RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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RIA Valuation Insights


Practice Management

Business Divorces at RIA Firms

Many times, conflicts with shareholders are unavoidable and are the natural bi-product of ownership transition and firm evolution. In these instances, a carefully crafted buy-sell agreement (“BSA”) can resolve these disputes in a fair and equitable manner (from a financial point of view) if the valuation process avoids common pitfalls. In this post, we discuss these pitfalls and how to keep your buy-sell agreement free of surprises.

Margins and Compensation

What is Normal Compensation at an Asset Management Firm?

Part 2

Investment management is a talent business, and that talent commands a substantial portion of firm revenue which often exceeds the allocation to equity holders. While there is no perfect answer as to what an individual or group of individuals should be compensated in an RIA, we can look to market data and compensation analysis, measured against the particular characteristics of a given investment management firm’s business model, to make reasonable assumptions about what compensation is appropriate and, by extension, what level of profitability can be expected.

Practice Management Transactions

Success and Succession Offers Targeted and Often Unexpected Insights on Internal Ownership Transition at RIAs

As the Baby Boomer generation continues to age toward retirement, many “founder-centric” asset management firms face the prospect of internal succession. The recent book “Success and Succession,” by David W. Bianchi, Eric Hehman, Jay Hummel, and Tim Kochis, is written from the perspective of three individuals who have experienced successful ownership transitions. The book provides some interesting insights into the logistical, financial, and emotional process that internal succession entails through colorful accounts of past triumphs and train wrecks.

Current Events

Earnings Calls 4Q15

Year-end 2015 closed out a quarter of elevated market volatility and falling asset prices in the traditional asset management industry. The year was marked by a rising flight to passive strategies and overall falling net inflows that pressured margins, causing many managers to take a hard look at their expenses and compensation structures going into 2016. Looking ahead, traditional asset managers are also facing headwinds from a slowdown in the global market, and a subdued (but cautiously optimistic) outlook at home. As we did last quarter, we take a look at pacemakers in the traditional asset management industry and outline four key themes we believe are expected to define 2016.

Industry Trends

What’s Stopping Banks from Getting into Wealth Management and How to Overcome It

Final Thoughts on AOBA

Much like Porsche discovered fifty years ago, many banks are responding to regulatory changes by opting for a hybrid model that pairs trust and wealth management operations with traditional banking. The advantages of banks developing their investment management operations are pretty easy to see: it produces a more stable and diverse revenue stream, it provides more touch points for customer relationships, and it can substantially improve a bank’s return on equity.

Of course, opportunity is a two way street, and banks looking to venture into investment management, especially by acquisition, typically encounter a couple of major obstacles: balance sheet dilution and culture clash. Both of these challenges arise from the main difference between traditional banking and asset management. Whereas banking is asset heavy and personnel light, asset management requires not much of a balance sheet, but plenty of expensive staffing. It’s a significant difference that can only be managed head on.

Industry Trends

Can Getting into Wealth Management Save Community Banking?

An AOBA Conference Followup

Last week, Brooks Hamner and I spoke at Bank Director’s Acquire or Be Acquired Conference in Scottsdale about how banks can build value through their trust and wealth management businesses. Our session got a great response, probably because we were some of the only speakers offering the banking community some hope. How then do you ensure that a trust not become an earnings-dilutive cauldron of liability?

Industry Trends

How Banks Build Value via Trust and Wealth Management Franchises

In this post, we have included the slide-deck from our presentation, “Valuing a Trust & Wealth Management Franchise” from Bank Director’s 2016 Acquire or Be Acquired conference. Even with the present market instability, banks have an interesting opportunity to expand their financial services while diversifying their revenue streams with asset management. We sense some growing demand for sophisticated trust services, and a lot of RIAs in the wealth management space see banks with existing trust departments as a complementary environment to sell into.

Current Events

Are You GIPS-Compliant?

The Global Investment Performance Standards (GIPS®) were adopted by the CFA Institute in 1999 and are widely accepted among the international investment management industry. GIPS are a set of ethical principles based on a standardized, industry-wide approach that apply to investment management firms and are intended to serve prospective and existing clients of investment firms. While compliance by investment firms is voluntary, many investors consider GIPS compliance to be a requirement for doing business with an investment manager. Alternative managers have lagged behind the industry in claiming compliance with GIPS, but changes in the industry suggest GIPS compliance is becomingly increasingly important.

Industry Trends Transactions

Asset Manager Dealmaking Up in 2015 on Lower Volume

Despite the recent uptick, we believe the backlog of available deals remains fairly robust given the four year pause in transactions from 2009 to 2013 and the aging demographics of many investment management firms. The real threat to deal making would be a longer, more pronounced downturn or continued volatility in the equity markets that would crater AUM levels and investor confidence.

Current Events Transactions

TSC buys $2.5B manager for Six Times (!)?

