M&A Frenzy

Deal­mak­ing is set­ting records, pri­vate eq­uity cap­i­tal is pour­ing in and RIA buy­ers are scram­bling to keep up. Is the pace sus­tain­able?

Financial Planning - - CONTENT - By Charles Paik­ert

Deal­mak­ing is set­ting records, pri­vate eq­uity cap­i­tal is pour­ing into the mar­ket and RIA buy­ers are scram­bling to keep pace.

The red-hot M&A mar­ket for RIAS shows no sign of slow­ing down. Yet. Deals are be­ing trans­acted at a record pace, cap­i­tal is pour­ing in and strate­gic buy­ers, led by well-fi­nanced RIAS, are fran­ti­cally plot­ting to con­sum­mate more ac­qui­si­tions in 2018. There are ap­prox­i­mately 10 to 20 qual­i­fied buy­ers for ev­ery seller, ac­cord­ing to in­dus­try es­ti­mates. Through the third quar­ter of 2017, the most re­cent data avail­able, deal vol­ume for the year was on track to set a record with over 150 trans­ac­tions, re­ports re­search and in­vest­ment bank­ing firm Ech­e­lon Part­ners. The record is 138 trans­ac­tions in 2016.

Deals have also got­ten big­ger: The av­er­age size of an RIA trans­ac­tion the past three years has topped $1bil­lion in AUM, ac­cord­ing to Sch­wab Ad­vi­sor Ser­vices.

Like nec­tar at­tract­ing bees, the highly de­sir­able as­sets, re­cur­ring rev­enue, tal­ent and clients of ad­vi­sory firms have a mag­netic ap­peal to deep-pock­eted suit­ors seek­ing to tur­bocharge growth.

In­deed, top-tier pri­vate eq­uity firms are in­vest­ing heav­ily in the in­de­pen­dent ad­vi­sory space, with an es­pe­cially keen in­ter­est in con­sol­ida­tors. Last year, KKR and Stone Point Cap­i­tal ac­quired a ma­jor­ity stake in Fo­cus Fi­nan­cial Part­ners, and Thomas H. Lee Part­ners made a $100 mil­lion in­vest­ment in Hightower Ad­vi­sors. Gen­star Cap­i­tal con­tin­ues to fund an ag­gres­sive growth push by Mercer Ad­vi­sors.

Scram­bling to keep pace, in­de­pen­dent RIAS com­mit­ted to lever­ag­ing M&A for growth are tap­ping their own sources of cap­i­tal — and are poised to go on buy­ing sprees this year.

“We have the abil­ity to grow or­gan­i­cally around 10% to 15% a year,” says Neal Si­mon, chief ex­ec­u­tive of Bronf­man Roth­schild, a $5 bil­lion ad­vi­sory firm backed by cap­i­tal from the two bil­lion­aire fam­i­lies that pro­vide its name, along with other pri­vate in­vestors. “But we want to grow faster than that, and M&A is a way to ac­cel­er­ate that process.”

Ad­vi­sor scarcity is also spurring the M&A frenzy, ac­cord­ing to Brent Brodeski, CEO of Sa­vant Cap­i­tal Man­age­ment, a $5 bil­lion--plus RIA based in Rock­ford, Illi­nois.

“Ac­qui­si­tions al­low me to part­ner with top advi-

sor tal­ent and hire more qual­i­fied peo­ple, be­cause now I have greater re­sources,” Brodeski says. “For the same amount of time and en­ergy that it takes to open a new of­fice, I come out ahead if I buy one.”

Sa­vant is one of a num­ber of bil­lion-dol­lar-plus RIAS that have re­cap­i­tal­ized with an eye to ex­pand­ing their foot­print this year. In 2016, Sa­vant’s M&A war chest was fat­tened by a $50 mil­lion in­fu­sion from an ar­ray of pri­vate in­vestors in­clud­ing an as­set man­ager, a mer­chant bank and three large sin­gle-fam­ily of­fices.

Af­ter a buy­ing hia­tus last year, Sa­vant ex­pects to com­plete two to three smaller deals in Wis­con­sin, Wash­ing­ton, D.C., and Illi­nois through mid-2018, says Brodeski, fol­lowed by an ac­qui­si­tion in the $750 mil­lion to $1.5 bil­lion range to es­tab­lish a beach­head in a new mar­ket.

