Cetera’s majority stake sale to Genstar gives 7,700 advisors a new PE partner

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Cetera Financial Group has agreed to sell a majority stake in itself to private equity firm Genstar Capital, a deal with a suitor who had flown below the radar despite rampant speculation about possible acquirers.

The 7,700-advisor firm and its holding company, Aretec, had retained Goldman Sachs in February for a capital structure review. A sale was one option, the suburban Los Angeles-based firm said at the time. People familiar with the matter had estimated the price tag could be as high as $1.5 billion.

Cetera and Genstar, the parent of major RIA aggregator Mercer Advisors, did not disclose the terms of the deal, which is expected to close in the third quarter. Genstar would take majority ownership of Cetera and Cetera’s leadership would retain “a meaningful ownership position,” according to the firms.

“We’ve really admired Cetera as a channel partner across various products and services over a number of years. We see the market trends that are really a tailwind for a platform like Cetera,” says Tony Salewski, a Genstar managing partner, noting the rise of holistic advice and independent firms.

Moore declines to say how many bids Cetera received but says he is pleased that the capital structure review pointed the two firms to the deal.

“We’re really looking forward to a very bright future together,” Moore says, praising the firm’s expertise in technology, lead generation and driving practice efficiency.

Industry experts had identified Advisor Group parent Lightyear Capital as one of several possible PE buyers if Cetera went up for sale. The range of potential suitors even included rival independent broker-dealer LPL Financial, where Moore had served as president before joining Cetera.

The name of San Francisco-based Genstar did not surface in most media reports, if any, surrounding the capital structure review. However, its several investments in the financial services include Mercer, which has more than $10 billion in assets under management and has acquired at least 14 RIAs since 2016.

When asked which firms among Genstar’s holdings formed the most similar example to Cetera, Salewski named Mercer Advisors, former Genstar portfolio firm and turnkey asset management program AssetMark and 401(k) and 529-plan provider Ascensus.

“This platform is one that is highly attractive in the industry and is really capable of being the leader in terms of advisor recruitment and services to advisors,” Salewski says.

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Cetera would maintain the same structure under the deal, the two firms say. Salewski would serve on Cetera’s new board of directors, alongside Moore, Genstar vice president Sid Ramakrishnan, former Charles Schwab executive Ben Brigeman and former Russell Investments executive Hal Strong.

The sale would cash out institutional investors with stakes in Cetera following its Chapter 11 reorganization. Cetera emerged from bankruptcy in 2016 under a new holding company, Aretec, after separating from onetime RCS Capital executive chairman Nicholas Schorsch.

The deal marks a “huge win for Moore and the rest of Cetera’s leadership team,” according to BridgeMark Strategies CEO Jeff Nash, who has worked on recruiting moves with advisors from Cetera and other large IBDs.

“This also buys Cetera’s leadership an enormous level of credibility with their advisors. Any hopes that other firms had for picking up easy recruits from Cetera are obviously now gone,” Nash said in an email.

“You now have some of the largest firms that support independent advisors in this space — LPL, Cetera, Advisor Group, Ladenburg [Thalmann], and Ameriprise — all simultaneously healthy and well-resourced for growth. This means much more competition for high quality advisors.”

In remarks at the FSI OneVoice conference in January, Moore had noted private equity firms’ growing interest in wealth management firms and their ability to leverage “a lot of capital on the sidelines that wants in this space.” He says no pending deal was on his mind at the time he made the comments.

Cetera has consolidated from as many as 11 IBDs under RCS in 2015 to a total of six late last year. At the beginning of the year, the firm also unveiled an executive shake-up at its member firms, along with a new two-channel structure composed of three “specialty” IBDs and three “traditional” IBDs.

The firm’s specialty channel has Cetera Advisor Networks, which is Cetera’s largest IBD and the No. 11 overall; Cetera Financial Institutions, an IBD for bank and credit union advisors; and Cetera Financial Specialists, an IBD catering to tax-focused practices.

The traditional channel consists of Cetera Advisors, which is the No. 18 IBD; First Allied Securities, No. 26; and Summit Brokerage Services, No. 31. Each of the six IBDs produce enough business in their own right to make Financial Planning’s annual FP50 list of the largest IBDs.

Together, they generated revenue of $1.78 billion in 2017, a 10% jump over the previous year in its first full year under Aretec, which is “Cetera” spelled backwards. Nearly half the firm’s revenue, about $880 million, came from commissions.

Cetera has boosted its technology tools, such as facial recognition software and a new client portal, while adding about 800 new advisors with $15 billion in client assets last year. The firm said it undertook the capital structure review in part because it beat its own expectations after the reorganization.

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M&A Private equity firms Independent advisors Independent BDs Strategic buyers Business development Robert Moore Cetera Financial Group Genstar Capital Goldman Sachs