How RIA Lenders Adapt to Health Crisis and Market Crash

The spread of the coronavirus and resulting market volatility do not appear to be slowing advisors’ appetite for M&A debt financing. But how do banks feel about lending to RIAs in the current environment?

Mike McGinley, executive vice president of small business banking at Live Oak Bank, said the North Carolina lender is still positive about the investment advisory space.

“We’re still approving loans and we’re still bullish on the industry,” he said. ‘We recognize that this will be an opportunity for many consultants and that many consultants are in a good position compared to other industries that may be a little harder hit.’

On Wednesday afternoon, McGinley said the bank closed three loans for advisors this week and expects to close more before the week is out.

“It’s a great industry to lend to in terms of risk,” McGinley said. “There’s recurring revenue, so we love that. It’s less about whether we want to lend credit to the industry and more about what valuations would look like in a prolonged downturn.”

He said when a deal is being valued for revenue levels and assets under management ahead of the market slump, the bank wants to make sure that either safeguards are built in for the buyer or that they are talking about what the valuation might look like three to six months from now.

McGinley said the Federal Reserve’s recent decision to cut interest rates to near zero shouldn’t have a big impact on lending this time.

“It’s not like you would have seen in the credit crunch when capital was pretty depleted and it was really difficult for banks to keep lending,” he said. “Banks will continue to lend in this environment as long as it’s a meaningful industry and they can grapple with the risks related to the current health crisis.”

Similarly, Scott Wetzel, chief executive officer of correspondent lending firm SkyView Partners, said this isn’t the downturn seen after the global financial crisis, when M&A deals in the RIA space in 2009 were about half what they had been in 2008 .

Wetzel’s Minnesota-based firm essentially matches RIAs with a network of banks willing to provide traditional M&A and succession planning loans to advisors.

“We saw a slight lull in activity early in this market decline, which seems intuitive as advisors are spending much more time resolving client concerns and probably less thinking about M&A or refinancing,” he said. “But that changed quite significantly last week.”

SkyView’s average weekly volume last year was about $9 million in loan applications per week. Last week, the company saw $26.2 million in loan applications, almost tripling.

“We had nine applicants last Friday alone,” says Wetzel. “It’s not like we run crazy marketing campaigns.”

McGinley said he expects at least a short-term pause in demand for acquisitions in the event of a prolonged downturn, primarily so buyers can take care of valuation and make sure they aren’t overpaying. In the meantime, sellers will want to make sure their value isn’t going down and that they’re not underselling the sale.

“Once the recovery starts I think we’re going to see an uptrend,” McGinley continued. “For some of the vendors who may have been on the verge of this issue, this could be the nudge they need to move forward.”

Live Oak Bank has made approximately $750 million in loans to investment advisory firms since lending began in 2013.

McGinley said the bank is calling all of its clients, including in the advisory space, to ensure they aren’t feeling stressed about their cash flow position.

“We’re offering deferrals if that’s the case, but we haven’t had to do that yet,” he said. “I think if the recovery from the downturn is faster then we probably won’t have such problems – but if it’s a prolonged recession then we might see an uptrend there.”

Live Oak, a public company, has lost more than half of its value over the past month.

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