Recapitalization? SPACs? Cetera’s PE backer shares long-term plans

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Cetera Financial Group’s private equity backer is promising the firm’s 8,000 advisors that Genstar Capital is in it for the long haul as an investor.

Cetera is “a flywheel; It just keeps getting better and better,” Tony Salewski, a Genstar managing partner and Cetera board member, said at a virtual event for advisors this week. “It's a business that we want to hold for a very long time.”

Salewski noted that his PE firm’s investments typically carry a five- to 10-year timeline. He also mentioned last year’s Mercer Advisors recapitalization deal between Genstar, Lovell Minnick Partners and Oak Hill Capital. Genstar sold Mercer “to ourselves in a new fund” in order to extend “from that initial five years to re-underwriting another 10 years,” Salewski said.

The message comes as the Los Angeles-based independent broker-dealer network and other large wealth managers face reduced business under the low interest rates triggered by the economic toll of the coronavirus. Despite credit agency warnings about high levels of debt and reports of home office layoffs, Cetera aims to grow through corporate realignment and recruiting with higher offers for incoming advisors.

Salewski spoke in an interview with Rose Price of VLP Financial Advisors at the remote version of Cetera’s annual Connect conference. After noting that Genstar represents college endowments, families and the pensions of teachers, nurses and firefighters, Salewski said it’s fueling technology, RIA support and other resources for advisors.

“We want to provide the tools, the services, the expertise and the capital to help you grow your business,” Salewski said. “That will fundamentally attract other advisors to our platform and be great for all of us, in terms of the ability to continue to invest more and more in the business.”

The investments will serve as a boon to Cetera’s recruiting. Still, LPL Financial and other IBD rivals in the full RIA channel are making similar investments using different sources of capital that have proven attractive to advisors, too.

At least 18 advisors with more than $2.4 billion in client assets have dropped Cetera this year for other IBDs or RIAs, according to Financial Planning’s tracking of company recruiting announcements. In May, a practice with $1.6 billion left one of Cetera’s five firms for Captrust.

While IBD recruiter Jon Henschen says the firm’s forgivable note offers based on advisory assets are “above industry average by quite a bit,” he says he has stopped placing advisors with Cetera due to declines in home-office service levels and the firm’s high debt leverage. Advisors changing firms tell Henshen they “don't want to have to do this again,” he says.

“If you go through a leveraged buyout scenario, it doesn't really emanate stability,” Henschen says. “They're all about financial engineering and cutting expenses. ... For them, long term is five years.”

Rose Price of VLP Financial Advisors and Tony Salewski of Genstar Capital
Rose Price of VLP Financial Advisors (left) interviewed Genstar Capital Managing Director and Cetera board member Tony Salewski (right) at the remote version of Cetera’s annual Connect conference on Oct. 13.

On Genstar’s behalf, Salewski spoke openly of the PE firm’s enthusiasm for Cetera’s prospects and its future plans. Besides the Mercer deal and Genstar and TA Associates’ Orion Advisor Solutions-Brinker Capital merger agreement in June, Salewski cited special purpose acquisition companies as becoming “another potential exit avenue” for Genstar’s 30 portfolio firms.

Genstar purchased a majority of Cetera’s parent firm in 2018 for a reported $1.7 billion. At $1.92 billion in revenue last year, Cetera’s five brands with 7,700 producing representatives together constitute the fifth-largest firm in the sector, according to Financial Planning’s IBD Elite survey. Genstar bought the firm from creditors who pulled Cetera out of bankruptcy protection under an earlier parent company in 2016.

Noting the widespread media coverage of the PE capital flowing into wealth management, Price asked Salewski, “How should the advisors listening in today think about it from your perspective, in terms of holding periods, exit strategies and the impact to them?”

Genstar’s role as majority owner “is all part of value creation,” according to Salewski. It partners with management to “follow their lead on where they think the most value can be created,” he said.

“As we look at a long-term horizon, there are very few assets like this, of this scale that have this amount of impact on the market,” Salewski said. “We plan to be around for a very long time on that journey.”

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