RCAP Holdings, the private equity firm best known as an innovator in the non-traded REIT industry, surprised many observers by announcing it will buy the 26th largest independent broker dealer in the country, First Allied Holdings.

However, independent broker-dealers should ready themselves for a lot more of the same, according to RCAP founder and CEO Nick Schorsch, and another key executive involved in the First Allied deal.

“I think this is a tipping point,” Schorsch said in an interview, indicating that he expects copycat deals. “There will be a lot of people looking at this space with a very different eye.” The terms of the deal, which is pending regulatory approval, were not released. Adam Antoniades, CEO and president of First Allied, could not be immediately reached for comment.

Robert Belke, a First Allied board member and a partner in Lovell Minnick Partners, the private equity firm that is selling its First Allied stake to RCAP, also said he thinks the purchase could stimulate an influx of investment.


“I wouldn’t be surprised to see other more non-traditional buyers look at the space,” Belke said in an interview.

The announcement comes six years after RCAP entered the wholesale broker-dealer space by launching Realty Capital Securities, which sells REIT products to more than 80,000 registered reps nationwide. Since then, Schorsch says, he and his firm have been evaluating the retail space and contemplating a purchase.

For the past few decades, the retail, independent broker dealer space has been undergoing an accelerating process of consolidation that many experts believe could last another 20 years. If regulatory challenges or competition from the up-and-coming RIA industry don’t act as spoilers, the space could come to be dominated by giant independent B-Ds that are grown or built out of today’s competitors.


In just the past year and a half, for example, private equity-owned Cetera Financial Group acquired two B-Ds from MetLife (Tower Square and Walnut Securities), two private equity firms (Aquiline Capital Partners and Genstar Capital) bought Genworth Wealth Management, AIG acquired Woodbury Financial from The Hartford and Ladenburg Thalmann bought Securities America.

However, concerns over cost and complexity are holding many other investors back, Schorsch believes.

“This space has been overlooked because of the regulatory scrutiny,” he said. However, “we think the regulatory scrutiny is a positive. We think it’s helped clean [the industry] up. Quality and transparency matter a lot.”

These are qualities that are of critical importance to mass affluent clients, according to Schorsch. It’s this particular demographic that, he believes, have been greatly underserved by the financial services industry.


RCAP made an initial commitment of $200 million for First Allied, according to Schorsch, who declined to give the purchase price. By buying First Allied, he said, RCAP is tapping into this unmet demand.

“The retail investor has been overlooked for many, many decades,” Schorsch said.

And, he believes, this is the right time to invest in financial services firms, like independent B-Ds, that can effectively serve this client.

“We do think that people have come through the worst of it in this industry,” Schorsch added, “and now we are on the upswing.”

In just under two years of ownership of First Allied, the firm has proven to be a strong investment for Lovell Minnick, according to Belke. He cited First Allied’s acquisition of The Legend Group as evidence of the firm’s rapid growth. That purchase increased First Allied’s total number of independent contractor registered reps and financial advisors to 1,500. It’s client assets grew to $32 billion under management and the firm grossed $233 million in 2012.


“We had a vision a couple of years ago,” Belke said, “to use First Allied as a platform to acquire other B-Ds as well as to grow organically with its existing advisors, and the management team at First Allied executed on that vision.”

“I believe part of [RCAP’s] strategy would be to continue using this as a platform to acquire other BDs,” Belke added. “I think that they’ll probably be successful doing that.”

Schorsch, however, said he has no plans to do so. Instead, RCAP will focus on capitalizing First Allied for further growth, he added.

Given that First Allied is not being incorporated into another B-D, there will be no change in management or the executive team, Schorsch said.

“It’s a company that’s not broken and doesn’t need to be fixed,” Schorsch said. “It’s a company that just purely needs capital. That’s one of the things that attracted us. This is a great business.”


The sale immediately raised concerns in some quarters that RCAP is simply looking for a dedicated channel to use to push its REIT products.

“Does RCAP expect FA [financial advisors] to sell their Realty Capital products?” consultant Chip Roame, of Tiburon Strategic Partners, asked in an email. “This could be a rub.” Realty Capital Securities is a wholesale B-D and an investment banking and capital markets business.

Schorsch and Belke categorically rejected that suggestion.

“We are not looking for more distribution,” Schorsch said, adding that his firm’s REIT company is “a very good mature business.”


To that end, he and Belke added, First Allied has been taking pains this week to assure its network of advisors that no one will be forcing them to sell particular product.

“A big part of the message to advisors is providing assurance that [proprietary product sales] are not part of this transaction,” according to Belke. “That’s very important because these are independent advisors. They are fiercely independent. They need access to the breadth of product.”

As part of the deal, First Allied's senior management and other employee shareholders have committed to $10 million in equity in the RCAP Holdings family of companies, the firm said in a statement. It’s a “sign of confidence,” according to Roame.

Schorsch indicated that no one should expect RCAP to try to make a quick buck off of First Allied.

“We are permanent capital,” he said. “We are not in this to grow it and sell it. We are in this to hold.”

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