HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale

Sep 25, 2017 @ 10:49 am

By Lynne Marek

HighTower Advisors CEO Elliot Weissbluth built one of the biggest wealth adviser networks in the U.S. Now he just needs to figure out how to deliver riches to its investors.

An initial public offering for the Chicago company expected last year would have allowed some to cash out, but that never happened. Now a potential sale presents the same opportunity.

While some financial institutions are scrambling to meet a new fiduciary standard that lets advisers put customer interests first, HighTower built its brand from the start by luring advisers from big banks with a promise of independence. The advisers also came for equity stakes in HighTower, alongside early investors. With the company a decade old now, some are likely looking for payoffs, even as HighTower wrestles with expanding competition.

"Many expected HighTower to go public," said Chip Roame, managing partner at industry consultant Tiburon Strategic Advisors in Tiburon, Calif. "Private-equity investors want liquidity. Early member firms want liquidity. Successful pre-IPO firms figure out liquidity alternatives when an IPO is delayed."

Mr. Weissbluth, 50, declined through a spokeswoman to comment on the privately held company's plans. Private-equity firms that invested in HighTower, like Asset Management Finance did in 2010, typically seek returns in less than eight years. Some angel investors, like former Charles Schwab CEO David Pottruck, who is chairman of HighTower, have also backed the company for an unusually long period — since its 2007 inception in Mr. Pottruck's case.

HighTower took a big step toward increasing the value of the company in April by making its biggest acquisition ever, buying WealthTrust of Houston and adding $6.4 billion in client assets to its network. While the price paid wasn't disclosed, HighTower acknowledges that the purchase also boosted its borrowing to $245 million. The firm now has about 190 advisers in 28 states and a total headcount of almost 500.

At the big banks, "they're dealing with a massive conflict of interest, and on the (registered investment adviser) they're dealing with the technology and regulatory headaches of running a business," Mr. Weissbluth told InvestmentNews. "Our solution is to solve those problems."

The WealthTrust purchase got the attention of the industry because of its size, but whether it ultimately pays off is something that only time will tell, said Alois Pirker, research director at Aite Group in Boston. HighTower won't disclose its revenue or net income.

COMPETITION HEATS UP

The company has shown it can persuade wealth managers to join its network, but it's tough to tell from the outside whether that's translating into profits, said Philip Hildebrandt, CEO of Chicago asset management firm Segall Bryant & Hamill.

Meanwhile, competition is getting stiffer. Large rivals are vying with HighTower for advisers, and one of them, New York-based Focus Financial Partners, recently sold a majority stake to a group led by private-equity giant KKR. "The private-equity firms are buying if they believe there's big growth ahead," Mr. Pirker said.

With the addition of WealthTrust, HighTower claims about $51 billion in client assets — putting the company just beyond a $50 billion goal Mr. Weissbluth set for the company years ago. Although back then, he figured all the advisers would become employee-owners of the company, making their books of business assets under management.

Instead, he pivoted from just offering advisers an option to join HighTower as employee-owners to also offering an affiliation with the company, without employment. A third option allows advisers to simply pay a fee for use of HighTower's proprietary technology platform.

Being an equity-owner wasn't the right choice for every adviser, Mr. Pirker said. Likewise, some HighTower advisers who did become equity-holders now have different timelines for wanting an exit, he said. "That balancing act of keeping everyone happy is not easy," he said.

Some executives, advisers and investors have left the HighTower fold in recent months. When HighTower was completing its April acquisition of WealthTrust, one of its co-founders, Dan Lidawer, ditched his post as a managing director to become chief operating officer at Chicago-based Cresset Asset Management. He declines to comment.

HighTower's former chief deal-maker, Mike Papedis, who was credited with rounding up advisers across the country, left the company a month before Mr. Lidawer.

Around that same time, the company revamped its ownership structure, divvying up equity stakes differently, say two people familiar with the changes. That move might have allowed some investors to cash out.

BIG NAMES DEPART

Some big-name advisers have also departed, including Paul Pagnato and David Karp, who took their Reston, Va.-based firm and its $2.5 billion in assets out of the HighTower network last year. For some advisers, HighTower has been a stepping stone to complete independence, Mr. Pirker said.

Mr. Weissbluth and a co-founder, Chief Administrative Officer Larry Koehler, remain in leadership. And longtime investors, including Burrito Beach owner Greg Schulson, are still backers. Mr. Schulson and co-founder Drew Kornreich, who left HighTower as president several years ago, also decline to comment.

Mr. Roame expects HighTower to keep targeting an IPO and thereby effectively remain on the sales block. "I could see three scenarios: HighTower going public; a large market PE firm taking out existing owners and keeping the firm private for its next growth stage; and/or a strategic investor such as a wire house or foreign bank acquiring HighTower," he said.

Mr. Weissbluth is likely hedging HighTower's options, ready to shift toward the best returns.

Lynne Marek is a senior reporter at InvestmentNews' sister publication Crain's Chicago Business.

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