Private equity digs heels into RIA industry

Private equity money and managers are just starting to settle in and get cozy with the wealth management and financial advice industries.

Indeed, with registered investment advisers kicking off such steady revenues each year, don’t look for private equity investors to stop investing in RIAs and make a dash for the door any time soon. Private equity managers typically invest in a business for up to seven years before looking to sell and cash out of their investments.

By most accounts, mergers and acquisitions of RIAs continue to be close to record numbers for the past several years.

Much of the capital for that deal-making comes from private equity funds and managers, and there is plenty of reasons for them to continue to be interested in the industry, according to members of a panel speaking Wednesday afternoon at the InvestmentNews RIA Summit, a virtual event with nearly 700 attendees.

“The way that RIA businesses are run, and the margins that are part of it, I find that private equity is here to stay,” said Steve Young, president and co-founder of HGGC, a private equity investor. A three-time Super Bowl champion, Young is also a member of the Pro Football Hall of Fame.

Private equity managers are keenly interested in the wealth management industry, said Young, who was speaking on a panel titled, “Cashing out: Succession planning, transfer ownership, P/E investment.” Like the computer software industry, wealth management has recurring revenues from charging client fees, strong growth, good margins and low capital expenditures.

Asked about the potential for erosion in the fees advisers charge to clients, Young replied: “There will be some changes and we’ll [get] through them.” He added that despite the potential for fee pressure, which could dampen valuations for firms or a create “a different underwriting perspective,” as he called it, private equity will remain focused on the RIA industry.

At the start of the year, Merit Financial Advisors sold a minority ownership stake to HGGC and a private investor, Wealth Partners Capital Group.

“We’ve been talking about this migration from asset-based fees for a long time, and it hasn’t happened yet,” said Bob Oros, CEO of Hightower, an RIA aggregator owned by private equity shop Thomas H. Lee.

“Even if it did, the fundamental profile of the business is so attractive, the annuitized revenues, and even if we got away from asset-based fees, we would find some other form that looked similar,” Oros said.

“And number two, there’s high retention of advisers’ clients,” he added. “I don’t see that changing. I think this business remains attractive for years to come.”