The strategy behind Creative Planning’s private equity deal

M and A mergers and acquisitions text on blocks

CEO Peter Mallouk says he's building a cash reserve as a defensive play

The move by Creative Planning to join the party and sell a piece of the financial advisory business to private equity investors is not about capitalizing a growth spurt, according to chief executive Peter Mallouk.

“If I want to do this for a long time, I want to have a big pile of money on the side so we can continue growing even in down markets,” he said of the recent decision to sell a minority stake in the $50 billion registered investment adviser to private equity firm General Atlantic.

Mr. Mallouk, 50, who has been leading Creative Planning since 2004, said General Atlantic’s ownership stake is “in the teens,” and that he still owns “well over 80%” of the business.

[More: Peter Mallouk heads an RIA with $42 billion in assets — and has made only one acquisition]

“I still retain control and we’re not doing anything different than before,” he added, emphasizing Creative Planning’s recent push into acquisitions will not suddenly shift into a higher gear with the new capital.

Private equity, a category flush with cash and looking for investment opportunities, has for the past few years been aggressively buying up large swaths of the financial advisory space, which has been fueling merger activity and driving up valuations.

But, unlike some RIA-PE partnerships that have handed over majority ownership stakes and management control to the outside investors, Mr. Mallouk insists he is just taking advantage of what the market is offering.

“Valuations have been so high, we’re at unprecedented levels in this space, and there’s record private equity money on the sidelines,” he said. “We’re securing capital while valuations are high.”

ORGANIC GROWTH

Creative Planning, which has 700 employees in 27 offices serving about 30,000 clients, has experienced primarily organic growth since Mr. Mallouk took over.

The RIA made its first acquisition 11 months ago and has made an acquisition during each of the past four months, which is a pace Mr. Mallouk expects to maintain.

“About one acquisition a month seems like the pace that makes sense for us,” he said. “None of the [PE] money is for acquisitions; that’s just reserved for the firm.”

Daniel Seivert, chief executive of the investment bank Echelon Partners, said he is not surprised private equity would end up with a piece of Creative Planning, even if it’s a minority stake.

“Creative Planning is one of the most attractive growth plays in the wealth management space that to this point was not available to invest in,” he said. “They have a highly replicable business model; they have an amazing track record of organic growth, with a repeatable process; they have meaningful barriers to entry to what they are doing; they added inorganic growth, and have been doing that well; and they have a strong record of satisfaction with clients, employees and partners.”

Mr. Seivert also likes the fact that Creative Planning didn’t give up majority ownership or management control as part of its deal with PE investors.

“There is a huge advantage to minority, non-controlling, long-term capital in that Peter Mallouk stays in control but gets help with some of the larger strategic development issues,” he said. “They didn’t need the money per se, but raising it accomplishes two things: They have more capital to do larger deals, and they gain a partner to help with growth and growth strategy.”