RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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RIA Valuation Insights


Alternative Asset Managers

Non-Traditional Venture Investors are Changing The Rules Of The Game

After a steady build up since the end of the credit crisis, it appears that 2016 is going to be marked as the year when the venture capital industry lost momentum, although not for a lack of investors. The birth rate of new unicorns has slowed considerably since their 2015 baby-boom, even as the VC market remains dominated by tremendous inflows of capital in late-stage companies. Money has continued to pour in as riskier VC investments are still expected to outperform listed alternatives due to volatile public markets, higher multiples, low interest rates, and the less-than-stellar performance of the global economy. The source of new capital has changed, however, as the venture industry saw a marked increase in nontraditional investors – including pension plans, hedge funds and mutual funds.

Alternative Asset Managers

Performance Fees are Dead! Long Live Performance Fees!

Earlier this month, Mercer Capital had the pleasure of helping sponsor the Southern Capital Conference, an annual gathering of venture capital and private equity GPs, as well as the LPs who invest with them. If you believe everything you read about this segment of the investment community, you might expect a fair amount of groaning from the General Partners, with private equity managers under pressure to improve performance, negotiate fees, and increase transparency. The reality was very different.

Current Events Transactions

If the Pathstone–Convergent Combo is the Shape of Things to Come

RIA Heads Need to Remember that MOEs are Tricky

When firms of similar size join forces to get a bigger footprint, solve leadership issues, stop advisors from competing with each other, etc. – realizing those benefits is the easy part. The hard work happens because different firms have different histories, and different histories create different cultures. Blending cultures can be awkward, as in MOEs (mergers of equals). This guest post, by Jeff Davis, provides a checklist of dos and don’ts for MOEs that will ring true in the investment management community.

Current Events Practice Management

The SEC’s Proposed “Transition Plan” Requirement is One More Reason to Think about your Firm’s Ownership

By now you’ve probably read the SEC’s proposed rules on Adviser Business Continuity and Transition Plans. Most of the proposed rule simply codifies a reasonable standard for practice management at an RIA. Certain of the proposal’s requirements, such as IT management and being able to conduct business and communicate with staff and clients in the event of a natural disaster, are likely to be met with turn-key solutions from vendors. Of more interest is how the requirement for a “transition plan” in the event of the death or incapacitation of an advisory firm owner will be implemented.

Asset Management Industry Trends

The Market is Bearish on AUM Growth, but What if the Market is Wrong?

We have written at length about bearish signs in the RIA space, and valuation metrics seem to generally reflect a reduced growth outlook. We wonder, though, if things are really that bad. While, we suspect there is, over all, some phantom fee compression in the industry as assets are allocated to passive instruments and active managers who charge more don’t get the RFP they once would have, the other two themes focus on demographics and market outlook which are not, necessarily, bearish for the investment management space.

Alternative Asset Managers

SEC Regulation May be Coming for the Private Market

In for a Dime, In for a Dollar

Recently, SEC Chair Mary Jo White gave a keynote speech to attendees of the SEC’s and Rock Center’s Silicon Valley Initiative, an event bringing together regulators, academics and entrepreneurs to discuss issues affecting venture capital and private equity within Silicon Valley. Although the audience may have been targeted, White’s speech provides insight into the SEC’s concern over the lack of transparency, governance and oversight in the PE and VC industries.

Asset Management Current Events Margins and Compensation

Brexit Just Accelerates Downward Trend in RIA Valuations

Gimme Shelter

Brexit’s full impact on the market is still to be determined, but a quick review of asset manager pricing reveals a valuation gap with the broader equity market that opened over the past twelve months, got much worse in June, and even accelerated over the past week. Sifting through the noise at quarter end, we pose, if market valuations in the industry are getting a haircut, what does that mean?

Current Events Transactions

Brexit and Killen Underscore the Need for Buyer Protection in Asset Manager Transactions

Black swan events and the very nature of the asset management business illustrate the importance of contingent consideration in RIA acquisitions for prospective buyers. The volatility associated with equity managers means AUM and financial performance can swing widely with market conditions, so doubling down on a one-time payment for an RIA can be extremely risky, particularly at high valuations. Of course, the market can just as easily pivot in the buyer’s favor after the deal closes, but gaining Board approval for such gambles is an exercise in futility if insurance is available in the form of contingent consideration.

