Private equity entered the registered investment advisory space in a real way around a decade ago. Industry watchdogs point to Lee Equity Partners’ $258 million take-private purchase of Nasdaq-traded Edelman Financial Group in 2012 and Centerbridge Capital Partners’ 2013 minority investment in Focus Financial for $216 million as watershed deals.
Since then, a growing pile of dry powder has had countless effects on the development of the adolescent industry, including divergent growth rates,
the rapid expansion of services and some creative collaborations.
WealthManagement.com polled industry M&A consultants to gauge their views of the most notable private equity deals in the space over the last few years. Here we share just a few of our favorites, highlighting different approaches and results, some unconventional deal structures and a handful of serial sellers.
Edelman Financial Engines’ ‘Private Equity Round Robin’ 2012, 2015, 2018, 2021
In 2021, Warburg Pincus bought a minority position in Edelman Financial Engines alongside majority owner Hellman & Friedman, which took over its controlling share from Lee Equity Partners in 2015.
Founded by the late Thomas H. Lee, Lee Equity had taken the Nasdaq-traded Edelman private for about $265 million, or $8.85 per share, three years earlier.
H&F subsequently acquired Financial Engines in 2018 in another take-private deal that merged the $169 billion AUM RIA (among the largest in the nation at the time) with $21.7 billion Edelman, creating one of the first mega-RIAs with both 401(k) and financial planning capabilities and an enterprise value of around $4.5 billion.
H&F still holds a majority stake in Edelman Financial Engines, which today oversees more than $240 billion.
Warburg Pincus’ investment (estimated at between $1 billion and $1.4 billion) represented a homecoming of sorts, as the firm previously held a piece of Financial Engines prior to an acquisition it exited in 2017.
Captrust Sells Quarter Stake to GTCR, Grows Assets by More than 80% June 2020
In 2020, Captrust sold a 25% stake to private equity backer GTCR to support the firm’s plans to grow through acquisitions. Captrust has since expanded assets by about 83%—from $390 billion in June 2020 to more than $714 billion today.
“This investment was notable because it was the first for Captrust and highlighted the shift to multi-service-line competition,” said Advisor Growth Strategies Principal Brandon Kawal. “Captrust has a large institutional retirement plan business in addition to private wealth, among other services.”
Valuing the firm at $1.25 billion, the GTCR investment provided shareholder liquidity to around 350 employees and has supported more than 25 acquisitions. Two GTCR managing directors with RIA experience took seats on the Captrust board.
Still invested, GTCR is the only private equity partner Captrust has gotten into bed with—and Captrust appears to be the only RIA GTCR has ever backed.
THL Leads ‘Innovative’ Secondary Investment in Hightower December 2020
After first investing in Hightower Advisors in 2017, Reuters reported in early 2020 that Thomas H. Lee Partners (Lee’s first private equity endeavor) was looking to divest at least a portion of its “significant” stake in the Chicago-based firm. Later that year, THL announced instead it would reinvest in Hightower alongside Neuberger Berman, Goldman Sachs Asset Management and Coller Capital as lead investor in what it characterized as an “innovative transaction,” since rather than selling, it retained a stake while bringing in other partners.
“This investment was significant because it demonstrated a path where a primary investor did not have to exit to be successful,” Kawal said. “Thomas H. Lee helped fund the shift from a breakaway platform to an acquirer, and this recapitalization validated Hightower’s strategy shift and attracted notable new investors such as GSAM and Neuberger Berman.”
In the fall of 2020, Hightower reported $80 billion in assets across 113 businesses in 33 states. Since December of that year, Hightower has added 25 firms and increased assets to more than $153 billion.
Focus IPO Partner KKR Buys Beacon Pointe November 2021
In 2021, Beacon Pointe Advisors sold a little less than half of its equity to KKR and proceeded to grow assets by almost a third to more than $26 billion.
At the same time, minority owner Abry Partners exited its investment in Beacon Pointe after supporting the firm through an internal merger and providing capital as assets nearly doubled to around $20 billion over less than two years.
“KKR’s investment in Beacon Pointe is interesting given the former’s status as a very large, well-known publicly traded alternatives manager,” according to Dan Erichson, managing partner at Park Sutton Advisors. “It signals broad conviction of PE sponsors around the space.”
Erichson and David DeVoe of DeVoe & Co., which initially introduced Abry to Beacon Pointe, both pointed out the quick turnaround on Abry’s investment was due to its rapid success and may serve to validate some shorter-term investment strategies in the sector.
“Abry helped drive more than 10 acquisitions representing more than $6 billion in additional AUM within 18 months,” said DeVoe. “They made such a strong return that they sold their stake in an unusually short timeline.”
Genstar Recaps Cerity June 2022
Cerity announced last summer that Genstar Capital was buying a majority stake in the $45 billion AUM firm at a valuation of around $1.6 billion. Earlier investor Lightyear Capital, which bought out Emigrant Bank’s controlling interest in 2017, retained a minority position.
