Minority-interest investing in financial services firms, a budding trend that began about four years ago, can be an enticing option for RIAs to acquire capital and strategic advice without giving up control. Peter Nesvold, founder of a new merchant bank, has made two such investments and reveals a few details about an upcoming third in an interview with ThinkAdvisor.
“I’m not looking to wrest control away from management” or “change what has made them successful. I’m there to help accelerate their growth,” says Nesvold, who last September launched Nesvold Capital Partners, to take minority stakes in growth-oriented financial services firms.
New York City-based Nesvold, 49, brings strategic capital as well as the perspective of a 20-year Wall Street veteran who has advised hundreds of RIAs.
His chief goal as an equity owner is to “maximize the value of the business over time,” he explains in the interview.
The RIAs in which Nesvold invests win his expertise in acquisition and recruiting strategies, among other areas, plus his personal experience as an entrepreneur.
NCP’s first two deals, announced last September and October, were minority investments in Stratos Wealth Holdings, a family of companies managing about $16 billion in client assets and based in Beachwood, Ohio, and Pure Financial Advisors, a $2.7 billion RIA, headquartered in San Diego.
This past May, Nesvold, 49, left RIA investment bank Silver Lane Advisors, a leading M&A advisor to the asset and wealth management industry, of which he was chief operating officer. That was 13 months after he and wife Elizabeth Nesvold sold Silver Lane, founded in 2007, to Raymond James. Ms. Nesvold remains at Raymond James heading asset and wealth management investment banking.
In the interview, Nesvold discusses his top criteria for taking a minority stake and just what he brings to the party, including the amount of personal capital he is investing in the firms.
Before joining Silver Lane in 2013, Nesvold, graduate of Fordham University School of Law, had a robust career as an equity research analyst at Bear Stearns, Lazard Asset Management and Jefferies & Co.
ThinkAdvisor recently held a phone interview with the attorney, speaking from Northeastern Pennsylvania. He discussed the give and take of minority-interest investing and why he unveiled a merchant bank in the middle of the pandemic.
Here are excerpts from our conversation:
THINKADVISOR: Why did you launch a new enterprise in the pandemic?
PETER NESVOLD: When you look at the external environment, it does seem like an odd time. But I’d been thinking about the merchant bank model for a number of years. A little more than a year into the process of [selling] Silver Lane to Raymond James, I [knew] that I had the freedom and flexibility to pursue what I really wanted to do. So for me, this was an ideal time.
What are your chief criteria for investing in a firm?
I have a “rule of 20.” Does the company either have operating margins of 20% or more, or are they growing their revenue by 20% or more? That’s a high bar, but I’m looking for businesses that are generating really significant cash flow but perhaps are struggling with how to re-accelerate their growth.
Where does the money come from that allows you to make these investments?
Right now, it’s my own personal capital. Fortunately, I’d gone through the sale of a business. I own less than 10% in Stratos and Pure. But together with the co-investor [Emigrant Partners], we own around 35%-40%.
Is your taking a minority stake in a third company imminent?’
I’m working on one right now. I received a phone call from someone I’d known for years who asked if I’d be interested in the possibility of being an investor in their firm. Every business has some challenges. This one has some elements that are really great, like wonderful profitability; but their growth hasn’t been as robust in recent years. That’s where they’re really excited about our potential collaboration: How do we re-accelerate top-line growth?
Will you have a co-investor this time?
It’s just me individually — though I might bring in a co-investor. There are a couple of minority investors that could bring some of the elements that I don’t bring, such as distribution and infrastructure.
What is it that you do bring?
My own perspective as an entrepreneur, having [advised] hundreds of RIAs over the years. I bring my relationships, experience, expertise. It’s the individual attention that I bring.
Who might be your co-investor in the third company, and in those that follow?
If I want to take larger stakes, I have a couple of family offices lined up. There are two different single-family offices who make direct investments that really love the wealth management industry. They have a lot of experience [there] and would love to deploy more capital.
How would such a collaboration be structured, the upcoming one in particular?
I would make a deal that we work on [the investment] together. About $5 million to $20 million would come out of the family office money. So the check size would be much larger.
How do you contribute to the way a company you invest in is run?
I’m not looking to change the way a firm has done their business or to get in the way of that. I do anticipate being active in the business, but I’m not there to change what has made them successful or to wrest control away from management. I don’t get involved in the nitty-gritty of the financial planning process. I’m there to help accelerate their growth.
By what means?
It could be through acquisition or recruiting, brand-building, research. Sub-acquisitions, or tuck-ins, is one area where I get very involved helping management [decide] whether or not [such a firm] is an opportunity that makes sense strategically. Usually those firms are much smaller. They might allow a company to add a new geographic region or new service offerings.
Do you advise the RIAs’ end clients?
I stand shoulder to shoulder with management as an owner of the business rather than being a [financial] advisor. I’m an advisor in that I’m providing perspective — I’m there to maximize the value of the business over time as opposed to just being successful with a specific transaction.
What are the geneses of your first two minority-stake investments?
Personal relationships. I’ve known the principals for years. So that makes it a lot easier. I think that as I continue this process and meet more firms I don’t have a history with, it could get a little harder.
You’ve said that taking a minority stake is a trend. So, is this a competitive arena?
It’s competitive but not based on valuation. I’ve found that with minority stakes, it’s less about the valuation and more about what the individual brings to the table to help the company grow.
Is your goal still to invest in just two or three firms a year?
Yes. Because at this time, it’s primarily my own capital — possibly pivoting to the family office money — and I expect to be highly engaged with each of the companies. Therefore, I want to make sure I don’t rush into these too fast. The intent is not to build out a 50-person business. The intent is to keep it very small so that I can give personalized attention to each company. So for now, the goal is two or three per year. We can reevaluate that over time.
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