News that Centerbridge Partners may be in talks to buy the Advisor Group for more than $2 billion is a strong indicator that the advice business remains a darling of private equity, according to one industry watcher. But with talk of a recession and market downturn on the horizon, these deals could find themselves in stormy weather, another observer argues.
“The independent broker-dealer market remains popular with PE firms,” said Chip Roame, head of the consulting group Tiburon Strategic Advisors.
And, should the deal go through, Roame adds, it would follow Genstar Capital’s purchase of Cetera for about $1.7 billion in mid-2018 and Warburg Pincus’ acquisition of Kestra Financial two months ago for an estimated $700 million.
“With 7,000-plus financial advisors, $228 billion in assets and $1.7 billion in revenues, this is one of the larger opportunities,” Roame explained. “Other ways of investing in the independent advisor market are through technology platforms that serve the financial advisors, as well as in RIAs themselves.”
While Advisor Group says it boosted revenue 20% last year to $1.7 billion, Raymond James — which has an advisor headcount of roughly the same size — grew its private-client sales by 15% in fiscal year 2018 to $5.1 billion.
American International Group sold the entity — which includes FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial — to Lightyear Capital and the Public Sector Pension Investment Board of Canada in 2016.
Advisor Group remains tight lipped about the reported deal. “As the company has stated previously, it is well-known that private equity firms are interested in this industry. Given the success of Advisor Group, it is not surprising this would lead to deal speculation about the company, and we don’t comment on speculation,” according to a statement.
For recruiter Jon Henschen, the devil of this potential M&A is in the details. “It will be interesting to see how the purchase is structured,” he said.
Until recently, all the PE deals in the IBD channel were of the growth-equity type. “But with the purchase of Cetera Group by Genstar, we see a breakaway from growth equity to leverage buyout (or LBO), as that purchase was financed with $1 billion of junk bonds rated B3 by Moody’s,” Henshen explained.
“Many would say that recent purchases by PE firms have been at or near the top of the market,” he added. If that holds true, these are some potential pitfalls going forward, according to the industry watcher:
- Rising interest rates can eat into cash flow, resulting in a decline of company valuation;
- Unless a company’s operations improve dramatically in a declining environment, it may incur significant losses; the Advisor Group has already consolidated its back-office operations;
- Going forward, many PE managers forecast the need to lower their fees, have more concentrated portfolios and hold their investments longer — for 8-12 years vs. the typical 3-5 year period.
“In spite of the industry growth in advisory assets, a major market correction will result in fewer assets to charge fees on, which will force PE firms invested in broker-dealers to ride out the storm unless they grow through acquisition and/or aggressive recruiting,” Henschen explained.
As for recruiting, many of advisors’ forgivable notes are based on a stated time frame and do not include a fees-and-commissions (or production) requirement. “You can imagine the impact of advisors experiencing a 30-50% drop in production and the broker-dealer break even timeline on the notes extending years forward,” Henschen said.
“In an extended market correction,” he added, “the bright side for PE would be fire sale prices for smaller broker-dealer purchase opportunities.”
Earlier this month, Advisor Group named Lori Love to the newly created role of chief customer experience officer. She reports to Advisor Group President and CEO Jamie Price.
The appointment came on the heels of the company’s rollout of its eQuipt technology platform. Earlier, Love worked for Internet Brands — including for clients like webMD, as well as for Disney Interactive, Evolve Media, Yahoo/Overture Services and Wells Fargo.
In March — five months after it struck a recruiting deal with Allianz Life Insurance — Woodbury Financial said it has added 407 advisors, or about 64% of advisors with Questar Capital and Questar Asset Management. These reps came on board with 86% of the ex-Questar advisors’ total assets under management, $1.8 billion, and 83% of assets under administration, $12.2 billion.
The IBD brought on another 165 advisors (from NPC and the closing of its Capital One acquisition) and $9.8 billion in AUA over the prior 18 months, it said in March, giving it a total of about 1,600 advisors, $11 billion under management and $45 billion under administration.
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