“Lightyear did elect to roll equity into the recapitalization, demonstrating their confidence in Cerity’s future growth potential and M&A strategy,” said Echelon Partners CEO Dan Seivert.
“Cerity is a firm that raised capital at all lifecycle stages,” said Kawal. “Former Cerity—HPM Partners—was staked initially, and Genstar entered as the third capital partner and now Cerity is one the most significant and successful RIAs in the United States.”
Following Genstar’s investment, Cerity has grown assets to more than $65 billion. The firm announced three acquisitions in the first three weeks of 2023 and has since added four more—for a total of more than $11.5 billion in acquired assets over the last eight months alone.
Bain-Led Consortium Stakes CI U.S. Wealth Management Biz May 2023
CI Financial announced early this year it was selling a 20% stake to a group of investors—including Bain Capital, the Abu Dhabi Investment Authority and others—for $1 billion in a deal that resembles a convertible debt instrument, according to some observers.
Canada-based CI entered the U.S. market in early 2020, buying dozens of stateside RIAs and quickly amassing billions in debt while undergoing a massive internal reorganization. The firm took steps to offer up around a fifth of its U.S. stock in an IPO late last year, but then Bain reached out about providing capital through its special situations fund to help CI pay down debt and continue pursuing acquisitions, while postponing the IPO until public markets become more amenable.
“What’s interesting about this to me is that you have this very engineered deal structure and I think it has real implications in the RIA space,” Kawal said, noting the transaction offered an uncommon level of public transparency.
“It’s a huge capital raise and then, within the deal structure itself, you have hurdles that have to be hit,” he explained. “Effectively what it means is that the ownership in this structure starts in one place and it’ll remain that way as long as certain hurdles are hit over the next several years. If not, the ownership will change in favor of the investors.”
Kawal believes such structures enable sellers to capture higher valuations in uncertain economic landscapes.
“Price is important, but structure may even be more important,” he said. “I think many in our industry aren’t really aware of how terms and price interact with each other, and what betting on growth actually looks like.
“I think this deal is going to be the most public example of that,” he added. “Of, really, the validation of the wealth model, but also seeing how this plays out and if this is what others are signing up for in their deal structures too.”
This summer, CI unveiled new branding for its U.S. business. Now operating as Corient, the firm has grown to more than $190 billion in client assets in less than four years.
6th PE Deal in History Takes Focus Private, Again July 2023
Incorporated in 2004, Focus Financial Partners was quick to jump on the private equity bandwagon, raising $35 million from PE and venture capital firm Summit Partners in 2006. Three years later, Summit recapped the firm alongside Polaris Ventures to the tune of $15 million and $35 million, respectively.
When Centerbridge Capital Partners II got in on the action, scooping up a non-controlling piece alongside Polaris and Summit in 2013, Focus partner firms oversaw a collective $62 billion in client assets. After widespread speculation the rapidly growing aggregator was planning to go public, Focus announced in the spring of 2017 it was cashing out earlier investors and selling a 70% equity stake to KKR and Stone Point Capital in a deal that valued the firm at $2 billion.
Focus filed for an IPO in May of 2018 and took the company public in July at $33 a share, ending the first day of trading at $37.
In June 2021, KKR exited its position in the firm, selling back more than 7 million shares, while Stone Point retained its position. Following the close of its deal to be taken private again in a sale to Clayton, Dubilier and Rice this year, Stone Point will be the only previous investor permitted to roll over its investment while all other stakeholders are cashed out at $53 per share.
“Focus has been an active RIA acquirer but, since their IPO and until CD&R’s offer, the company’s stock price remained mostly flat even as the market appreciated greatly,” said Echelon’s Seivert. “The industry will be watching Focus after the deal officially closes, as it will provide a good measure of the ability of publicly traded RIAs to flourish relative to their private equity-backed peers.”
Focus has already announced that COO Rajini Kodialam and Managing Director Lenny Chang, two of the firm’s three founders, are stepping back from leadership roles into “senior advisor” positions, and there has been speculation that CEO Rudy Adolf may also be headed for the door. Adolf and Kodialam are both receiving millions of dollars in the sale, according to public filings.
In less than two decades, Focus has grown to oversee around $350 billion in assets. It’s among the most active acquirers in the nation but has slowed dealmaking over the last three years, completing 38 deals in 2021, 24 last year and just nine through the first half of 2023. Industry observers say they are curious to see how its new owners approach the firm’s next phase of growth.
Harris Baltch, the head of Dynasty’s investment bank, expects to see Focus ramp the pace of acquisitions back up as private markets tend to tolerate more leverage, but questioned whether they will remain “as disciplined as before.” Republic Capital Group Managing Partner John Langston predicted the firm will take advantage of reduced oversight and become more creative in its deal-making process.
After establishing a reputation as an early innovator in RIA aggregation, many expect the laissez-faire Focus model will get an overhaul as CD&R seeks to realize the benefits of scale and synergy across its 90 partner firms.
Others have said the Focus deal may discourage other firms from going public, at least in the near term, viewing it as an indication that financial advice is still undervalued in those markets.