A weekly update on issues important to the Investment Management industry
This fourth post in a series on selling your RIA focuses on corporate culture, the single most defining element of investment management firms. RIAs are more than EBITDA margins and GIPS compliant performance numbers. Ironic, isn’t it, that culture is rarely negotiated and never mentioned in a purchase agreement?
If you’re entering into negotiations to sell your RIA, buckle up, stay composed, be mindful of your goals, and don’t catch deal fatigue.
The primary danger of an unsolicited offer is that it lures potential sellers into thinking the deal is done and the process will be easy. As with most things in life, if something looks too good to be true, it usually is.
We’ve been asked to review unsolicited offers to buy an asset management firms many times. As such, we thought it would be worth taking a few blog posts to talk about unsolicited offers, how to approach them, evaluate them, and decide whether to pursue or reject them.
Asset manager M&A activity in 2017, in particular, is on track to reach the highest level in terms of deal volume since 2009.
Of all the topics we cover in RIA Valuation Insights, the most popular concerns what an investment management firm is actually worth. As a consequence, we thought it would be worthwhile to offer a webinar on the topic, and are planning to do so on Tuesday, October 3.
If you’re considering an offer for your firm that includes earn-out consideration, think about having some independent analysis done on the offer to see what it might ultimately be worth to you. If you’re working the buy-side, prepare to spend lots of time fine-tuning the earn-out agreement—you won’t get credit if things go well for the seller, but you will get blamed if it doesn’t.
We continue the discussion of earn-outs in the RIA industry. While there is no one set of rules for structuring an earn-out, there are a few conceptual issues that can help anchor the negotiation. We list five in this week’s post.
This blog kicks off a series which we’ll ultimately condense into a whitepaper to explore and maybe demystify some of the issues surrounding earn-outs in RIA transactions. If nothing else, earn-outs make for great stories.
We’re always perplexed by the lack of transactions in the RIA industry. Sure, there are some out there, but a typical year reports less than a hundred deals in a space with almost 12,000 federally registered advisors. This means that less than 1% of industry participants transact in a given year. How could that be in an aging profession with a highly scalable business model? We offer a few explanations in this week’s post.
As part of the analyst community that closely follows developments in the investment management industry, we were disappointed (but not surprised) that Focus Financial Partners pulled their S-1, again, and found a private equity recap partner instead of going public. Picking up on last week’s blog theme, Focus likes to tout their strategy of building an international network of efficiently connected wealth management firms as an “unfair advantage”, but it appears that their real capability is finding capital when necessary to avoid a public offering. Stone Point Capital and KKR bought 70% of the company, enabling prior private equity partners, affiliates who had sold their firms to Focus in exchange for stock, and employees with equity compensation to monetize their positions while Focus remains private.
Albeit unlikely that Bill Withers was alluding to the plight of active management in his 1972 hit solo, it does appear to be an apt descriptor for recent dealmaking in the RIA sector. Standard Life’s $4.7 billion purchase of Aberdeen Asset Management earlier this month follows shareholder pressure to right the ship after years of significant underperformance from both firms. The market seems less convinced.
Despite a rocky year for asset manager valuations, sector M&A was still strong. Total transactions were down about 10% from 2015 while aggregate deal value increased close to 20%. Several themes from the prior year also persisted as wealth management acquisitions remained robust and banks continued to play a pivotal role on both the buy-side and the sell-side.
As inspiration for fair deals and perfect swaps, we looked into Midland State Bancorp’s recent acquisition of Sterling National Bank’s trust department. From what we’ve read about the deal, it appears both parties walked away with what they wanted.
Though probably not as historic as Plymouth landing or even the Eddie Murphy comedy, Henderson’s purchase of Denver RIA Janus Capital last month is a rare sign of confidence in active managers that have been losing ground to passive investors for quite some time. The era of ETFs and indexing has dominated asset flows for quite some time, so this transaction seems to counter the recent trend.
Banks looking to diversify their revenue stream with investment management fee income would be well advised to study TriState Capital’s acquisition-fueled buildout of its RIA, Chartwell. The Pittsburgh depository started with an internal wealth management arm, bought $7.5 billion wealth manager Chartwell Investment Partners in early 2014, picked up the $2.5 billion Killen Group in late 2015, and last week announced the acquisition of a $4.0 billion domestic fixed income platform strategy from Aberdeen Asset Management.
On balance, 2016 could be a record year for asset manager transactions both in terms of deal count and collective volume. While this may be a stretch given the number of distressed sales during the financial crisis, a continuation of the current trend is certainly achievable.
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.
Often branded as an industry bellwether for its size and breadth of services, BlackRock has been as solid as the name would imply given the recent fallout in asset manager valuations. How has it found an opportunity despite industry headwinds and the sideways market?
Last week, Affiliated Managers Group (ticker: AMG) announced the completion of its investment in three alternative asset managers – Capula Investment Management LLP, Mount Lucas Management LP, and Capeview Capital LLP. This post discusses this transaction against the dim alternative asset management market environment.
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.
Some of our recent musings on mutual fund outflows and multiple contraction may actually have positive implications for RIA deal-making in 2016 and beyond. The maturation of the mutual fund industry and active fund managers will likely spur consolidation and buying opportunities for those looking to add scale. With valuations and market caps down over the last eighteen months or so, the affordability index has gotten a lot better for many of these businesses.
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.
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.
