A Sterling idea: Building and flipping adviser networks
Independent financial advisory firms are being targeted for acquisition by investors looking to roll up small advisory firms into larger businesses and then cash in on the sale of adviser networks.
And that’s not surprising since it’s proving to be a lucrative market.
Sterling Grace Corp., an old line New York investment firm turned hedge fund manager, has earmarked $100 million to buy stakes in regional financial planning networks in the United States as well as Canada, the United Kingdom and Germany over the next three years.
Sterling Grace, a family investment office for shirttail relatives of New York’s W.R. Grace clan, is banking on its ability to repeat the success of the adviser network that it developed in Australia and New Zealand.
The sale of the Down Under planning and money management business to AXA Pacific Holdings Ltd., announced last week, represents a $103 million deal for Sterling Grace and will likely boost the company’s new efforts in the United States.
looking for distribution
The business of rolling up financial advisory firms into larger networks is proving lucrative as demand increases to find distribution networks to sell financial services and products.
This month, General Electric’s GE Financial Assurance unit agreed to pay an estimated $75 million for Centurion Capital Group Inc., the country’s fifth-biggest third-party distributor of mutual fund and separate-account wrap products [InvestmentNews, Oct. 15].
“That just absolutely stunned me,” says Hamilton Leach of Financial Services Management Group LLC, a Weehawken, N.J., investment banking boutique that represents buyers and sellers of independent financial advisers.
Investment bankers estimate that Centurion’s $1.9 billion in assets generate about $20 million in annual revenues. That means that GE paid an estimated 3.7 times revenues – a hefty premium over the average 1.65 multiple for independent financial adviser sales tracked by Moss Adams LLP in Seattle.
“The idea of owning or buying distribution systems is clearly where the action is going. To grow, these companies need distribution,” says Mr. Leach.
And based on Sterling Grace’s experiences in Australia and New Zealand, the model appears to work.
After Sterling Grace acquired New Zealand financial planning and asset management firm Spicers Portfolio Management in 1997 and last year added Australia’s Invest Assure Group, a money management and administration company, it formed Sterling Grace Portfolio Management Group Ltd.
The combined companies, which include nearly 300 independent and in-house planners, manage $1.3 billion in assets, up from just $239 million in 1997, when Sterling Grace entered the market.
But a business model that works Down Under may not have legs to survive elsewhere.
Sterling Grace’s effort follows several similar initiatives – mounted by Assante Corp., Investment Managers Inc., Evensky Brown & Katz and others – which have stalled after failing to attract financing or planners interested in signing on.
Getting any advisers to focus on practice sales amid the market’s turmoil also could present challenges.
“We’ve found that advisers have been really concentrated on running their business and helping their clients recover from the events of the last month,” says Elliot Holtz, a senior vice president at National Financial Partners in New York. National Financial is a consolidator of insurance, employee benefit and financial planning companies.
Some advisers remain skeptical of the benefits of roll-up efforts.
“If someone offered a great unit-cost advantage and great technology, where everybody that joined gained access to a whole array of products, that would be a pretty attractive acquisition model,” says Andrew Goodwin, chairman of Optimum Investment Advisors LP, “except Charles Schwab is already doing that to keep the independents independent.
“The only reason you ought to merge with another group is because collectively you can grow your business more profitably than you can alone,” adds Mr. Goodwin, whose Chicago independent planning group has acquired several planners.
To lure advisers, Mr. Grace expects to pay mostly cash and use stock and equity options for advisory businesses as incentives to achieve earnings and revenue growth targets.
“We have been looking at companies with 12 planners to several hundred, where clients and advisers are tied in well with the planning company,” he says. He anticipates paying up to $20 million each for firms.
“We [also] have very good relationships with wholesalers, and we know how to structure new products,” says Mr. Grace, referring to the wrap programs and mutual funds packaged by Sterling Grace.
“When you combine that with capital and a continuing equity interest by advisers, you’ve got the recipe for success for planners who would like to take some dollars off the table for their own personal planning reasons, but also keep a sizable amount of equity to participate in the growth of the business,” he says.
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