Private equity likely buyer in Cetera sale

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Cetera Financial Group’s more than 7,700 advisors across six independent broker-dealers may soon face yet another big change: new ownership.

The IBD network is exploring a sale and the price tag could amount to $1.5 billion, or $350 million more than RCS Capital paid in 2014 to acquire the El Segundo, California-based firm, people familiar with the matter told Bloomberg. Creditors assumed control of Cetera after RCS went bankrupt in 2016.

Executives with Cetera and its current parent, Aretec, retained Goldman Sachs to help with what they called “a capital structure review process,” the firm announced this week. Representatives for the firm said it would be premature to speculate on the outcome of the review.

Private equity firms and other investors see opportunities in wealth management, Cetera CEO Robert Moore said during a panel in January. Fortress Investment Group, Eaton Vance Management and Carlyle Investment Management, three PE firms, currently have stakes in Cetera, along with other equityholders.

The possibility of a sale did not take industry experts by surprise as much as the quick timing after coming out of bankruptcy. Besides PE capital, the consensus prediction, other options include taking the firm public or selling to a bank, insurance firm or another wealth management company.

The search for a buyer is “overstressing for advisors” who could have to lead clients through repapering and the loss of some investment options under new ownership, says Alois Pirker, the research director for the wealth management practice at consulting firm Aite Group.

Still, he adds, “You have something of scale. You have something that probably still has inefficiencies that can be addressed. There’s possibly some upside there.”

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Cetera earlier this month divided its six IBDs into traditional and specialty channels following a series of management moves. The firm disclosed 2016 revenue of $1.6 billion from 8,012 producing advisors in Financial Planning’s latest annual FP50 survey, down from $2.04 billion from 9,295 advisors in 2014. Combined revenue among the six IBDs still amounts to the fourth highest revenue in the IBD space.

The firm released a statement Monday confirming it is reviewing its structure, with Goldman to help identify the right strategies to continue its momentum.

"While the current debt structure was put in place in conjunction with our restructuring in 2016, we have materially outperformed the financial projections made at that time," a spokesman for the firm said in an email.

"Although our current loan terms are attractive, the leveraged finance markets continue to be constructive and at near-record lows in terms of pricing and spreads. Our strong financial performance (which has also led to a ratings upgrade at one of the credit rating agencies), puts us in a position to consider even lower cost financing options with longer terms and less restrictive covenants."

Cetera’s CEO had discussed the trend toward consolidation in the IBD space during a panel at the FSI OneVoice conference in late January. Moore expects M&A deals of multiple kinds to keep reshaping the space in the foreseeable future because they are good for the acquirers, he said.

“There is a lot of capital on the sidelines that wants in this space,” he said. “It's a high cash flow-generating, low capital-consuming structure for them, and PE firms have almost become more strategic investors than they were 10 years ago.”

He added, “Their investment horizons are longer, their ability to kind of invest in the business as opposed to just sort of, you know, strip it and sell it is much greater.”

IBD recruiter Jon Henschen says he disagrees with the view that PE firms are taking a longer-term approach. For example, he notes, Lightyear Capital purchased the IBDs that would become Cetera in 2010 and sold them to RCS Capital 2014.

“They’re going to flip it, make their money and move on. And usually when they flip it, it goes from one private equity firm to another,” Henschen says. “The story they were telling me is that they were in there for the long haul and they wanted to bring it public.”

Representatives for Fortress, Eaton Vance and Carlyle didn’t respond to questions about the potential sale.

A spokeswoman for Lightyear, a current owner of Advisor Group, had no immediate comment on whether the firm would be interested in buying back Cetera. A spokeswoman for Stone Point Capital, the majority owner of Kestra Financial, declined to comment.

Cetera has a complex ownership structure divided among PE firms, pension funds and other creditors after the bankruptcy, notes recruiter Louis Diamond. A new owner could result in retention packages and technology investments for advisors but also client consent forms and cost-cutting moves, he says.

“It was inevitable that there would be some sort of a change in ownership,” says Diamond, who adds that he expects a PE firm to be the buyer. “Any time there is change it’s an opportunity for an advisor, especially an independent one, to figure out if they’re in the best possible place for their clients.”

A risk of advisor attrition looms as a potential factor turning away some prospective buyers, Aite’s Pirker agrees. He sees another PE firm as more likely to buy into Cetera than the other potential suitors, he says.

“I would imagine that it’s something that keeps the advisors happy and makes sure that the ship remains steady until it runs into a new harbor,” Pirker says.

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Independent BDs Independent advisors M&A Strategic buyers Private equity funds Robert Moore Cetera Financial Group RCS Capital Goldman Sachs Lightyear Capital