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.