In mid-October the registered investment adviser community woke to the news that Edelman Financial Services, one of the largest independent RIAs in the U.S., had agreed to sell a majority interest to private equity giant Hellman & Friedman. The transaction, believed to be the biggest-ever private equity investment in a pure-play, fee-based RIA, signals rising interest in the space among institutional asset managers.
“It secures both our future and direction for years to come, giving us the ability to execute our goal to reach millions of Americans with a partnership with an investor focused on the mass-affluent marketplace,” says Ric Edelman, founder, chair and CEO of his eponymous Fairfax, Virginia–based firm, which manages about $15 billion in assets.
RIA mergers and acquisitions remained strong in the first half of 2015, building on the momentum of the previous year. Through June there were 61 takeovers, an 84 percent surge over the 33 deals during the same period in 2014, according to DeVoe & Co., a San Francisco–based RIA industry advisory firm. Banks and financial intermediaries, including private equity firms, made the biggest increase in acquisitions, accounting for 17 percent of the total after striking no deals in 2014.
According to Edelman, San Francisco–based Hellman & Friedman is an ideal investor partly because it recognizes that the firm’s business model is personality-driven and wishes to pursue a growth strategy that keeps the same approach. “We will be adding talent and expanding, but not at the expense of institutionalizing our services or turning into a big-box brokerage clone,” he says.
Embracing outside capital from a private equity investor has served Edelman well in the past. In 2012, with the RIA’s share price having failed to recover from the credit crisis, New York–based Lee Equity Partners took it private in a $258 million deal that allowed it to expand its footprint. After the latest deal, senior management at Edelman and Lee will retain minority stakes in the firm.
Although there’s no reliable data on how much buyers are paying for RIAs, well-placed investment bankers agree that valuations rose in 2015. “There has been pretty strong recovery in pricing for independent wealth managers since the crisis,” says Roger Hartley, co-founder and managing member at Mitchell, Hartley & Bechtel Advisers, an independent investment banking advisory firm headquartered outside San Francisco. “But those valuations are very much informed by the unique nature of each business. It’s a robust but discriminating marketplace.”
Many industry experts regard private equity’s enthusiasm for RIAs as a sign of more deals to come. “It’s a clear indication of the power of the independent model when smart money starts to vote with their pocketbook,” says David DeVoe, founder and managing partner at DeVoe & Co., which advises RIAs on business strategy and consults with breakaway brokers from major banks. “Objectively positioned fee-only advisory firms are clearly a model positioned to win in the years to come.”
DeVoe thinks the consolidation of the hedge fund industry over the past 20 years — from a fragmented business to one that focuses on efficiencies of scale so players can compete as more rivals enter the market — may provide an analogue.
As with hedge funds, size is increasingly important for RIAs. “A decade ago the sale of an adviser with $100 million in assets was a big deal; today the new standard is $1 billion,” notes Michael Bilotta, a managing director at Conshohocken, Pennsylvania–based Gladstone Associates, which advises independent RIAs on mergers as well as valuation, strategic development and succession planning.
As Bilotta sees it, investor interest has grown as independent wealth managers deploy ever-more-sophisticated business models. Another draw: The trend toward organic consolidation has left a relatively small number of big and dynamic firms that can benefit from finding a partner with deep pockets.
Private equity’s appetite for the independent wealth segment has extended beyond RIAs to service providers and technology platforms. “Having a partner provides us with the ability to do acquisitions,” says Todd Clarke, CEO of Omaha, Nebraska–based CLS Investments. An outsourced exchange-traded fund portfolio manager for wealth managers, CLS found its coffers filled after Boston-based private equity manager TA Associates acquired its parent firm, NorthStar Financial Services Group, for an undisclosed sum in February. NorthStar focuses on providing services to RIAs and independent broker-dealer advisers.
“In an environment with increased competition, fee compression and heightened regulatory costs, scale becomes critical,” Clarke says. “Having the ability to grow by acquiring attractive business models can help us achieve that scale.”
Few industry insiders think the pace of private equity investment in the RIA space will slow anytime soon. “We used to call them; now they call us,” Gladstone’s Bilotta says of private equity firms. “As they become more knowledgeable about the industry, they will not stop coming.”