In Lea­wood, Kansas, Mariner Wealth Ad­vi­sors will also have am­ple re­sources as it pur­sues ad­vi­sory firms in 2018.

The sale of an as­set man­age­ment firm owned by the RIA’S par­ent com­pany, Mariner Hold­ings, is ex­pected to add around $1 bil­lion to Mariner’s cof­fers. Af­ter sit­ting on the side­lines for nearly three years, Mariner plans to make seven to 10 ac­qui­si­tions this year, ac­cord­ing to CEO Marty Bick­nell, tar­get­ing firms across the coun­try with be­tween $250 mil­lion and $1 bil­lion in as­sets.

The high-pro­file ex­ec­u­tive Ron Car­son avoided deal­mak­ing last year af­ter a switch of ven­dors to Cetera Fi­nan­cial Group from LPL Fi­nan­cial.

But new fund­ing from Car­son Group’s largest share­holder, the pri­vate eq­uity firm Long Ridge Eq­uity Part­ners, sig­nals a buy­ing spree this year. “We will have plenty of fi­nan­cial re­sources to be an ag­gres­sive buyer


and plan to be very ac­tive in the M&A mar­ket,” Car­son says.

Bea­con Pointe Ad­vi­sors in New­port Beach, Cal­i­for­nia, is also strongly com­mit­ted to in­creas­ing growth through ac­qui­si­tions. But un­like many of its com­peti­tors, it re­lies en­tirely on eq­uity, not cash, when mak­ing deals.


“The fact that we don’t want to cash peo­ple out makes us more at­trac­tive than our com­pe­ti­tion,” says Matt Cooper, Bea­con Pointe pres­i­dent. “We’re not of­fer­ing a short-term fi­nan­cial trans­ac­tion. We’re of­fer­ing eq­uity to smaller firms who want to con­trib­ute to a grow­ing en­ter­prise for the long term.”

The firm, which has ac­quired four com­pa­nies since 2015 with a cu­mu­la­tive AUM of around $865 mil­lion, is tar­get­ing RIAS with $200 mil­lion to $550mil­lion in AUM, and hopes to do three or four deals in 2018, Cooper says. He and the other RIA ac­quir­ers hope to cap­i­tal­ize on be­ing part of the ad­vi­sory fra­ter­nity.

“The op­er­a­tors speak the same lan­guage, and there’s a higher de­gree of com­fort,” says the in­vest­ment banker and con­sul­tant David Devoe, man­ag­ing di­rec­tor of Devoe & Co. “The cul­tural fit is more likely to work, and there’s of­ten more clar­ity on how things will un­fold af­ter two RIAS com­plete a deal.”

In­deed, Bronf­man Roth­schild’s Si­mon be­lieves ad­vi­sors con­sid­er­ing a sale will be swayed by the “real op­er­a­tional syn­er­gies” a fel­low RIA can of­fer. “Un­like an ag­gre­ga­tor — which is a col­lec­tion of si­los — or a pri­vate eq­uity deal, firms who merge with us will be part of one in­vest­ment team, one brand, one back of­fice,” he says. “We of­fer cash and eq­uity and have more deals on the ta­ble to­day than we’ve ever had.”

But suc­cess­fully woo­ing a like­minded RIA in this mar­ket is hardly a slam dunk.

“Ad­vi­sory firms of­ten face cap­i­tal

con­straints, of­fer lower pric­ing and tend to have more seller fi­nanc­ing, us­ing prom­is­sory notes for risk mit­i­ga­tion,” says Liz Nesvold, man­ag­ing part­ner of Sil­ver Lane Ad­vi­sors, a New York in­vest­ment bank spe­cial­iz­ing in the RIA M&A mar­ket.

“They don’t have the rev­enue dis­tri­bu­tion that a bank does, for ex­am­ple, or the sta­bil­ity,” she adds. “And while eq­uity is a great form of con­sid­er­a­tion, the only buyer for that stock is the ac­quir­ing firm it­self.”

RIA buy­ers are also con­fronting an in­creas­ingly crowded mar­ket of well­funded buy­ers hunt­ing for sim­i­lar sell­ers. The roll-up firm United Cap­i­tal re­ceived a cash in­fu­sion from an Aus­tralian life in­surance com­pany that will boost its al­ready re­lent­less M&A ef­forts.

