Stone Point to sell majority of Kestra to Warburg Pincus

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Kestra Financial’s pending recapitalization reflects the changing shape of the independent broker-dealer sector, ushering in a new private equity investor while cashing out two insurance firms’ shares.

Majority owner Stone Point Capital has agreed to sell its stake in Kestra to Warburg Pincus, while keeping a significant minority position. Warburg, the 50-year-old global private equity firm which has former Treasury Secretary Timothy Geithner as its president, also boasts a long track record with IPOs.

James Poer, the longtime CEO of Austin, Texas-based Kestra — which has 2,300 advisors across three subsidiaries — gave the first official word that the deal had been reached to Financial Planning. The parties didn’t disclose the financial terms of the agreement.

Poer said the transaction should close in the second quarter pending regulatory approval, roughly three years after Stone Point bought the stake from insurance firm NFP. Kestra did not publicly discuss the bidding, though Poer pledged to advisors late last year that it wouldn’t be sold to a competitor.

Minority stakeholder insurance firms Securian Financial and NFP would no longer be investors after the transaction, according to Poer. It would be “premature to discuss future capital structure” after the deal closes — including the possibility of going public under Warburg, he says.

“They're the best of the best, and they're the long-term capital partner that is in line with our position and our goal of building a premier wealth management business,” Poer says. “We entertained a few different options and felt this was the best for our future.”

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Insurance firms exiting the IBD sector and PE firms eager to get into it have helped fuel six straight years of record M&A activity in wealth management. The 44 deals in the fourth quarter constitute the largest number for any fourth quarter ever tracked by consulting firm and investment bank Echelon Partners.

At the firm’s conference in Austin earlier this month, Poer and other executives met with Kestra advisors to discuss a potential new capital structure. Kestra strived to keep “an honest dialogue” with its advisors during the process, Poer says.

“This is all about fueling our ability to continue to build a really top level value stack for the people we serve,” he says. “Advisors understandably get concerned about rumors that have been flying around the press. And they get misinformed by competitive recruiters about our process. They're just seeking clarity.”

Stone Point would keep a seat on Kestra’s board, and Warburg will pick one up, according to Poer, who did not identify the point person handling Warburg’s Kestra investment. Longtime co-CEOs Joseph Landy and Charles Kaye, along with Geithner — who joined as president in 2013 — lead the acquiring firm.

The acquiring firm, which a Feb. 15 Investment News report said was a leading contender for the Kestra stake, issued statements about Warburg's investment from managing directors Jeff Stein and Arjun Thimmaya.

Kestra's "focus on providing best-in-class service and technology to its advisors and their clients positions the business for an exciting future," Thimmaya said.

Warburg’s 17 funds have invested $73 billion in more than 850 companies worldwide. The PE firm participated in the record-breaking $14 billion in Series C backing for Chinese online payment giant Ant Financial last year. It has also invested in software firm Yodlee and RIA The Mutual Fund Store.

IPOs in the past two years for Warburg portfolio firms include the Vietnamese bank Techcombank, Vietnamese real estate developer Vincom Retail and Indian hotel chain Lemon Tree Hotels. Poer did not rule out a potential IPO, though he gave no indication one was imminent.

“We really enjoy all the benefits that being private brings to us and all of the advisors that we serve,” he says.

Funds managed by Stone Point had purchased the majority stake in Kestra, previously known as NFP Advisor Services, in June 2016. Kestra also has a hybrid RIA for wirehouse breakaways named Kestra Private Wealth Services and H. Beck, a 600-advisor subsidiary IBD it acquired in 2017.

Representatives for Stone Point didn’t respond to requests for comment.

NFP’s parent firm kept the substantial minority stake in Kestra following the Stone Point Deal, and the insurance firm and IBD Securian made a minority investment in Kestra as part of the H. Beck transaction. Neither NFP nor Securian responded to requests for comment on the Warburg deal.

Poer has criticized what he sees as the wealth management industry’s misunderstanding about PE firms. In a December message to advisors, he said the firm might consider a deal with “financial investors (private equity and other institutional investors)” but wouldn’t sell to “strategic buyers (competitors).”

“There was misinformation in the marketplace. We felt it was necessary to provide clarity and be open communicators,” Poer says. “We don’t view this as selling the company, we view this as capitalization evolution.”

Kestra and Kestra PWS boosted their revenue by 12% year-over-year in 2017 to $475.4 million, according to Financial Planning’s latest annual FP50 survey. H. Beck’s revenue rose 7% to $114.7 million that year, resulting in a total of $590.1 million in revenue across the three firms.

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Independent BDs M&A Private equity firms Private equity funds James Poer Kestra Financial Kestra Private Wealth Services H. Beck