A weekly update on issues important to the Investment Management industry
Last week, Macquarie Group announced its acquisition of Waddell & Reed (WDR) for $1.7 billion. At first glance, the pricetag implies an EBITDA multiple of over 11x and some are asking why Macquarie’s new CEO paid such a premium for a business whose AUM has halved over the last six years. Unfortunately, it’s not that simple. In this post, we dig into the deal economics and explain why paying a premium does not necessarily mean Macquarie over paid.
In last week’s blog post, we covered five considerations for designing earn-outs. While there is no one set of rules for structuring an earn-out, keeping those conceptual issues in mind can help anchor the negotiation. This week, we look at an example RIA transaction to illustrate how the considerations come into play when buyers and sellers are working out deal pricing and structure.
Like old sports cars, acquisitions don’t come with warranties, so protecting yourself against buyer’s remorse is critical. Even with escrows and punitive terms, you can’t guarantee that you’ll get what you pay for in an acquisition; but, with a properly structured earn-out, you can at least pay for what you get.
In part one of this series of posts, we explore the basic economics of contingent consideration and the role it plays in negotiating RIA transactions.
An RIA’s margin is a simple, easily observable figure that encompasses a range of underlying considerations about a firm that are more difficult to measure, resulting in a convenient shorthand for how well the firm is doing. Does a firm have the right people in the right roles? Is the firm charging enough for the services it is providing? Does the firm have enough–but not too much—overhead for its size? The answers to all of these questions (and more) are condensed into the firm’s margin.
The market for sustainable investments has grown to over $12 trillion in the U.S. and the movement of investable assets into sustainable strategies is expected to accelerate. In this week’s post, we link to the newly published 2020 Alternative Asset Manager Update authored by Taryn Burgess, CFA, ABV. The update reviews the growth of sustainable investing over the last decade and considers the valuation implications for your RIA.
Now, after seven months of living with the pandemic, there is still no end in sight. We might only be halfway! But despite the barrage of challenges, the RIA community has embraced WFH, profited from buoyant markets, and resumed a relentless pace of M&A. It has been, if very strangely, a very good year. Is this a sign of industry resilience? Or an awful lot of luck?
COVID-19 adversely affected sector M&A for a couple of months when most of the U.S. was under shelter at home/safer in place orders. However, deal activity is recovering quickly and now could be further accelerated as banks look to replace lost interest income with fee-based revenue. An increasing number of clients on the banking side of our practice are showing interest in the wealth management space, and it’s easy to understand why. Long-term rates hovering at historic lows have significantly impaired net interest margins, so banks are exploring other income sources to fill the void. Wealth management is a natural place to start since so many banks already offer financial advisory services of one form or another.
Share prices for publicly traded asset and wealth managers have trended upward during the second and third quarters after collapsing in mid-March with the broader market. Alt asset managers have fared well over the last year as volatility and depressed asset prices have created an opportunity to deploy dry power and raise new funds in certain asset classes. Traditional asset and wealth managers have generally moved in line with the broader equity market, while leveraged RIA aggregators have seen more volatility, both up and down, as the market bottomed in March before trending upward.
Personnel costs are by far the largest expense item on an RIA’s P&L, but we’ve found significant variation in how RIA owners think about compensating their employees (and themselves). This is the second post of a two-part series on compensation best practices for growing investment managers which focuses on how to structure partner compensation.
Personnel costs are by far the largest expense item on an RIA’s P&L, but we’ve found significant variation in how RIA owners think about compensating their employees (and themselves). We’ll devote the next two posts to discussing best practices from an outsider’s perspective. This week, we address how to structure employee compensation when you are not ready to bring on an equity partner.
After the initial punditry on whether or not the 2020 market crash/recession and recovery would be “L” shaped, “U” shaped, “V” shaped, or “W” shaped, it has become clear that the recovery is “K” shaped, with higher-skilled and higher paying jobs recovering rapidly, and many lower-skill, lower-paying jobs declining. What does this mean for RIAs? Most RIA clients are higher-income professionals who are paying more attention to their investment portfolios in this environment – not less. Bullish for clients = bullish for the industry.
