It’s turning out to be a nasty season for sales of equities. But how about broker-dealers?
Industry watchers have varying takes on how they see the market for broker-dealers playing out for potential sellers in late 2018 and early 2019. But they agree that the private equity owner of Kestra Financial — Stone Pointe Capital — is smart to be making a move now.
“Stone Pointe … bought it, rebranded it and did great work dressing it up for another sale,” said Tim Welsh, head of the consultancy Nexus Strategy, in an interview. “It looks like the end of the bull market, so if you are gonna sell a financial company, you’ve got to do it now.”
A downturn in the stock market, Welsh says, “means valuations are going to get crushed.” Thus, PE or other firms “with any inkling at all to sell, now’s the time to do it,” he explained.
Kestra declined to comment on a possible sale by its PE owner, which was reported by InvestmentNews on Friday.
How receptive are PE firms likely to be at this increasingly bullish time in the stock market? “Timing will have a bearing on this,” according to Welsh.
“There are consolidators out there, and some will engage in conversations even at the stage of the market,” the industry consultant said. “Kestra has lots of advisors, and [some of the consolidators] might want to take a swing at it.”
Kesta has about 2,300 affiliated advisors. In 2017, it had about $475 million in revenue, $76 million in assets under administration and $24 billion in assets under management.
The BD-PE Cycle
Stone Point Capital “is likely concluding that the markets will only get worse with time, so it’s best to cash in,” said recruiter Jon Henschen of Henschen & Associates.
That PE firm has owned Kestra for roughly 2 1/2 years. Madison Dearborn, the prior owner, kept if for a similar length of time.
“Both PE owners were largely hands off on broker-dealer operations and reliable sources of capital, which is in the best interests of whatever new owner that comes along to continue,” Henschen explained.
“Much of the low-hanging fruit in broker-dealer purchase opportunities has been picked with the most recent PE acquisitions,” he said, such as Lee Equity Partners-backed Atria Wealth grabbing Cadaret Grant earlier in 2018.
Kestra’s advisors have a trailing 12-month level of yearly fees and commissions of over $400,000 per advisor on average, Henschen says, “and a strong focus on advisory assets held in brokerage accounts, which makes for a highly profitable combination.”
“During Stone Point’s ownership, Kestra had substantial success with organic growth, both on an independent-to-independent level and wirehouse-to-independent level,” he explained.
Other industry watchers say that at least some private equity firms remain eager to pay top dollar for a BD, as Genstar likely did earlier this year when it took a stake in Cetera.
The larger BDs are attractive, especially those that are boosting revenue growth at a healthy pace and have good-quality advisors and generally clean compliance records.
While prices may not be as high as they were two or three years ago, there are still good deals to be struck for BDs, according to some veteran deal-makers, who also expect more deals to come next year.
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