Does private equity benefit RIAs?

Any RIAs who may be thinking of teaming up with venture capital or private equity firms to grow their firm may want to think twice.

That was one of the takeaways from a recent podcast in which Chuck Failla, president and CEO of Sovereign Financial Group, with his guest Michael Kitces, head of planning strategy at Buckingham Wealth Partners and co-founder of AdvicePay.

While there was a lot to unpack in their conversation, Failla tells InvestmentNews that the overall takeaway was “just how down to earth he was.”

Kitces “is just an icon in our industry,” Failla says. “I don't think there is any one person more iconic in the investment advisory space than that of Michael Kitces. He was just very down to earth, very easy to talk to, and the conversation just flowed very, very easily.”

Failla noted that Kitces’ views on private equity and venture capital were similar to his own.

“I don't like venture capital very much,” Kitces said in the January 31 podcast. “I'm really not a fan of it in the RIA space in particular. I don't even love it in the technology company context. I just find companies tend to raise too much capital, puts too much pressure on growth, and then they just start making not ideal choices for their users, because they're trying to justify it to their investors … VC expectations have become misaligned with how our industry works.”

While private equity is slightly better because its growth expectations are not quite as wild and the time horizons are a little bit more reasonable, Kitces said he still finds it challenging because industry benchmarking data in the aggregate show most advisory firms grow their client base by mid-single digit percentages a year, plus market gains, while private equity investors are looking for growth of more than 30 percent.

“To grow an advisory firm at 30 percent a year instead of 15 percent a year is, unless you've actually lived a real fast-growth environment, you don't really know what you're necessarily biting off and signing up for,” Kitces said on the GoRIA podcast.

“I don't think it's impossible to grow advisory firms that quickly and effectively, but almost no one that takes outside PE money has actually tried to grow a firm that fast at size and scale, and I think, rhey tend to not realize what's coming, what they've signed up for and what it takes to do that, or what kinds of trade-offs you have to make to do that,” he said.

Failla says one of the concerns that he personally has when it comes to private equity or venture capital reminds him of one of his favorite expressions: “If you don't know who the sucker is at the poker table, it's probably you.”   

“For me, when it comes to private equity, that's how I would feel. If I'm sitting at a table with seven to 10 different private equity people, I'm almost certain to be the sucker, so that's why I've been very hesitant,” he said.

Failla cited a few other key points in his conversation with Kitces, including the differences between broker-dealer and RIA compliance, and that one of the things advisors should think about when going RIA, especially if they're an established adviser, is what their exit plan will look like.

“I will say, at least with private equity, I think it's way too early for us. But for an exiting advisor, private equity could be a good answer, and much more accessible as an RIA versus broker-dealer,” he said.