Last Wednesday, the SEC announced an expansion to the definition of “accredited investor” to include individuals based on professional certifications and inside knowledge of issuers while keeping the old wealth and income thresholds the same. What does this mean for RIAs, their clients, and for capital markets?
Earn-outs are commonly used in RIA deals, and we expect contingent payments to make up an even larger percent of deal consideration for the next few months, quarters, or years depending on how long the current economic uncertainty lasts. And while we hope most of our clients would be thrilled by the prospect of $335 million in upfront cash payments, we don’t want you to end up feeling as Ryan Reynolds did last week. In this post, we explain what an earn-out is, why they are commonly used in RIA transactions, and how earn-outs may be used as a saving grace for deal activity in the current economic environment.
Last week we covered Joe Biden’s proposed estate tax changes and their impact on family wealth transfers if he gets elected in November. Proper estate planning can mitigate the adverse effects of higher taxes on wealth transfers, but the window to do so may be closing if we have a regime change later this year. Further, the demand (and associated cost) for estate planning services may go up significantly in November, so you need to apprise your clients of these potential changes before it’s too late.
2020 has been full of surprises, and the third quarter is bringing more. The persistence of the pandemic and the consequent economic strain on many has shifted political winds in favor of the minority party. If these trendlines don’t roll over between now and November 3, we’ll have a new executive and legislative regime and, with it, a redirection of tax policy. It’s not too early to start thinking about what impact certain legislative changes will have on the RIA industry, especially with regard to estate tax law.
Despite the global pandemic, the long-term outlook for most alternative asset managers appears healthy due to strong investor interest and emerging opportunities caused by market dislocation. In the near term, however, managers with large exposure to highly affected industries, or those that have seen large asset outflows, are likely to see their valuations decline. Managers with less exposure to highly affected industries and those whose strategies and fundraising are poised to benefit from the current environment are likely to see valuations increase.
The outlook for RIA M&A at the end of the first quarter was murky. As anticipated, previously announced deals in the final stages of negotiations did close despite COVID-19, but new deal activity slowed some in the second quarter. Interestingly, independent RIAs, rather than consolidators, drove much of this deal activity.
It probably doesn’t feel like it, but most RIA stocks are up over the last year. Over this time, we’ve had two bull markets and one bear market in one of the most volatile twelve-month periods. Against this backdrop, we discuss recent market performance, implications for your RIA, and a potentially improving outlook.
We spent some quality time with the SBA’s release of PPP borrower data to see what impact the program has had on the investment management industry. After scrubbing out some misclassified businesses, we found more than 2,400 program participants (RIAs, trust companies, financial planning firms, etc.) that borrowed at least $150,000 (a separate release covered smaller loans). Even though the borrower pool is relatively small (there are at least 10,000 RIAs that aren’t participating), the demographics of the pool are telling.
The situation giving rise to the need for a valuation could be one of the most important events of your professional career. Familiarity with the various contexts in which your firm might be valued and with the valuation process and methodology itself can be advantageous when the situation arises. To this end, we’ve prepared a whitepaper on the topic of valuing interests in independent trust companies.
If one thing has become clear, it’s that market volatility is here to stay – at least for a while. In this post, we explore what this volatility means for you and for your RIA.
One of our first blog posts addressed the fallacies of rule-based valuation measures in RIA transactions. Our position hasn’t changed, but these so-called rules of thumb have certainly evolved over time. In a recent podcast with Michael Kitces, industry transaction specialist Elizabeth Nesvold of Raymond James explains the history and rationale behind these changes. For this week’s post we’ll discuss this evolution and why such measures are usually more misleading than meaningful.
You’ll probably find that the “downtime” afforded by working remotely and traveling less is a perfect time to clean up some practice management issues, including your buy-sell agreement. So pull your shareholder agreement out and compare it to our whitepaper.