Cap­trust Fi­nan­cial Ad­vi­sors, which spe­cial­izes in re­tire­ment plan­ning ser­vices for in­sti­tu­tions, was one of 2017’s most ac­tive buy­ers, with seven deals to­tal­ing over $1 bil­lion in as­sets. The firm plans to dou­ble its na­tional foot­print to 35 metro mar­kets in 10 years, says CEO Field­ing Miller.

Also pur­su­ing an ag­gres­sive M&A strat­egy is Wealth Part­ners Cap­i­tal Group, a newly formed RIA ag­gre­ga­tor founded last year by the ex­ec­u­tive team that ran the highly suc­cess­ful wealth man­age­ment di­vi­sion of Af­fil­i­ated Man­agers Group.

Wealth Part­ners is tar­get­ing small and mid­sized RIAS across the coun­try via three re­gional firms in which it has al­ready in­vested.

Banks are also in the mix as buy­ers with deep pock­ets. Although their share of M&A deals has dipped to sin­gle dig­its in re­cent years, banks have ac­counted for ap­prox­i­mately 13% of RIA ac­quir­ers through the third quar­ter of 2017, ac­cord­ing to Ech­e­lon Part­ners.


Can the hot M&A pace — and the re­sult­ing seller’s mar­ket — con­tinue? For starters, buy­ers and sell­ers are keep­ing a wary eye on the stock mar­ket.

“The bull mar­ket has run well be­yond a typ­i­cal cy­cle,” Devoe says. “A mar­ket pullback would have a pro­found ef­fect. Clients will be call­ing, and ad­vi­sors have to put ev­ery­thing else aside. M&A falls to the way­side.”

In ad­di­tion, as­sets, earn­ings and rev­enue would all drop dur­ing a cor­rec­tion, mak­ing ad­vi­sory firms worth less. A spike in in­ter­est rates would be an­other red flag for the mar­ket, in­dus­try ob­servers say.

Cheap credit has helped fuel the M&A boom, al­low­ing buy­ers to lever­age their cap­i­tal, pay higher prices and still get a hand­some re­turn on the seller’s EBITDA. “If the mar­ket turns, lever­age re­mains a fixed re­quire­ment,” Nesvold says. “That can make a big dif­fer­ence.”

Or, as Brodeski puts it: “Lever­age is like adding oc­tane to your gas. A lit­tle bit can boost your fuel, but too much can blow your en­gine.”

As de­mand for sell­ers rises, they are also get­ting choosier, notes Matthew Ma­trisian, se­nior vice pres­i­dent of strate­gic ini­tia­tives for As­set­mark, an in­dus­try ser­vice provider.

“If an ac­quirer has a sys­tem in place, it’s sim­ple to in­te­grate the seller’s as­set base, and the eco­nomics are ben­e­fi­cial to the buyer be­cause they can take the rev­enue stream and drop it into their EBITDA with lit­tle over­head,” Ma­trisian ex­plains. “It makes sell­ers very at­trac­tive right now.”

A po­ten­tial head­wind for buy­ers “is the fact that sell­ers are get­ting much smarter about what they want to ac­com­plish,” he says. “They have lever­age now and have more abil­ity to dic­tate terms when pick­ing a buyer.”

Nonethe­less, RIA buy­ers re­main re­mark­ably op­ti­mistic.

“Even if there’s an eco­nomic event, I think it will only have a very short­term im­pact on the mar­ket,” Mariner’s Bick­nell says. “The sup­ply of sell­ers will still be there. Those who haven’t solved the suc­ces­sion is­sue will be look­ing for part­ners for growth. And those do­ing fi­nan­cial deals to­day will lose their ap­petite. That leaves buy­ers like us in a good place.”

Cooper, Bea­con Pointe’s pres­i­dent, agrees. “The forces driv­ing this mar­ket, in­clud­ing chang­ing de­mo­graph­ics and the ris­ing cost of com­pli­ance, reg­u­la­tion, tech­nol­ogy are so strong,” he says, “that I’m not con­cerned it will slow down any­time soon.”

Neal Si­mon, CEO of Bronf­man Roth­schild, says a firm con­sid­er­ing a sale should be drawn to a fel­low RIA of­fer­ing “real op­er­a­tional syn­er­gies.”

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