Jury’s out as market rejects mega RIAs

IPOs may still be a road to riches for giant aggregators, but critics say hurdles remain.

Call it the RIA-going-public blues.

Mega registered investment advisors have a history of struggling once they become publicly traded companies via an initial public offering or merger.

Even a financial advisor as vaunted and savvy as Ric Edelman, who raised his profile 20 years ago as a guest on “The Oprah Winfrey Show” and is now an industry bitcoin advocate, couldn’t make a public company RIA and financial planning endeavor work after seven years of struggling to gain investor interest.

In 2005, Edelman’s financial planning and RIA firm became a public entity after he sold it to Sanders Morris Harris Group Inc., a publicly traded holding company. The Sanders Morris name was later dropped in favor of The Edelman Financial Group, which went private and was sold in 2012 to private-equity firm Lee Equity Partners.

At the time, Edelman told InvestmentNews that the firm, which then had $17 billion in assets, was not large enough to develop the liquidity and attract the attention of analysts needed for institutional investors to trade the stock.

“I wasn’t dissatisfied with being a public company, per se,” Edelman said. “Our dissatisfaction was that the stock price [did] not accurately reflect the value of the firm. I was the first person in our industry to become public. Now I’m the first person to delist.”

Fast forward more than a decade, and creating a viable market for publicly traded RIAs still faces high, if not insurmountable, hurdles, which is all the more disappointing after years of record-breaking consolidation and mergers and acquisitions.

Giant RIA aggregators, which have bought billions of dollars of RIA assets, appear teed up for the public markets. Last year, it looked as if giant RIAs were heading for a wave of success in the public markets.

So far in 2023, that wave has turned into a trickle.

The RIA industry has leaned on private capital for decades for growth; IPOs would give mega RIAs access to the public markets. Two giant RIAs — one public, AlTi Global Inc., and the other expected to go public, CI US, the U.S. wealth management operation of Canadian’s asset manager CI Financial Corp. — have faced challenges this year.

The decision by Focus Financial Partners Inc. — founded in 2004 by Rudy Adolf, a pioneer among RIA aggregators — to sell to private investors and become a private company again after five years of trading as a public company is another indication of the challenges facing mega RIAs trying to become public companies.

Focus Financial Partners, which had its initial public offering in the summer of 2018, said it was going private in February in an acquisition valued at more than $7 billion, or $53 per share, a premium of 36% over the average share price in the two months before the company announced its intention. The buyer was private equity manager Clayton Dubilier & Rice. Focus Financial was a public company for less than five years.

“This transaction represents an important evolution in the resources we will have to invest, enabling us to increase the value we deliver to our partners and their clients,” Adolf said in a statement at the time.

It appears the road to long-term, sustained IPO riches for RIA firm employees and investors is more difficult than perhaps imagined.

“Can large RIAs go public and realize returns for investors and access the capital markets? Yes,” said Peter Mallouk, president and CEO of Creative Planning, one of the fastest-growing RIA aggregators of the past decade with $210 billion in assets. “But with the examples so far of CI Financial or Focus Financial Partners, we haven’t seen a true independent wealth management firm try this yet.”

“The public markets didn’t look at CI or Focus as integrated wealth management firms because they weren’t,” Mallouk said. “With traditional wealth management firms, there’s a lot of integration and not just in the back office, but in the way things are done in general.”

He noted that when Focus Financial Partners, which was a holding company designed to buy RIAs, acquired a firm, the firms kept their own names and brands, and each operated with a different investment philosophy. The criticism in the market is that the firm’s business model was difficult to understand. It also stands in contrast to Creative Planning, which operates as one cohesive firm.

Mallouk’s critiques of CI Financial’s strategy in the U.S. RIA market echo what many in the market have recently said: tlarge Canadian financial institution borrowed heavily and acquired RIA firms at a rapid pace, all with the hope of launching a red-hot IPO for its U.S. wealth management group, CI Private Wealth.

“The market needs to see more traditional wealth management firms go public,” Mallouk said. “The private market and investors continue to see value in this space.”

It’s been anything but smooth sailing for mega RIAs and the public markets this year.

With $67 billion in client assets, AlTi Global Inc., formally Alvarium Tiedemann Holdings, started trading at the start of January on the Nasdaq, debuting at $10.91 per share. The deal was first announced in September 2021 when the Tiedemann Group, a New York-based investment and wealth management firm, and Alvarium Investments Limited, a London wealth management and investment firm with global reach, said they were merging with a special purpose acquisition company, or SPAC, and would eventually operate as a public company.

