Adviser roll-up turns to private equity

SAN FRANCISCO — Hoping to attract some of the torrent of private-equity capital showering Wall Street, a financial adviser in suburban St. Louis is looking to bundle his brethren’s practices and sell them en masse in the private-equity market. “Private equity is thriving because of cheap money,” said James Reding, principal of Paradigm Wealth Advisors LLC of Des Peres, Mo., who launched Financial Advisor Rollup LLC last month. He formed the St. Louis firm to tap low-cost capital so that midtier registered investment advisers would be able to monetize their practices at multiples of revenue equivalent to what larger firms typically command, he said. Firms that manage $100 million in assets generally are not offered the four- or five-times-revenue multiple that firms with $500 million in assets are, Mr. Reding added. Declining to name names, he said that two large private-equity firms are interested buyers, and he has promised them by January a package of 50 advisory firms each managing assets of $50 million to $500 million. Since Mr. Reding began to cultivate advisers a month ago, 15 have agreed to sell a 50% stake in their firms, and another five are negotiating with him, he said. “Private-equity [firms] can pay two to three times what advisers pay, and they still get a 20% return, while my guys get a shot at an [initial public offering] where they get an absolute home run,” he said. “We’re looking to get that same four- to five-times-[revenue] multiple [for small practices] as the guy with $500 million.” This promise of selling at a handsome price helped to convince Tim Fortier, managing partner of Westmark Capital Management LLC of Chesterfield, Mo., to consider selling his practice to Mr. Reding’s roll-up.“That’s been one of the missing links,” Mr. Fortier said. Westmark has $30 million of assets under management and is acquiring another adviser to boost that amount. Though Mr. Reding could succeed in this roll-up venture, he may face greater challenges than he realizes, according to Joe John Duran, chief executive of United Capital Financial Partners Inc., a Newport Beach, Calif., firm that also uses private equity to buy smaller advisers. “We couldn’t do 50 [acquisitions in one fell swoop], so I’d tip my hat if he could do that,” he said. United Capital has made 14 acquisitions of firms with a combined $2 billion of assets under management since its founding two years ago. Most of the firms manage about $100 million in assets, he said. In Mr. Reding’s view, the growth of United Capital may be limited by Mr. Duran’s lack of contacts among the very largest players in private equity. But Mr. Duran disagrees. “We have unlimited sources of capital,” he said. “We give them 30 days, and they step up with the money.” The constraints on growth are far more subtle and self-imposed, Mr. Duran added. “We could have 100 [advisers acquired] if we weren’t trying to make a company out of it” by integrating the firms into a cohesive whole, he said. In fact, Mr. Duran said, he tells advisers that it is advantageous for them to take as little cash as possible from private-equity investors to limit an investor’s stake in the adviser’s business. Indeed, Financial Advisor Rollup is negotiating hard on this point with the private-equity companies, Mr. Reding said. “We’re negotiating for in-house compliance and other services,” he said. “What can I get advisers besides that check?” Financial Advisor Rollup also will reinvest much of the private-equity inflow in the growth of the practices, Mr. Reding said. But that check is very important to making the deal work, because it gives small advisers incentive to do what they least like to do — adhere to a common set of business practices, said Robert Spindel, managing member of Paradigm Financial Group, which manages $200 million. Last year, he sold his Chesterfield-based practice, Castle Financial Advisors LLC. “There has to be something to alter their behavior, and money is a motivator for many people,” he said. Yet practices become integrated into a cohesive organization mostly through hard work, Mr. Duran said. “It takes a lot of people, and expensive people at that,” he said. “I have 20 [chartered financial analysts], certified financial planners and [people with doctoral degrees.]” Mr. Reding said he plans to lean heavily on technology to get the business up to speed. “It only takes me 20 minutes to see whether a guy is worth screening,” he said.