Private equity investors zero in on the RIA business

Private equity has discovered the financial advice industry, which can represent a whole new set of opportunities — and challenges — for advisory firms.

“The appeal for us is, it provides some capital to help us continue to grow,” said Scott Hanson, co-chief executive of Hanson McClain Advisors.

The $2.4 billion registered investment advisory firm, which Mr. Hanson and his partner Pat McClain founded 24 years ago, last month sold a controlling interest in the firm to Pantheon Capital Partners, a private equity firm.

The total investment amount has not been disclosed, but Mr. Hanson said the new capital will be used to invest in technology, systems and people, as well as acquisitions.

“We found we couldn’t figure out how to grow faster than 7% or 8% a year,” he said. “And I’m at a stage in my life where I didn’t want to dip into my own piggy bank to finance the growth.”

With private-equity funds sitting on nearly $1 trillion worth of ready cash, it shouldn’t be a surprise when a PE firms comes calling.

“It has certainly accelerated over the past three years as the private equity firms have figured out that the wealth management space is a very attractive, sustainable growth space,” said Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions.

But while PE firms become increasingly drawn to the predictable income model of a successful advisory firm, Mr. Slater said RIAs need to look before they leap into a relationship with outside owners who are making relatively short-term investments.

“If you’re a target, think in terms of what the PE firm has to offer, because it’s about trying to find an alignment between what you want and what they expect of you,” he said. “Many of these firms are investing in proven operators because they’ve seen them make acquisitions, so the degree of involvement and accountability is what you want to know.”

The nature of private equity investing typically means the PE fund will be looking to capitalize on its investment within three to seven years.

For the financial advisory firm, that usually means a new relationship with another private equity investor.

That idea does not appeal to Fielding Miller, CEO of CAPTRUST, a $240 billion advisory business.

“We’ve certainly been approached, and clearly there is a lot of private equity money trying to find its way into the investment advisory space,” he said. “We want to be able to control the clock, and PE has a five-to-seven-year plan, then they’re out, or you’re looking at selling to another private equity investor. Now your business is getting disrupted, and you’ve kind of created a new master to serve.”

Brent Brodeski, CEO of Savant Capital Management, a $5.4 billion advisory firm, also was not interested in the short-term relationship of a typical PE investor.

But since his firm needed money to re-capitalize to buy out a retiring owner and make some acquisitions, Mr. Brodeski found a private equity firm interested in a longer-term relationship.

The Cynosure Group, along with a handful of family offices and some internal funds, compiled $53 million last September to help Savant meet it capitalization needs.

Outside investors now own less than 25% of Savant, and the commitment could be 20 years or longer, Mr. Brodeski said.

“The typical PE model is very short-term oriented, and it doesn’t matter if it’s good for your clients or good for your long-term success, because they want a liquidity event,” he said. “They might put you on a treadmill, pump you full of steroids and sell you to the highest bidder in five years.”

Critical perspectives notwithstanding, the private equity space is providing the capital that a large segment of the financial advisory space increasingly craves.

Earlier this month, private-equity backing was key in the formation of Atria Wealth Solutions, which partnered with Lee Equity Partners to buy two independent broker-dealers with nearly 500 advisers and more than $30 billion in assets under administration.

“We are extremely excited about backing the Atria team, and very excited they were able to find such a great platform,” said Danny Rodriquez, principal at Lee Equity Partners, which invested in Atria through a PE fund that was started in 2016.

“The appeal of the advisory business is an aging population that requires very good advice, and an adviser base that continues to show they prefer to be independent,” he added. “There have been a lot of transactions by private equity firms, which is a testament to the tailwinds behind the financial advice business.

The Lee Equity Partners fund has also been invested since 2012 in Edelman Financial Services, a $20 billion advisory firm that is now majority owned by the PE firm Hellman & Friedman, which represents Edelman’s third private equity partner since 2005.

“When you have the right private equity partner they can be very helpful in growing the organization,” said Ric Edelman, founder and executive chairman of the advisory firm.

“We’re very happy with our relationship with Hellman,” he added. “They are willing to be a long-term investor, but if the opportunity presents itself they will sell us. We know there will be another transaction at some point in the future.”