The share price for AlTi Global has been up and down throughout the year, peaking at $27.50 in January and hitting a bottom of $4.13 in May. Last Friday, AlTi Global shares were trading at $7.81.

A spokesperson for AlTi Global declined to comment for this article.

CI SELLS STAKE

Meanwhile, CI Financial said in May it was selling a 20% stake in its U.S. wealth management and RIA arm, CI Private Wealth, with $150 billion in client assets. But the financing terms of the deal caused some to take a critical look at the potential for an IPO, which has been postponed.

Bain Capital and the rest of the group that ponied up $1 billion for the stake in CI Private Wealth got preferred shares called payment in kind that guaranteed a 14.5% annual return, potentially hampering the company going forward, according to critics of the outside investment.

At the end of May, credit ratings group DBRS Morningstar cut its “trend” on the debt of CI Financial Corp. to negative from stable, reflecting “the deterioration in CI’s credit fundamentals, including weaker earnings,” and “still very high leverage,” according to a research note at the time.

“In order to retain a majority interest in CI US, the company will have to grow at a pace that is comparable to the past two years, which would be much more challenging under the current market conditions, and may lead to additional borrowing,” the research note said.

“Furthermore, the terms of the investment deal stipulate a 14.5% compounding annual return for the Investors that will be materialized at the time of the IPO, within the next six years,” according to DBRS Morningstar. “The uncertainty with respect to CI’s ultimate ownership in CI US may therefore remain high for some time.”

“It doesn’t look like a clean IPO for CI US,” Nadja Dreff, senior vice president and head of Canadian insurance in the global insurance group at DBRS Morningstar, said in an interview July 7. “The company got the money with strings attached. It’s a lot of change for CI in a short amount of time, and they have a lot of debt to contend with.”

Dreff added that CI Financial’s ratio of debt to EBITDA, or earnings before interest, taxes, depreciation and amortization, was 7.3 times. EBITDA is a key cash flow metric for RIAs.

Moody’s Investors Services’ perspective on CI Financial and the 20% sale in the U.S. wealth management business was a bit more sanguine.

“CI made progress in deleveraging by using the proceeds from the minority stake sale of CI US to pay down debt,” according to a Moody’s note from the end of May. Moody’s also calculated CI Financial’s pro forma leverage at a debt-to-EBITDA ratio of 3.7 times, taking into account the preferred shares yielding 14.5% as part of the deal.

“We feel great about balance sheet and debt profile,” said Jason Weyeneth, vice president of investor relations and corporate strategy at CI Financial. “We sold the 20% stake to the investor group and they have zero rights to the cash flow, unless we choose to distribute it.”

“We just wanted to retain 100% of flexibility to use the cash flow as we see fit and what’s best for the business,” Weyeneth added.

Financial advisors who own RIAs are keenly aware of the potential pitfalls a wealth management aggregator may face if it decides to become a public company. The recent examples only make RIA owners, who are currently deluged with offers from buyers, more wary about whom they may sell their firm to.

“If you find the right partner, that’s when the magic happens,” said Rick Kent, CEO of Merit Financial Advisors, a fast-growing wealth management firm with $8.1 billion in combined advisory and brokerage assets. “But you find the wrong partner, that’s disaster.”

“A lot of the deals out there we found had the firm, meaning us, giving up on the upside,” said Doug Flynn, partner and co-founder of Flynn Zito Capital Management, which manages almost $600 million in client money.

“The earnouts were tied to factors out of our control, like growth related to the market,” he said. “We’ll continue to see consolidation, but because of our fierce independent nature we’re not there yet, although the money is tempting.”

One critic of the mega RIAs, a senior brokerage executive who asked not to be named, said that the large aggregators looking to go public have plenty of flaws that financial advisors need to be aware of.

“I don’t think some of these RIA aggregators are real operating companies,” said the executive. “They’re private equity managers paying inflated multiples for a bunch of RIAs and hoping they can flip it to another buyer.”

“I don’t see where the giant RIAs improve anything in the operating part of the business of an RIA,” the executive said. “If you pay an inflated multiple for an RIA but don’t improve its bottom line, what’s the value proposition in the market?”

[More: Top fee-only RIAs in 2023]