Private equity firms continue to have substantial involvement in the independent channel as they fill the void left by insurance companies exiting the broker-dealer universe.
Private-equity ownership can bring benefits to the advisor, but we also see moves by PE firms that are detrimental to the interests of broker-dealers’ advisors. Why are institutional investors attracted to private equity, and what lies ahead?
Here’s what’s happened with private equity ownership, past and present:
Private Equity Success
As the chart shows, LPL is the only private-equity owned firm to go public, with management and larger producing advisors making millions from selling their stock ownership. For all the other PE-owned BDs, divesting was the exit strategy.
NFP Advisors stood out as a particularly positive case of PE ownership, as staffing remained robust and Madison Dearborn invested $20 million into technology upgrades.
When NFP Corp./Madison Dearborn sold a majority equity stake in NFP Advisors to Stone Point Capital, NFP Advisors rebranded as Kestra Financial. What could have been a disruption was a nonevent, with continued stable staffing and strong capital investment by Stone Point.
(Madison Dearborn maintains a majority stake in NFP Corp.)
The sale also resulted in new growth areas such as the Private Wealth Services business model, which caters to wirehouse advisors wanting to go independent, with the broker-dealer taking care of office space and staffing (entrepreneurial responsibilities that wirehouse advisors often dread).
PlanMember had a positive experience with Lovell Minnick, as the PE firm offered timely capital support during the difficult market conditions of 2008 and 2009.
With a strong 403(b) focus at PlanMember, AXA offered 403(b) products and 403(b)market penetration. Thus, a partnership with Plan Member ensued, buying out Lovell Minnick’s minority equity stake in 2010.
Private Equity Mishaps
Lightyear Capital’s sale of the Cetera broker-dealers to RCS Capital Corp. (RCAP) has been the poster child of what can go wrong with a change in ownership.
Lightyear sold the Cetera broker-dealers in April 2014. In October 2014, the $23 million accounting scandal of inflated financial results broke wide open. RCAP and RCS Capital Corp.’s stock plummeted, with billions in market capitalization lost.
RCAP was a narrative of a systemically corrupt corporate culture, starting at the top with Nicholas Schorsch. Advisors experienced a great deal of broker-dealer-management hand-holding via frequent conference calls and weathered a storm of disparaging press articles (largely under the leadership of Larry Roth).
Lightyear could not have known the harm that would occur months later when they sold the Cetera BDs, but therein lie the risks of ownership change.
The Cetera broker-dealers split away from RCAP in June 2016 and were purchased by Genstar Capital in July 2018.
With new ownership, Cetera advisors are hoping for blue skies ahead, but potential turbulence remains a risk in the forecast. The $1.7 billion price tag for the Cetera broker-dealers includes $1 billion of the sale being financed by junk bonds.
A rating of B3 from Moody’s Investors Service gives Cetera a high debt-to-EBITDA ratio of 7.5, as reported in August by InvestmentNews. Servicing heavy debt loads can limit investment capabilities in technology and services and potentially bring instability in a market correction as high-yield bonds behave more like stocks and less like bonds in declining markets.
Majority vs. Minority Ownership
Lovell Minnick’s 1 year, 10 month ownership of First Allied was an example of the downside of majority ownership by private equity vs. minority equity ownership.