As usual, it’s not that easy

Tri-State Capital Holdings, Inc. (traded on the Nasdaq as TSC) bought The Killen Group, a $2.5 billion manager of the Berwyn mutual funds, for about six times EBITDA. More specifically, TSC paid Killen $15 million cash up front (based on trailing EBITDA of $3.0 million), plus an earn-out paying 7x incremental EBITDA (which could add another $20 million to the transaction price). So, best case scenario for Killen is for them to deliver about $6 million in EBITDA and get paid $35 million (!).

Alternative Asset Managers Industry Trends

Are Asset Manager Valuations Headed Higher or Lower in 2016?

Barring Basis Risk, Barron’s is Bullish

Despite 195 nations signing onto the Paris Climate Conference commitment to clean energy last week, it looks like Santa will be stuffing most asset managers’ stockings with coal this Christmas. Hopefully it’s at least low-sulfur.

December has been a rough slog for the RIA space. So far it’s mostly been attributed to the cracks in high yield credit. With junk bonds stumbling shortly after Thanksgiving, managers with large high yield offerings are feeling the Grinch. One standout example: WDR. Waddell & Reed’s Ivy High Income Fund has suffered huge outflows this year. Pile outflows with asset devaluation and WDR’s stock has gotten crushed, losing almost a quarter of the company’s equity market cap so far this month (!).

Alternative Asset Managers Current Events

Updated: Valuation Best Practices for Venture Capital and Private Equity Funds

The International Private Equity and Venture Capital Valuation (IPEV) Guidelines were developed in 2005 to set out recommendations on best practices in the valuation of private equity investments. The IPEV Board is made up of leading industry associations from around the world, including the National Venture Capital Association (NVCA) and the Private Equity Growth Capital Council (PEGCC) in the United States. In October 2015, the IPEV Board published draft amendments to the existing guidelines that, if approved, will go into effect at the beginning of 2016.

Current Events

Asset Managers Cast a Wary Eye on PE Valuations in the Aftermath of the Square IPO

Investment managers who expected the Square IPO to settle the debate on high private equity valuations have been, so far at least, thoroughly disappointed. Square, Inc. went public on November 17 at just $9 per share and opened debate in a venture community wary of high valuations on whether or not investment terms can compensate for high prices. In other words, do special investor provisions designed to protect late round investors from frothy PE valuations do more harm than good? In our last post on IPOs, we discussed the current imbalance between the public and private markets, in which an exuberance of private equity capital has driven up private valuations and created a dislocation between the privately established value of the firm and the publicly achieved value available at IPO. As a consequence of this phenomenon, IPO activity fell to new lows in the third quarter, as 16% of IPOs downsized their debuts. Square is one of a growing number of companies resorting to equity protections in order to attract late-stage investors, often at the expense of employees and earlier investors.

Current Events

What Industry Leadership is Saying about Asset Management

3Q15 Earnings Calls

As the dust settles in the aftermath of the third quarter, we take a look at several earnings calls from pace makers in the RIA industry. Changes in the character of the financial markets is driving change in firm business models, and out of this we see a few common themes that we expect will play a role in shaping the industry going forward.

Alternative Asset Managers

A Few Thoughts on Valuing Investments in Startups

Concurrent with Madeleine Harrigan’s post last week about IPOs being the new private equity downround, the financial reporting group at Mercer Capital published an interview with the head of the group, Travis Harms, on the difficulties mutual funds face in valuing level 3 assets (think Square). The following is an excerpt from that interview.

Alternative Asset Managers

Are IPOs the New Down Round?

There’s something about nature that abhors a vacuum. Right now that vacuum seems to be the imbalance between the public and private markets, with the latter attracting maybe too much interest since the credit crisis, at the expense of the former. Blame fair value accounting or Sarbanes-Oxley or the plaintiff’s bar, but it has been some time since being public was actually considered a good thing. With interest running high in the “alternative asset space” and cheap debt for LBOs, the costs of being public have not been particularly worthwhile. This situation is not sustainable, and was never meant to be. Family businesses can stay private forever, but institutional investors eventually need the kind of liquidity that can only come from the breadth of ownership afforded by established public markets. Valuations are never really proven until exposed to bids and asks.

Current Events

What are you afraid of this Halloween? FinCEN

Sometimes the fear of a thing is worse than the thing itself, and being haunted by proposed regulations may indeed turn out to be worse than compliance. The horror show of FinCEN may turn into a series with multiple episodes. In this post, we examine this proposed regulation and its implications.

Current Events Transactions

Monday Morning Quarterback: Edelman sells for $800 million (!)

Last week brought the news that PE firm Hellman & Friedman acquired a controlling interest in mega wealth manager Edelman Financial. Edelman is headed by radio-show personality Ric Edelman and manages about $15 billion for over 28,000 clients. While terms of the deal were not officially disclosed, the Wall Street Journal reported the transaction valued Edelman at a number north of $800 million, a nice pickup on Edelman’s going private deal in 2012, which transacted the company at $263 million. The financial press was practically hyperventilating over the price last week, but a little analysis on the number reveals pricing that is more normal than most would imagine.

Investment Management

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