Alternative Asset Managers

Marking Illiquid Investments in Liquid Funds

As mutual fund flows continue to favor passive strategies, some active fund managers are beginning to look to alternative asset classes to augment returns and generate sustainable alpha. Since open-end funds need to calculate NAV on a daily basis, the inclusion of illiquid venture capital investments in liquid funds shines a brighter spotlight on fair value measurement.

Practice Management

The Importance of Specialization in Investment Management

A Review of Philip Palaveev’s The Ensemble Practice

In an industry characterized by constant pressure to adapt to market conditions and offer highly specialized client service, many financial advisors still spend a significant portion of their time acquiring new clients rather than collaborating with other professionals. According to Philip Palaveev in his recent book The Ensemble Practice, the majority of financial advisory practices still function as “solos,” or one individual against the entire market. This practice is inherently problematic in its lack of sustainability and the problems it poses for an owner who desires to leave a legacy post-retirement.

Current Events

2016 Q1 Analyst Call Report

Our quarterly summary of analyst calls is as revealing as usual, as pacemakers in the asset management sector review this quarter’s performance and how it may shape the year ahead. Madeleine Harrigan highlights four RIA market trends discussed by expert analysts.

Practice Management

Resolving Buy-Sell Disputes

On Being a Jointly Retained Appraiser

The closest we get to detective work at Mercer Capital is when we’re jointly retained to resolve a shareholder disagreement over a buy-out. Whether we’ve been court-appointed or mutually chosen by the parties to do the project, we’ve done enough of these over the years to learn that the process matters as much as the outcome. In this post, we discuss our process for handling such engagements.

Practice Management

Ambiguity in Buy-Sell Agreements is Expensive

Despite talented people, carefully developed business plans, and the best of intentions, not every partnership goes well, and some of those that don’t go well don’t end well either. When a partner leaves an investment management practice, the potential for a major dispute over the buy-out usually looms. Internally, at our firm, we sometimes refer to these situations as “business divorces”, even though the consequent acrimony often exceeds that of a marital dissolution. Here are a few mistakes we’ve seen others make, in the hopes that you read this and don’t do the same.

Practice Management

Why Should Your Firm’s Buy-Sell Agreement Require an Annual Valuation?

It’s all about Expectations Management

A recurring problem we see with buy-sell agreements are pricing mechanisms that are out of date. Keeping the language in your agreement up to date is important, but the most reliable way to avoid some unintended consequence of your buy-sell agreement is to have a pricing mechanism that specifies a regular valuation of your RIA’s stock. An annual valuation accomplishes a number of good things for an investment management firm, but the main one is managing expectations.

Practice Management

When Buy-Sell Agreements Blow Up

What Would Mom Do?

The subtitle of Chris Mercer’s original book on buy-sell agreements is “Ticking Time Bombs or Reasonable Resolutions?” Implicit in this title is that parties to buy-sell agreements too often discover the painful implications of the question never asked. I think about this every time we work on a dispute resolution project involving a buy-sell disagreement. In particular, I think about one of the first ones that I worked on, where maybe there was no disagreement, but should have been.

Practice Management

What Matters Most for RIA Buy-Sell Agreements?

In Our Experience…

If an asset manager’s buy-sell agreement is going to specify reasonable expectations for the value of the firm, what are they? We think there are at least four elements that should be clearly stated in each buy-sell agreement to ward off costly ambiguity.

Practice Management

Is Your Buy-Sell Agreement Purpose Built?

An Introduction to the Topic for Investment Management Firms

This post launches a series on buy-sell agreements, specifically as they pertain to RIAs. Buy-sell agreements are peculiar contracts between shareholders with a very specific purpose: to provide for the transition of ownership and liquidity in a business, usually in case of a specific event. Outside of a particular event, buy-sell agreements usually sit on a file server or in a desk drawer, and no one thinks about them, until a need arises to pull out the agreement – at which point no one can think about anything else.

Investment Management

Mercer Capital provides RIAs, trust companies, and investment consultants with corporate valuation, litigation support, transaction advisory, and related services