8 financing options for RIA acquirers: A full menu

In a prospering industry, financial advisors considering the acquisition of one or more wealth management businesses likely have more potential sources of capital than ever.

But that ever-expanding list of financing options across possible lenders, new parent firms or minority investors also poses some challenges, according to Brandon Kawal, a partner at management consulting and transaction advisory firm Advisor Growth Strategies. The full menu includes the increasingly dominant M&A players among private equity firms and registered investment advisory company aggregators that they're backing, as well as traditional capital providers such as banks and, now, facilities from private credit firms.

If RIA owners are considering a transaction that will fold them into a new parent firm, Kawal's team counsels them "to think about the buyer's return model or the investment return model in all of this and how that return model matches up with your strategic objectives," he said. But a full change in control represents only one category of the available options.

"There's a lot that goes into it, so I do think that, generally, it's a good sign that there are more financing options available for this market, because there's a lot of opportunity here. But, on the flipside, it creates a lot of questions and it could create a lot of confusion for the everyday operator in our industry," Kawal said. "It all goes back to, if you want some level of capital, why? You have to start extrapolating your 'why' to the market, not the other way around — not whoever is looking to give you capital and you figure out the why after, because it just won't work out."

The "truly permanent capital" of Sammons Financial Group, a nearly "100-year-old company that has never sold anything," has helped Richmond, Virginia-based independent advisor services and RIA firm Wealthcare boost its M&A activity since Sammons acquired Wealthcare last year, according to Matt Regan, Wealthcare's president. 

While he credited the firm's prior owners, private equity firm NewSpring Capital's NewSpring Holdings, with being "incredibly supportive" as the firm expanded from roughly $1 billion in client assets to $9 billion, he said the pitch that, "when we buy a firm, it's forever" acts as a differentiator on the M&A recruiting trail. Wealthcare has subsequently reached $10.5 billion in assets, including $1.5 billion with nine advisory practices it owns. In the process, Sammons, a major annuity and insurance firm, has diversified its holdings over the past five years with its purchases of Wealthcare, turnkey asset management and technology firm Beacon Capital Management and fee-only RIA firm NorthRock Partners.    

"They made a very conscious decision to hedge that interest-rate exposure," Regan said. "It's just a very different strategy, because when you're owned by private equity, the charge is, grow your revenue, expand your margins and don't spend a lot of money."

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Looking for financing? Try these types

But each investor or capital provider for an RIA or other wealth management business may be pursuing different variations of many strategies at one time or another. For instance, loan facilities secured last month by Steward Partners and Coastline Wealth Management acted as only the latest examples of private credit firms' entrance into wealth management as a source of M&A and other growth financing, rather than as simply part of the alternative investment menu. 

The types of financing sources that advisory practice founders, successors or wealth management company owners may pursue spans:

• Minority investments from firms that focus on them or other non-majority acquirers
• Banks of many sizes, including ones that have built a specialty in lending for RIA M&A
• U.S. Small Business Administration-backed loans
• Credit facilities or other financing from private credit lenders
• Internal loans or deals between founders and successors or "sunset" transactions
• Private equity investors or wealth management firms backed by them
• Other privately held or publicly traded firms that purchase firms or provide capital
• Ultrahigh net worth family offices that acquire wealth management businesses
  

In turn, once an advisory business acquirer chooses a source of financing, that firm could act as a separate variety of capital or investor for a third company. "Tuck-in" deals — in which a smaller firm operates under a parent company that is either its source of financing or the issuer of debt notes that supply the capital — have turned into the most common type of M&A transactions. Breaking apart the above eight categories into further distinctions would likely reveal even more strains of wealth management acquirers, investors or lenders.
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Bullish on financing

The plethora of capital sources reflects an industry that reeled in record profits last year, to the tune of 39% margins and average advisory practice operating profits of nearly $2.1 million, per one estimate. The ability to expand through the addition of new clients or advisor recruits, deeper relationships with the existing base of customers and asset appreciation gives wealth management firms "three distinct drivers of growth, if you think about it," Regan said. Even though private equity investors have entered the industry to a degree that is "nothing short of epic," other financing sources like banks "would love to lend against these assets," he noted. If the reverse were true, the private equity investors would be leading the charge out of the industry.

"You are seeing continuation vehicles. You're seeing private equity firms extend the life of these investments, roll them into new funds, provide new capital," Regan said. "They like the space. There's nothing that they've looked at and said, 'This is unsustainable.'"

Kawal expressed a similarly bullish outlook, noting that the most attractive sellers continue to fetch premium valuations. With the caveat that sellers without characteristics such as strong growth rates, client niches and succession plans may not amass as many bidders or financing providers at the highest valuations, he doesn't buy into the idea that price tags will fall across the board in the industry. In fact, he predicted that more firms in the future may take the opposite path from the trend toward going private. 

"If you look at the absolute size of some of the largest platforms in this space, I think it's inevitable that one of them will want to take advantage of the public markets," Kawal said. "There's no evidence that the demand side of the equation has gotten any smaller."