strategies, products, and therefore, growth opportunities. This dynamic, according to research firm Cerulli Associates, has caught the attention of major private equity firms, heightening their interest in taking part in the boom of this business.

The report, titled “The Cerulli Edge—The Americas Asset and Wealth Management Edition,” highlighted that there are over 18,000 RIAs focused on retail investors, boosting the potential for growth and scalability. According to a press release, new players are entering the market, including some of the largest private equity investors. The goal: to gain access to these increasingly important distribution channels.

Five years ago, Cerulli noted, private equity’s involvement with the RIA channel was limited to top-tier firms. However, as more opportunities have emerged in the market, more investors are seeking to deploy capital to help RIAs grow. As a result, competition has intensified for the fastest-growing advisory firms, creating bidding wars and larger-scale deals.

Moreover, despite higher interest rates and the 2022 market downturn, sector valuations have remained high.

Activity isn’t heating up solely in the large-firm segment, the report adds. While mega-deals still represent significant and growing opportunities for private equity in the RIA space, investors continue to be “very active” in segments with lower AUM, targeting firms with $2 billion to $3 billion in assets.

Given the size of the market, Cerulli emphasized that the trend still has room to grow.

Support and Competition

Given the rising interest in the sector, Cerulli stresses that private equity investors must add meaningful value to help their portfolio RIAs grow quickly.

“Core interest in RIAs remains strong, with stable revenues supported by tight-knit investor relationships, a high-growth area in wealth management, and a market composed predominantly of smaller, fragmented players,” said Stephen Caruso, Associate Director at Cerulli, in the press release.

“To better realize that growth potential, however, investors need to be prepared to support the RIAs in their portfolios, which may include backing future M&A transactions, guiding the executive team through periods of change, or developing the brand as a buyer,” he added.

Due to the attractiveness of the RIA space, Cerulli notes that private equity firms now face increasing competition from minority investors and private credit providers.

Retail investors, in particular, are seasoned industry participants with longer investment horizons. “Minority investors tend to have a more patient approach, allowing RIAs to grow without the pressure to scale quickly for an exit,” Caruso explained.

Additionally, the private credit industry has also entered the scene, offering valuable support to growth-oriented firms. “Private credit is becoming increasingly attractive to RIA channels as a non-dilutive form of capital. As firms weigh the cost of capital, those wanting to maintain control now have another option, with more providers entering the market,” the executive said.