Delicious pie
Headlines about merger and acquisition activity in the registered investment advisor industry tend to focus on public equity buyers or jumbo outright acquisitions by fast-growing national consolidators.
These options make a lot of sense for advisors at the later stages of their careers, observed Michael Belluomini, senior vice president of mergers and acquisitions at Carson Group, but there’s another compelling option for mid-career advisors that tends to get less media attention: minority investments.
Belluomini talked through the virtues of minority investment strategies during a recent ThinkAdvisor interview, noting that such investments have played an important part in the firm’s growth journey to $50 billion in assets under management. Other firms have also introduced minority investment strategies in recent years, including the likes of Raymond James, Rise Growth Partners, Dynasty Financial Partners and others.
Each firm brings its own flavor to minority investments, Belluomini said, but the general principles tend to be the same.
“When we back a firm, it’s about asking how we can take those lower-value, repetitive tasks off of their plate so that they can focus on the true levers of growth,” Belluomini said. “It’s about empowering them to elevate the client experience and better compete for high-value clients they couldn’t go after before. In some cases, our support can also help them embark on their own inorganic growth strategy.”
Overall, Belluomini said, minority investment strategies deserve as much or more attention as big-ticket PE deals or big moves made by strategic acquirers.
When Minority Stakes Make Sense
Belluomini said there is something of a standard playbook when it comes to assessing the potential benefits of a minority investment.
“If you think of the lifecycle of most firms, they go from building up a book to building a more sophisticated practice to building a scalable enterprise,” Belluomini said. “Minority investments tend to make the most sense in the middle of that business development lifecycle.”
At this stage, Belluomini said, a firm leader has built something sustainable, and now it’s time to both realize some of that value and gain access to the more advanced capabilities that will push them toward the scalable enterprise phase.
“Case in point, I had a conversation recently a $500 million AUM advisor who is just tapped out,” Belluomini said. “His business has grown like a weed but he’s never been so busy, and he just doesn’t have the bandwidth to take a run at $1 billion. He wants to do that, but he knows he can’t do it alone.”
In such a case, taking on a minority investment can provide a variety of benefits, Belluomini said. On the one hand, the firm can gain access to back-office efficiency and new client service capabilities that will support organic growth. On the other, minority investments can also allow for the firm to begin making its own strategic acquisitions of individual advisors.
“That makes the run towards $1 billion look a lot more realistic,” Belluomini said.
Equity Swaps vs. Cash
People often think about cash-based minority investments, Belluomini noted, and that is one potential pathway. But in Carson Group’s experience, the real magic of minority investments has come from equity swaps. In these situations, advisors exchange a portion of the equity of their own business for a portion of equity in Carson Group.
“It’s proven to be a really strong retention tool,” Belluomini said. “Partner firms get equity and access to Carson’s tech suite, as well as practice management support in the areas of high-net-worth client services and tax management. They also get to participate in the upside of the overall business. As you know, we've grown from $20 billion to $50 billion in AUM over just the last few years. People want to be a part of that, and a minority equity swap is one way to do so.”
Generally, Carson receives the right of first refusal when negotiating minority deals, Belluomini explained, which gives the firm flexibility to decide whether to acquire the remainder when an advisor’s practice is ready for full succession.
The benefit for participating advisors is also clear, Belluomini said, as this structure gives them the opportunity to gain equity in Carson and participate in the firm’s broader growth. They can also set up a well-crafted succession plan on their own timeline.
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