Edelman Financial Engines to be recapitalized at $7.3B valuation

As private equity firms race to grab even small stakes in RIAs, a global giant with a growing wealth management portfolio is scooping up a part of one the industry’s biggest names.

Edelman Financial Engines and lead investor Hellman & Friedman agreed to sell a minority stake in the firm to Warburg Pincus, the companies said March 15. The deal values the RIA, robo advisor and 401(k) firm at $7.3 billion, with an expected second-quarter close. The valuation is nearly two-thirds higher than when the company formed in a high-profile merger in 2018.

With an existing financial services portfolio that includes digital advice firm Facet Wealth and wealth manager Kestra Financial, Warburg is following other private equity firms that have rushed to acquire smaller stakes in the industry. The number of minority stakes changing hands in massive RIAs like Creative Planning, Captrust and Dynasty Financial Partners more than tripled to 26 last year, accordingto investment bank and consulting firm Echelon Partners.

In addition, Warburg made earlier investments in Financial Engines and a company it sold to Financial Engines, The Mutual Fund Store, in 2015, according to consultant Gavin Spitzner of Wealth Consulting Partners and RIA valuation analyst Matthew Crow of Mercer Capital.

“As the combined Edelman FInancial Engines business has continued to grow and realize the promise of the integrated company, it makes sense that they and H&F recapitalize with Warburg Pincus,” Spitzner said in an email. “As much success as they've already had, I believe they're only in the first inning when it comes to the opportunity of an integrated workplace retirement and financial planning offering.”

The deal also indicates “continued interest” in products and services for mass affluent clients after Goldman Sachs’ 2019 acquisition of United Capital as part of a move to expand its traditional base, Crow said in an email.

“Warburg has a history with this investment, and the fact that they’re jumping back in may indicate they never actually wanted out in the first place,” Crow said. “Now that no one is talking about them, I think robo advisors are finally bringing some major changes to the industry, but doing so quietly.”

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The parties didn’t disclose the exact terms of the deal, though Warburg Pincus’ Head of Financial Services Michael Martin told Reuters it represents a percentage of Edelman Financial Engines in the “mid-to-high teens.” Hellman & Friedman had valued Edelman Financial Services at more than $800 million when it purchased the majority of the RIA in 2015 and the combined firm at $4.5 billion three years later, according to Reuters, which first reported the deal.

“We believe that the Edelman Financial Engines business model, which spans workplace retirement plan advice and traditional financial planning and investment management services, uniquely positions the firm to help millions of Americans reach their financial goals,” Martin said in a statement.

Edelman Financial Engines manages about $260 billion in assets from more than 1.2 million clients with 150 offices nationwide. Its assets under management have expanded by more than $100 billion since the 2018 merger, and the deal displays “the abundance of opportunity ahead,” for the firm, CEO Larry Raffone said in a statement.

Hellman & Friedman has raised more than $50 billion and invested in 90 companies, including its stewardship of LPL Financial’s initial public offering in 2010.

“We are excited to continue working with Larry and team as they seek to protect and enhance the financial well-being of so many Americans, and we look forward to partnering with Michael and the Warburg Pincus team,” Hellman & Friedman partner Allen Thorpe said in a statement. “They bring great expertise in the financial services industry and will be a great addition to the board as we support the company’s bright future together.”

In addition to the higher volume of such minority-stake deals in 2020, the average AUM of the sellers surged by 49% to $3.4 billion, according to Echelon. The ability to diversify or pay down debts, tap into higher valuations, acquire dealmaking expertise and buying out retiring or silent partners are just some of the factors driving the minority deals.

The Warburg recapitalization enables it and Edelman Financial “to work together to grow their wealth and asset management footprint in the crowded marketplace,” Carolyn Armitage, a managing director with Echelon, said in an email. “Growth is important for the employees to have expanded opportunities, which helps to attract and retain the best and the brightest our industry has to offer, expanded and specialized expertise and services and enhanced profits.”