How do M&A deals get done in a super-competitive market for RIA firms?
Writing the biggest check always helps. Cultural fit is important — as buyers and sellers constantly reiterate. And the buyer must provide resources that the seller feels are indispensible to its needs.
HighTower Advisors won’t say if it was the highest bidder in its latest deal, a cash and equity purchase of what it’s calling a “substantial” stake in Lexington Wealth Management, an RIA based in Lexington, Massachusetts with $929 million in AUM.
But company executives have made no secret of the fact they intend to use the considerable capital resources of its private equity owner, Thomas H. Lee Partners, to get more such deals done.
And HighTower does appear to have checked the other boxes to Lexington’s satisfaction.
The Massachusetts RIA found its way to the Chicago-based aggregator after carefully surveying the intensely competitive RIA market. Lexington decided it “really wanted to grow and get better,” says Michael Tucci, the RIA’s co-founder and CEO.
But the advisory firm knew that getting to the next level meant exploring an M&A deal. Lexington then retained consultant Andy Putterman and investment banker Silver Lane Partners, a division of Raymond James.
Lexington ended up meeting with 20 firms, including banks, regional RIAs, private equity firms and national aggregators as it considered its sale options, according to Tucci.
[Other buyers] essentially wanted us to become a dot on their map.
“At the end of the day, [those firms] essentially wanted us to become a dot on their map,” he says. “And some firms say things in big print that they take away in small print.”
Tucci and co-founder and President Kristine Porcaro “didn’t want to abdicate” their active management roles, Tucci says. “We have a lot of gas left in our tank and we wanted a real partner.”
HighTower promised to retain the firm’s entrepreneurial ethos and personnel — and also had the capital to allow Lexington to make sub-acquisitions in New England.
“HighTower sees Boston and New England as a key growth area,” confirms Silver Lane managing director Edward Higham. “They are seeking to deploy additional capital to build out the region through tuck-in acquisitions onto the Lexington platform.”
HighTower is also building up value for an anticipated liquidity event in the near future.
HighTower’s potential to have an IPO can bring the equity leverage to get deals done.
Noting that private equity “is not long-term capital,” HighTower CEO Bob Oros
Tucci wouldn’t say if the possibility of a forthcoming HighTower IPO factored into Lexington’s decision to sell, but industry consultant Tim Welsh notes that HighTower’s “potential to have an IPO can bring the equity leverage to get deals done.”
What’s more, Oros’ ability to communicate HighTower’s new M&A focus “is resonating in the marketplace, whereas in the past, their direction was more muddled,” Welsh points out.
In a seller’s market, however, that M&A focus comes at a price.
“The environment of capital chasing opportunities in the RIA space is becoming more dynamic,” says Matt Crow, president of M&A research and consulting firm Mercer Capital, “with an increasing number of lender solutions, as well as permanent capital providers, competing with the HighTowers of the community for deals.”
And EBITDA valuation multiples keep rising, according to industry executives, reaching levels of high single digits to low double digits for a billion-dollar firm like Lexington.
The environment of capital chasing opportunities in the RIA space is becoming more dynamic.
Another critical factor, adds Brooks Hamner, vice president at Mercer, is how the valuation multiple is applied. Reported EBITDA may result in one multiple,but pro forma, run-rate or an adjusted EBITDA could be another.
Oros has addressed restlessness among HighTower advisors, which culminated in several major defections before he took over as CEO in January.Around 90% of HighTower advisors’ revenues are now under contract, compared to less than a quarter in 2017, Oros told Barron’s earlier this month.
The Lexington deal is HighTower’s third billion dollar-plus transaction this year. In February, the aggregator bought an equity stake in Green Square Wealth Management, a multifamily office in Memphis, Tennessee, with $2.2 billion in AUM.
HighTower made a strategic investment in LourdMurray, a Beverly Hills, California-based wealth management firm that recently merged with Delphi Private Advisors, based in San Diego. The firms had a combined AUM of $4.4 billion.
