Schorsch shows he's a major player in the independent broker-dealer industry

Deals this week would put his network second to LPL in rep headcount

Jan 18, 2014 @ 12:01 am

By Bruce Kelly

Nicholas Schorsch, who over the past five years grew to dominate the once-clubby and fraternal nontraded real estate investment trust business, this week put the independent broker-dealer industry on notice that he is a force to be reckoned with in that industry as well.

With the announcement of his RCS Capital Corp.'s pending acquisition of Cetera Financial Group for $1.15 billion, Mr. Schorsch, 52, suddenly becomes a major player in the independent broker-dealer industry. If all his deals come to fruition — he also announced the acquisition of J.P. Turner & Co. for $27 million — his network would have close to 9,200 registered representatives and financial advisers producing about $1.73 billion in total annual revenue, placing him in the top tier of independent broker-dealers.

Go Deeper: The largest recent mergers and acquisitions of IBDs

That would put the Schorsch network second to LPL Financial LLC in rep headcount and third behind LPL and Ameriprise Financial Services Inc., when ranked by total annual revenue.

Many in the industry have started to take notice.

Indeed, Mr. Schorsch is on a trajectory to compete head to head with industry giant LPL, said Jeff Shaver, principal and managing partner with Atlanta Capital Group, a hybrid broker and registered investment adviser that has about $1.2 billion in client assets.

With about 157,000 shares, Atlanta Capital is also the biggest shareholder of RCS Capital Corp., of which Mr. Schorsch is the chairman. Trading with the ticker symbol RCAP, the firm is the vehicle for his broker-dealer acquisitions.

The Cetera acquisition is “fantastic, and you have to compare RCAP to LPL, which is trading around $53 [a share] right now,” Mr. Shaver said.

“We think RCAP is undervalued and it could be could be in the $30 per share range. It's just too thinly traded right now,” Mr. Shaver said.

RCAP went public in June at $20 a share and closed Friday at $21.45.

Along with long-term debt, proceeds from the offering and shares were part of the financing that Mr. Schorsch has used for his broker-dealer buying spree, which began last June when he said that RCAP Holdings was purchasing First Allied Holdings network of 1,370 reps and advisers for an undisclosed amount.

He then followed in October and November, respectively, with announcements that RCS Capital intended to buy Investors Capital Holdings Inc., with 550 reps, and Summit Financial Services Group Inc., with 310 reps. Those two deals remain pending.

Mr. Schorsch certainly thinks that his firm is headed to the top tier.

Fresh off the announcement of his intention to purchase Cetera Financial Group, he compared his new broker-dealer network, when the deals are completed, to two of the biggest names in the retail-securities industry: the old Merrill Lynch and Raymond James Financial Inc.

“This combination give us a great platform with massive synergies and the ability build a clearing business in the future or the ability to negotiate a better clearing deal,” Mr. Schorsch said in an interview Thursday. “We are a newly minted investment bank with reach from Wall Street to Main Street.”

Mr. Schorsch has spent the past five years building a nontraded-REIT business and real estate investment banking company.

A newcomer to the independent-broker-dealer industry, he is pulling off the acquisition in the industry since 2005. That is when the predecessor to LPL Financial Holdings Inc. sold a 60% stake to Hellman & Friedman and Texas Pacific Group for $1.5 billion.

The four Cetera Financial Group broker-dealers generated an estimated $1.14 billion in revenue last year. RCS Capital's purchase price translates into the acquirer paying about $1 dollar for each dollar of broker-dealer revenue, or 100% of trailing-12-month revenue.

That is an almost unheard-of sum in independent-broker-dealer mergers and acquisitions. In the past decade, buyers have paid in the range of 20% or 25% to 60% or 70% of a broker-dealer's trailing 12.

When asked about the price tag for Cetera Financial Group, Mr. Schorsch said that using a formula based on a percentage of trailing 12 wasn't the right way to look at such a deal.

“You can't value a business like this,” he said.

“Cetera has $145 billion of assets under management, which means we paid less than 1% of its AUM. We view this as a very reasonable purchase and a great diversifier,” Mr. Schorsch said, adding that Cetera chief executive Valerie Brown and the rest of her team will remain with the firm.

“What you want is assets under control,” said Donald Marron, chairman of Lightyear Capital, the private-equity firm selling Cetera Financial Group to RCS Capital. “From that comes the revenues.”

Mr. Schorsch isn't afraid to ruffle feathers in the financial services industry. Over the past five years, he has turned the nontraded-REIT industry on its ear, speeding up the return of capital to investors to the delight of many investment advisers.

With dozens of independent broker-dealers as outlets, American Realty Capital, Mr. Schorsch's real estate company, was the biggest seller of nontraded real estate investment trusts and nontraded business development companies over the past two years. ARC raised $2.8 billion in equity in 2012 and $8.3 billion last year, far outpacing the competition.

Last year, Mr. Schorsch made a pivot away from producing new nontraded REITs and began buying broker-dealers and other financial services companies. Finishing the pending acquisition of Cetera would complete his transition from a REIT czar to a broker-dealer leader.

Mr. Schorsch and RCS Capital's work to complete the Cetera acquisition is perhaps the only thing that could slow down the indefatigable dealmaker.

“I think I'm going to take a break for a little while and catch up,” he said.

That break didn't last long. A day after making that statement to InvestmentNews, RCS Capital announced the J.P. Turner deal.


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