Is the RIA roll-up in trouble?

Mid-size aggregators may be coming under pressure.

Being an RIA aggregator might not be all it’s cracked up to be.

For years, serial RIA acquirers like Mercer Global Advisors have been snapping up the practices of retiring advisors, bolting on assets to create multi-billion-dollar businesses gleaming with private equity backing.

But as smaller RIA aggregators go up for sale, buyer beware: Their inner workings may not be so shiny.

‘I think we will start to see larger aggregators turn their eye and try to buy other sub-scale aggregator platforms. The challenge that larger aggregators are going to have is if most, if not all, of the equity all of those smaller aggregators have bought was only owned by founders and that the next generation of advisors wasn’t part of the decision-making process,’ said Karl Heckenberg, chief executive of serial RIA investors Emigrant Partners and Fiduciary Network. ‘They will find they are only compounding their current challenge, which is that they mostly have bought firms that are in run-off mode.’

The situation may be best typified by Allworth Financial, an aggregator based in Sacramento, California, which has purchased nine RIAs over the past three years. Since it sold a majority stake in itself to private equity firm Parthenon Capital, Allworth’s assets have grown from $2.4bn to $8bn, with M&A as a driver.

The bigger they are...

By all indications and metrics, Allworth should be considered a serious player in the industry with a long future as an independent firm. But as Citywire RIA reported in August, Parthenon Capital has hired Raymond James to serve as its banker for a potential sale of Allworth.

Putting a firm like Allworth on the block may just be private equity’s nature.

‘If you’re a mid-sized RIA in that $5bn-$10bn range and you’re backed by permanent capital like a family office, then the whim of your financial backers might not dictate much,’ said David Selig, who serves as chief executive of M&A advisory practice Advice Dynamics Partners. ‘But if you’re mid-tier in that $5bn-$10bn range now and you’re backed by something that looks more like private equity, then if your growth starts stalling, you’re probably going to be flipped to another PE firm or rolled up into another mega RIA. That’s probably where you’re headed.’

After a few scary moments in the spring, all-time high RIA M&A activity and valuations have returned, rebounding alongside the S&P 500. Those valuations have been talked about frequently in the context of mass-market RIAs in the $500m to $2bn range, but not their most frequent acquirers.

By putting their portfolio RIAs on the block now, private equity firms may be able to lock in significant gains on their initial investment, even if the transaction comes ahead of their usual five- to seven-year investment time horizon.

Parthenon had been invested in Allworth for roughly three years when it put the company up for sale, while Wealth Partners Capital Group had been invested in $7bn EP Wealth for a similar amount of time when a handful of its family office co-investors cashed out and sold their stake to private equity firm Berkshire Partners.

Election exits

The impending election might add an additional level of urgency for private equity firms to get a deal done, said Adam Birenbaum, chief executive of $50.5bn Buckingham Wealth Partners, as a Joe Biden victory could potentially result in higher capital gains taxes.

‘We have 90 days, basically, but I do believe that there are a lot of RIAs that will look to do something prior to 12/31 and even RIA aggregators that, if they were able to, would think about doing something prior to 12/31,’ Birenbaum said.

Which RIAs could go up for sale and which will persist? That may depend on the timing and whims of their sponsors. Carson Group (Long Ridge Equity Partners), Savant Wealth Management (Cynosure Group) and Beacon Pointe (Abry Partners) all operate in the same universe as Allworth and are backed by private equity firms, but the similarities end there: Abry Partners, for example, invested in Beacon Pointe just this year.

RIA aggregators may ultimately find that their private equity sponsors can only take them so far.

‘Some capital partners are set up to take a firm from $1bn to $5bn or $10bn, but not so many capital partners are set up to go beyond that,’ said Birenbaum, whose firm is backed by publicly-traded RIA financier Focus Financial Partners. ‘Both in terms of the time it takes but also in terms of the ongoing capital investment. That’s the thing to really think about… are these firms backed by hundreds of millions or billions of dollars to demonstrate that they can keep up that capital flow indefinitely?’

Large private equity-backed acquirers have already expressed their interest in snapping up smaller aggregators. Jeff Dekko, chief executive of TA Associates-backed Wealth Enhancement Group, said in September that the firm’s executives are ‘determined to position WEG as the gold standard for how RIA firms should be run, while setting the stage for us to become the top acquirer of both RIA firms and larger RIA aggregators.’

But those deals may ultimately add little to larger acquirers except for some more earnings before interest, taxes, depreciation and amortization (Ebitda), and debt on their income statements and balance sheets.

‘The play from their perspective is to buy these platforms, blow out that smaller platform’s management and overlapping infrastructure, and buy some Ebitda to try and service the new debt until the next larger sponsor comes along and pays a premium for that “growth,”’ Heckenberg said. ‘That works as long as rates stay low and the market doesn’t correct – but I think you’re still just aggregating a bunch of mediocre businesses.’

This article originally appeared on CityWire.


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