Edelman’s Big Private Equity Deal: Can Other RIAs Cash in Too?

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Ric Edelman's sweet private equity deal is good news for RIAs, especially other big, media-savvy firms. But the industry icon's latest transaction raises concerns about the risks of investing in a firm so closely associated with its namesake.

Highly-regarded private equity firm Hellman & Friedman, which helped take LPL Financial public six years ago, acquired a majority interest in Edelman from Lee Equity Partners, which will retain an equity stake in the firm. Ric Edelman will remain the largest individual shareholder of the RIA, which has approximately $14.5 billion in assets under management.

Terms of the transaction were not disclosed, but the Wall Street Journal reported that the transaction was valued at $800 million, which would be "very high" for the industry, according to M&A expert David DeVoe, managing partner and founder of DeVoe & Co., a San Francisco-based consulting firm and investment bank.

RIAs with more than $1 billion in assets are usually valued at around 6 to 9 times cash flow; firms with over $5 billion in AUM, because of their scarcity, usually command a premium price.

"The smart money sees the opportunities in this industry and continues to invest in it," says Matt Lynch, managing partner for the strategic consulting firm Strategy & Resources. "It's a very positive indicator for everyone in the business." 


The Edelman deal underscores the "continuing momentum" of M&A deals for large RIA firms with assets under management over $1 billion, DeVoe points out.

Typically there are about 10 such deals a year, DeVoe says, but in the first nine months of 2015 there have already been 20 M&A transactions involving independent firms with over $1 billion, including such blockbusters as First Republic Bank buying Constellation Wealth Advisors, AMG Wealth Partners purchase of MyCIO and Baker Street Advisors and the acquisition of Highline Wealth Management by Bronfman E.L. Rothschild.

That's in addition to notable recent private equity deals this year, including San Francisco-based Genstar Capital buying Mercer Advisors and Boston-based PE firm TA Associates snapping up NorthStar Financial Services.

Expect more to come, say industry insiders.

"The Edelman deal shows that there is serious institutional money out there interested in our space," says Brent Brodeski, CEO of fast growing Rockford, Ill.-based Savant Capital Management, which has around $4.5 billion in AUM. "There's a plethora of them sniffing around, and I think all the big firms are being pursued."

The most likely acquisition candidates are growth-oriented RIAs with over $5 billion in AUM looking for capital they can't obtain from banks or generate internally, as well as management expertise, Brodeski says. Private equity firms looking to achieve a return on investment of over 20% within four to six years are more than happy to oblige, he adds.

"They see the demographic trends, the money leaving the wirehouses and the advances in fintech that is enabling firms like ours to grow and achieve scale," Brodeski says.


However, with nearly $15 billion in assets and a highly sophisticated marketing machine leveraging national media with an iconic personality, Edelman Financial Services is hardly a typical RIA, and also has an unusual corporate history.

Founder Ric Edelman sold the firm in 2005 to Sanders Morris Harris, a publicly traded holding company, but the RIA went private again seven years later, after being bought by private equity firm Lee Equity Partners, with Edelman controlling a majority stake and continuing to run the company.

Edelman had around $17 billion in AUM at the time, and the deal price was valued at around $265 million.

As Edelman himself puts it, "There aren't many firms like mine."

More to the point, there's only one Ric Edelman, a high profile, charismatic former journalist who hosts a nationally syndicated radio show, is a best-selling author and leads dozens of seminars across the country throughout the year.


"Because Ric is the face of the business, there's an acute 'key man risk' associated with him," says DeVoe. "Edelman's value would be higher if the company wasn't so closely tied to Ric."

Edelman Financial's "celebrity approach" has advantages and disadvantages, notes fellow advisor and business owner Brodeski.

"It obviously drives a lot of business and translates into high growth rates," Brodeski says. "But if Ric isn't there, is the firm worth as much and does it grow as fast?"

Edelman is hardly unaware of the problem.

Earlier this year, the firm sought to groom David Bach, another media savvy advisor and author, as Edelman's successor.  The combination didn't work out, but the search for a new CEO is continuing.

