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Portfolio > Alternative Investments

For Aequitas Capital, Small Firms Are the Sweet Spot

By Danielle Andrus

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For small and midsize firms, those that are too large to qualify for a Small Business Administration loan and too small to attract private equity investment, Brian Rice of Aequitas Capital says his firm has a solution to help them grow.

Rice is executive vice president of Aequitas Capital and president of Aequitas Wealth Management, a private credit and equity firm that focuses on the health care, education and financial services industries.

“We’re focusing our wealth management platform predominantly on the $300 million to $800 million RIA shop,” Rice told ThinkAdvisor in February. “That is, we believe, the fastest-growing segment of advisors right now.”

Rice said Aequitas looks for firms that have a high-net-worth focus, an appetite to grow, either organically or through acquisition, and an appetite for alternatives.

“That’s really where we tend to focus, and we’re seeing some good opportunities, good growth, when those firms really define the type of clients they want to work with, what their ‘secret sauce’ or focus is, and then develop a specific marketing plan to go out and achieve that,” Rice said.

Firms with a focus on alternatives are attractive to Aequitas because it’s the “fastest growing asset class today and it makes up less than 5% of the allocation of investments,” Rice said. He estimates that by 2020, it may be as much as 15% of the portfolio. “With the evolution of wealth management and these products being brought down into the retail/high-net-worth area, folks now have access to this institutional-type investing that used to only be available for large institutional endowments.”

Bob Jesenik, CEO of Aequitas, said independent advisors as well as those in wirehouses who are unable to access alternatives are a niche for the firm. “We’re actually able to help facilitate and provide access in the platforms that we’re involved with, which they might not be able to access today, and that’s going to be a bigger and bigger challenge for many of these advisors,” he said.

Interest in alts doesn’t stop at advisors, either. Clients are looking for yield and with today’s low interest rates, they’re putting pressure on advisors to invest in those products, Rice said.

As advisors work to serve those clients and grow their firms by attracting others in the high-net-worth space, Rice said education is critical. “We formed what we call the ACP Alts Academy. We did this with Circle Squared Institute, Jesenik and his team.”

Through the academy, Aequitas uses webinars and podcasts to provide advisors with education about the different types of alternative investments, how to perform due diligence and how to integrate them into a client’s portfolio. “We literally kicked this off at the beginning of the year, and we’re already seeing some genuine interest and excitement around it,” Rice said. “Ultimately we’ll have some kind of quarterly academy where we’ll bring people together in more of a school-like fashion,” he added.

Challenges to Growth

One of the biggest challenges to growth that advisors are talking about, according to Rice, is succession planning. “We’ve got an aging demographic among financial advisors, and how are they planning for their exit?” he said. “Is it to sell, to develop talent inside the firm and transition over time?”  

Jesenik noted that as advisors start to think about retiring, they lose their focus on growth. If they haven’t included younger advisors on their team, though, they also face the prospect of attrition in their client base as the children of older clients leave to find firms they can make a better connection with. “Succession planning from both sides is going to be a bigger and bigger area to understand,” Jesenik said.

On the flip side of selling a firm is advisors’ interest in mergers and acquisitions. For firms with an appetite to grow, it’s a popular topic of conversation, Rice said. But, “Do they know how to do it? Do they have a thoughtful plan to target? And ultimately, do they have the capital?”

Advisors who want to grow their firms through acquisition have to think past the purchase and plan for how they’ll integrate the new firm’s culture and technology into their own, Rice said.

“We’re seeing in many cases one plus one coming together to be three in that one firm does a couple of things really well, the other firm does a couple of things really well, [and they’re] bringing that into one culture, sharing those best practices and growing the firm post-M&A activity through more organic growth or another acquisition.”

Jesenik said there’s an important and frequently overlooked benefit for advisors who are starting to think about succession planning. “These advisors have a very trusted relationship with their clients, and as a result the clients are really looking for their advisor to be successful,” he said. “I don’t know that advisors necessarily appreciate that and what that means in terms of not being afraid of succession planning but really to embrace it, [which] will lead to an even more satisfactory relationship in the eyes of their client as well as for their business. The more we can talk about that, the better.”

— Check out 3 Alt Investments That Deserve an Oscar: Morningstar on ThinkAdvisor.

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