A group led by real estate investor Nicholas Schorsch is acquiring independent broker-dealer First Allied Securities from Lovell Minnick Partners “because we believe in the alternative space,” Schorsch said, in an interview. “We looked at First Allied’s business specifically for what it offers RCAP Holdings, not for distribution of product,” he said. “We sell so much …, have a 51% market share and have raised probably $4 billion this year … we do not need more advisors selling our products.”
Schorsch is chairman and CEO of RCAP Holdings, which owns Realty Capital Securities, a wholesale broker-dealer and affiliate of American Realty Capital Properties, as well as several other entities. “It’s the opposite thinking from the idea that we want more distribution. First Allied is not a top-10 distribution source for us. They only sell three products for us,” he added. “This is the RCAP partnership investing in an industry we believe in.
As interest rates move higher, Schorsch says, the broker-dealer business is set to grow its profits. “We are at a vanguard tipping place. First Allied is and will continue to be completely managed by the existing executive team who have been running it under Lovell Minnick,” the current private-equity owner.
San Diego-based First Allied, which acquired the Legend Group in late 2012, includes a network of about 1,500 independent financial advisors with more than 300,000 clients and over $32 billion in assets. In 2012, its revenue totaled about $233 million, with the average fees and commissions per advisor at $293,000 and average assets per rep at $29 million, according to Investment Advisor’s 2013 Broker-Dealer Reference Guide.
As for why the deal is taking place less than two years after Lovell Minnick acquired a majority stake in the IBD, First Allied CEO and President Adam Antoniades said in an interview, “The time frame is shorter than first contemplated, of course. But every organization is for sale—every day of the week.”
With Lovell Minnick, the IBD had “a great partner that shared with us strategic thinking, fiscal responsibility and other disciplines that we will take with us for many years to come,” Antoniades noted. “Like other broker-dealers, we are looking to generate a return. For us, this [RCAP deal] gives us ability to accelerate well-established initiatives through which we can drive our organization forward …To maintain our value proposition, we have to roll out specific initiatives, and [with RCAP] we can accelerate investments in our initiatives. They are passionate about our industry and the challenges it faces.”
“This is not non-traded REIT money” going into an IBD, said Schorsch. “It’s our private capital, not investors’ capital. And it’s not private equity looking for a hot trade.”
In terms of First Allied’s distribution of non-traded REITs and other alternative products, “This is governed by regulators and … represents less than $300 million” of the IBD’s client assets,” Antoniades said. “Independent broker-dealers’ success is predicated on independent architecture. No one can force advisors to sell products.”
RCAP’s main role, according to Schorsch, is to provide the IBD with capital “to grow the most compliance-friendly environment it can for its financial advisors, with the best culture, technology, platform and products. This way, RIAs can get the best platform to work with their commissions business, for instance. First Allied needs capital to build all this out and support it.”
Other than providing that, RCAP intends to sit back and “let Adam do his job,” he says. “We did not buy First Allied to run it. We don’t have time … it’s purely an investment.”
“Lovell Minnick was a great owner for First Allied,” said Chip Roame, managing principal of the consultancy Tiburon Strategic Advisors, in an interview. “First Allied, with Lovell Minnick capital, was able to make several tuck-in acquisitions and also expand through the acquisition of clearing firm Legend … RCAP in some ways is just a new capital partner, replacing Lovell Minnick.”
“I’m surprised,” said d Jonathan Henschen, president of the recruiting firm Henschen & Associates, in an interview. “Lovell Minnick has only owned First Allied for a year or so.” Private-equity firms usually hold onto BDs for four or five years and then sell them at a profit or build them up to scale and go public. “Lovell Minnick was probably offered a pretty good price for First Allied. Speaking as a recruiter, this is good news. It means there’s good financing for broker-dealers.”
Other experts agree, noting that there should be much more wheeling and dealing to come. “We are seeing the investment-advisory industry, including wealth management and financial management, mature, and as it does, it’s consolidating” and experiencing more mergers & acquisitions, explained Philip Palaveev, CEO of the Ensemble Practice, an advisory-practice consulting firm, in an interview.
“Broker-dealers have consolidated a lot recently,” Palaveev added. “First Allied was institutionally owned already, so it’s essentially going from one professional investor to another and not really changing character. Independent broker-dealers will continue to attract interest by investors, because it’s a very successful business, and the growth potential attracts opportunistic capital.”