On Advice

Envestnet gets a lot of love from advisers and the Street

Platform usage, firm stock price have both soared

Mar 16, 2014 @ 12:01 am

By Bruce Kelly

Investment advisers are flocking to Envestnet Inc. and have turned the asset management and technology company into a market darling.

The company's stock price has soared in the past year.

Shares of Envestnet traded at $15.55 on March 13, 2013. A year later, the company's shares — with the ticker ENV — were trading at $43.21, a gain of 178%.

A small-cap stock with a market capitalization a shade under $1.5 billion, Envestnet over that same period easily outperformed the S&P 500, which was up 20.3%, and the S&P SmallCap 600, which rose 28.9%.

Envestnet became a public company in 2010 and is a leading provider of technology and web-based investment solutions and services to registered investment advisers and institutions in the United States and abroad. It has been building scale rapidly both through acquisitions and by drawing new financial advisers to its platform.

For example, last April, the company purchased Prudential Financial Inc.'s Wealth Management Solutions unit, which has $22 billion in assets under administration, in a $30 million all-cash deal.

At the end of last year, 30,632 advisers used some portion of Envestnet's platform, up 33% from 23,026 at the end of 2012.

And last week, William Blair & Co. said it will use an Envestnet application for real-time, transparent reporting and other portfolio management tools, starting next year.

'BIGGER AND BETTER'

Envestnet has loyal advisers.

“When I started my RIA in 2007, I didn't want to manage my own investments,” said Joe Derickson, chief executive of Retirement Wealth Management. “I wanted someone with research to put together a portfolio for clients.

“[Envestnet has] gotten bigger and better since,” he said. “They've added [exchange-traded funds] and separately managed accounts.”

The company thinks it has found a sweet spot in the RIA and dually registered adviser marketplace.

“Advisers are increasingly investing in sophisticated platform technology as a strategic priority to enhance their practice's efficiency and to scale up their ability to deliver the most customer-centric advice to each client,” Envestnet chief executive Jud Bergman said, according to a transcript of a February conference call with investors and analysts.

The company's long-term targets are to increase top-line revenue organically 20% per year, Mr. Bergman said.

But it also expects revenue growth of 35% to 39% this year, compared with 2013, exceeding its long-term projection due to a full year of revenue from the Prudential Wealth Management Solutions acquisition.

The company also has a strong balance sheet of $50 million in cash and no debt, putting it in position for further acquisitions.

Indeed, Envestnet will likely benefit as the investment advice industry continues to fragment and brokers move away from Wall Street firms to become independent investment advisers or affiliate with independent broker-dealers.

'PURE PLAY'

“We view Envestnet as a pure play on the growth in the independent financial adviser space, one of the fastest-growing areas in the financial services industry,” Alex Kramm, an analyst with UBS AG, wrote last year. “The independent adviser space has benefited from a secular trend of retail investors' increasingly seeking financial advice and advisers' breaking away from large wirehouses to become independent.”

Those advisers are looking for a partner to take care of back-office functions such as record keeping and account statements or help in managing their clients' money.

Envestnet does both.

Administration services can cost 2 to 4 basis points of assets, while money management costs 30 to 40, said Craig Richard, co-portfolio manager of the Buffalo Emerging Opportunities Fund, which has $566 million in assets.

Combined with the Buffalo Small Cap Fund, the two mutual funds own close to 1.5% of Envestnet's outstanding shares.

'FOOT IN THE DOOR'

“The strategy is to get their foot in the door with advisers and then grow the business with the number of applications the adviser will take on,” Mr. Richard said.

On average, Envestnet generates 15 to 17 basis points of revenue from its combined assets under management and assets under administration, he said.

Combined, those assets total $178 billion of the company's $537 billion total platform assets, which include licensing assets.

However, assets under administration and assets under management account for 80% of the company's revenue, Mr. Richard said.

“There's tremendous scale and leverage in the model,” he said.

The company's earnings before interest, tax, depreciation and amortization margin divided by total revenue is in the mid-teens.

That could ramp up to 30%, Mr. Richard said.

“Coming out of the [initial public offering], a few quarters were disappointing, and earnings growth lagged” at Envestnet, Mr. Richard said.

“But in the last year, investors see the potential for leverage and growth,” he said. “The sentiment around the name has improved a lot.

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