The differential in interest in public investment management businesses and private investment management businesses isn’t sustainable. Will higher interest rates eventually wear down leveraged acquirers, as they have in other growth-and-income sectors? Will PE investors start to question the merits of trading companies from fund to fund instead of testing valuations in the open market? Will the public RIA group follow Pzena’s lead and go private? Or will public investors’ newfound interest in dividend stocks lead them to RIAs? It’s tough to forecast a public RIA resurgence but never say never.
When business owners think about the value of their firm, they frequently think in terms of the dollar value that they believe they could sell the business for in an arms’ length transaction. However, the nuances of real world transaction terms in the investment management industry can often obscure what’s being paid for the business on a cash-equivalent basis. In this blog post, we explore various transaction structures employed in the industry and their relationship to fair market value.
We’re often asked by clients what the range of multiples for RIAs is in the current market. At any given time, the range can be quite wide between the least attractive firms and the most attractive firms. The factors that affect where a firm falls within that range include the firm’s margin, scale, growth rate of new client assets, effective realized fees, personnel, geographic market, firm culture, and client demographics (among others).
In this post, we focus in on the client demographics factor, explain how buyers view client demographics, and explore steps some firms are taking to reach a broader client base.
We think of investment management firms as a “growth and income” play. The space has attracted capital specifically because RIAs produce a reliable stream of distributable cash flow with the upside coming from market tailwinds and new clients. For all the trade press touting interest in RIAs, investing trends over the past fifteen years have had a mixed impact on the investment management community.
For asset managers, cheap capital makes stock picking less important. Persistent alpha is harder to prove. Passive and alternative products are more competitive. Investment committees are surly. Fee pressure is rampant.
For wealth managers, cheap capital has made diversification look kind of pointless and bordering on stupid. In the rearview mirror, owning anything other than the S&P 500 has, since the credit crisis, looked like a mistake. While this may not have had an immediate impact on revenue and margins, it does nothing to cement advisor/client relationships.
But what about valuations? Where do RIAs fit in an environment that favors growth stocks?
Farther Finance Advisor’s Recent Capital Raise Implies a Valuation at 20% of AUM and 20x Run-Rate Revenue
We’re sometimes surprised when we hear about buyers paying 20x EBITDA for RIAs with under $1 billion in assets under management, so you can imagine our reaction to MassMutual Ventures, Bessemer Venture Partners, and Khosla Ventures paying an implied valuation at 20% of AUM and 20x revenue for Farther Finance Advisors, a start-up, tech-heavy RIA with $250 million in AUM. We’ll explore the logic and potential pitfalls of this valuation in this week’s post.
As one of the more active acquirors in the investment management industry, Focus Financial Partners (Focus) has a broad perspective into the state of the RIA industry and M&A activity. In this week’s blog we summarize five key takeaways for RIAs based on Focus’ recent Q2 earnings release.
A Public Service Message That Earn-outs Aren’t Always Earned
One reason deal activity can remain strong in tough financial markets is that buyers can use earn-outs to control what they pay for deals, offering more money in the event that markets recover and justify higher valuations, and managing their outlays if performance lags. For sellers, the relevant consideration is bear markets may tank a big part of their expected deal consideration, well beyond their control. A falling tide may not simply work to the detriment of sellers, but also hand buyers a bargain purchase when markets improve. Earn-outs align interests in the near term but can provide asymmetric benefits in years ahead.
Last week Pzena Investment Management, Inc. announced that it had entered into an agreement to become a private company again via a transaction in which holders of PZN Class A common stock would receive $9.60 per share in cash, a 49% premium to its closing price before the announcement ($6.44). In this week’s post, we attempt to rationalize this premium and any implications for the investment management industry.
How Does Your RIA Measure Up?
Schwab recently released its 2022 RIA Benchmarking Study. The survey contains responses from over 1,200 RIAs representing $1.8 trillion in AUM to questions about firm operating performance, strategy, and practice management. The survey is a great resource for RIA principals to see how their firm’s performance and direction measure up against the average firm. In our blog post this week, we highlight some of the key results of the survey.
The most frequently ignored topic in the wealth management industry may be its first cousin, the independent trust industry. While many still associate trust work with banks, and banks still represent more than three-quarters of the trust industry, the growing prominence of independent trust companies is causing many participants in the investment management space to take another look. In some regards, independent trustcos look a lot like wealth managers, only more evolved. In this post, we discuss fees, what the current market environment and demographics mean for trustcos, regulatory trends, and our outlook for the future.