The 'key man risk,' for the firm was "a bigger concern 10 years ago than it is now," Edelman says. "We have dramatically reduced the firm's reliance on me. Others in the firm can, and have served as hosts on my radio and TV shows and do media interviews. We have a team of ten instructors who do virtually all of our 800-plus seminars each year, and we will continue to deemphasize me over time. This is partly why we are seeking a new CEO."


Edelman Financial should be able to grow without relying too heavily on its founder, industry observers believe.

"There's certainly risk there, but they've worked to mitigate it," says Inveen. "Edelman has achieved success not just because of Ric, but because they've institutionalized their direct marketing approach to a mass affluent market."

Edelman has done "a very good job of institutionalizing his business, so that clients are attracted to the firm, and not him personally," says industry consultant Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy. "They will definitely take a hit if he is gone, because of his marketing outreach and channels, but that can be replaced with a solid marketing and branding spend."


Indeed, Edelman may be more accurately compared to two other independent firms that also rely on cutting edge direct marketing techniques to target prospective mass affluent clients - The Mutual Fund Store and Fisher Investments.

"Like Fisher, they've been able to build up scale and grow organically," Hamburger says.

The Mutual Fund Store, which as bought by Warburg Pincus, one of the world's largest private equity firms in 2011, has "methodically diluted" the risk associated with its founder Adam Bold, who is also a media star and radio host, notes DeVoe.

Indeed, the Hellman & Friedman purchase of Edelman highlights the importance of the mass affluence market, one that is usually overlooked by larger wealth management firms, says Brian Hamburger, president and chief executive of Market Counsel, the Englewood, N.J.-based RIA consulting firm.

"This deal shows that by leveraging the mass media, you can attract buyers to this space beyond the ultra-high-net-worth market," Hamburger says.

The mass affluent market is, in fact, "extremely attractive," DeVoe says, and "can be effectively served by a business model like Edelman, with its marketing skills, extremely scalable platform and built-in growth engine." 

Asked about the comparison of his latest deal to the Mutual Fund Store's sale to Warburg Pincus, Edelman replies that the Hellman & Friedman transaction "is much bigger than that one was. The real question is what the size of the Mutual Fund Store's next transaction will be."

According to Bloomberg Business, Warburg Pincus is considering selling the Mutual Fund Store, which has around $8.5 billion in AUM, in a deal that could value the company at about $700 million. 


Edelman Financial's acquisition is significant because it "reflects the transition the industry is experiencing," says Ric Edelman. "Large firms will get larger, and small practitioners will be forced to join them or find themselves marginalized out of the industry."

The firm's sale will also result in "a monetization event for a great many members of our organization, planners as well as management," he says.

As for the future of Edelman Financial, Edelman says the firm has "ample funds to expand. And Hellman & Friedman has ample resources, both financial and knowledge, as well."

There are "no current plans" for an IPO, he maintains. "I'm not even thinking about it. Our direction for the next five to ten years is now set."

In the meantime, private equity firms will continue to be interested in RIAs, but they must have strong business development capabilities says Lynch.

"Edelman is a perfect example," Lynch says. "They have first rate marketing and rainmakers. Firms that know how to do business development are and will continue to be more valuable than those who don't."


Edelman's mastery of mass media, exemplified by the firm's hugely successful national radio financial advice show, is another attribute buyers are looking for, according to Hamburger. "The firms we're seeing attract the most interest can leverage media, whether it's social media, the Internet, digital interface or traditional mass media like radio," he says.

Institutional interest in the RIA business is still in its infancy, Hamburg maintains. "We're still at the batting practice stage," he says. "Private equity sees a lot of blue ocean opportunities in the independent space and knows that's where their investment can be most impactful."

Industry researcher Dan Inveen, principal of FA Insight, agrees, citing findings from the consulting firm's annual industry survey and study of advisory firms. "They're seeing the same things we are," Inveen says, "Record profits and high levels of growth."

With additional reporting by Ann Marsh.

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