Hungry for More: How Private Equity Firms are Snapping up RIAs

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On the prowl for new avenues for growth, private equity firms are ramping up their pursuit of the RIA market.

Mercer Advisor's acquisition of Kanaly Trust, involving not one but two powerhouse private equity firms, is the most recent example of the increasing influence of PE firms in the advisory space.

Last year, Lovell Minnick Partners sold Mercer to fellow PE firm Genstar Capital. This week, Lovell Minnick sold Kanaly to Mercer and will retain a stake in the bulked up $8 billion-plus firm, now an industry leader with national aspirations.

Investment banking firm Advice Dynamics Partners is getting "an unprecedented number of inquiries from PE firms seeking to invest in the wealth management space," says CEO David Selig. "Between Park Sutton, our strategic alliance partner, and Advice Dynamics Partners, we jointly receive multiple calls per week."


The Mercer-Kanaly deal "is indicative of the growing role of private equity in the RIA space," says David DeVoe is managing partner of DeVoe & Co., a San Francisco-based  investment banking and consulting firm specializing in RIA mergers and acquisitions.

Private equity is often called smart money, explains DeVoe. And this smart money is voting “for the independent model with their checkbook. As we see more private equity owning stakes in the industry's largest firms, we will likely see more transactions between PE portfolio companies."

Mercer CEO David Barton agrees.

Mergers and acquisitions are a big part of Genstar Capital's growth thesis, Barton says. "Genstar is investing more money into Mercer for capital structure and believes in organic growth through M&A."


Barton says he's targeting firms in key markets across the country with assets under management ranging from $100 million to $500 million. As Mercer merges with Kanaly, Barton says he expects most deals this year to be smaller tuck-ins, along the lines of Mercer's purchase earlier this year of Spruce Hill, a Guilford, Conn.-based RIA with assets of $110 million.

Nationally, Barton also sees "more private equity-backed deals going forward, with the lion's share at the upper end of the spectrum."

PE firms have a “high level of interest” in wealth management because it’s growing at a faster pace than other investment management channels, according to Barton. He also notes that more people are seeking professional CFP advice, in addition to an increase in the mass affluent high-net-worth audience.

But Jamie McLaughlin, an industry consultant specializing in the UHNW market, warns that private equity firms eyeing the independent advisory market may need a longer term time horizon than they are used to.

"Wealth management just doesn't work for traditional PE funds with a shorter-dated capital cycle of five to eight years," McLaughlin says. "They are likely to encounter negligible internal rates of return for advisory firms in the front end of the investment. An RIA could work as a direct investment for a PE fund with a long-term holding period."

The irony, according to McLaughlin, is that non-public wealth management firms desperately need capital now to grow, execute strategy, and affect succession."


Long term or not, plenty of private equity firms are piling into the business.

Lightyear Capital, after entering the independent broker-dealer market with its pending purchase of AIG Advisors Group, also grabbed a slice of the RIA market earlier in March. Wealth Enhancement Group, a $4.5 billion hybrid advisory firm bought by Lightyear last year, is buying wealth management firm HHG & Company, with over $1 billion in assets under management.

In one of last year's biggest deals, Hellman & Friedman became the majority owner of Edelman Financial Services, whose $15 billion in assets make it one of the industry's largest RIAs.  The seller was another PE firm — Lee Equity Partners.

Also last year, private equity firm TA Associates bought a majority stake in NorthStar Financial Services Group, parent company to the $6.5 billion RIA CLS Investments.

And the recent Mercer-Kanaly deal, engineered by Genstar and Lovell Minnick, may portend similar private equity alliances this year, says Advice Dynamic's Selig.

"Management depth and capital are two of the key ingredients to successful M&A," Selig says. "With two sophisticated advisory firms like Mercer and Kanaly joining forces, both backed by significant capital, it's an indicator of things to come."

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