Will Goldman Sachs Pay 18x EBITDA for Your RIA?

No. But Goldman’s United Capital Buy Suggests the Consolidation Winds are Shifting

Current Events

Mass-Affluent Fun: Early 70s Porsche 914 | Image by Pujanak via Wikimedia Commons.

Brand value is difficult to create, hard to measure, and easy to ruin.

In the late 1960s, Porsche and Volkswagen found themselves trying to develop similar cars.  Porsche needed a replacement for the 912, a Carrera look-alike with a smaller engine and a cheaper price, and VW needed an updated version of its top-of-the-range (for Volkswagen) Karmann Ghia coupe.  The two automakers combined forces to joint-venture what became the 914 model for Porsche and the new Karmann Ghia for VW.  Since the bodies and powertrains of the two cars were going to be very similar, Porsche faced the balancing act of preserving its exclusive image while taking advantage of the economy of working with the maker of “the people’s car.”  The automakers resolved this conundrum by deciding that only the Porsche would be sold in North America.  This marketing alchemy worked, and while the 914 is not regarded as the best performing or most beautiful Porsche ever developed, it did become their best-selling product, by far, during its seven-year run.

Subsequent “down-market” Porsches like the 924 through today’s 918 series have produced the sales volume necessary for Porsche to be efficient while maintaining the pricing power conferred by a premium marque.  This combination has delivered higher margins for Porsche than other German automakers with a more consistent top line than the more upmarket strategies followed by rivals from Italy.  If you do it right, extending your reach can support your brand, not dilute it.

Goldman Sachs Extends Brand to Wealth Management

Some may wonder whether Goldman Sachs is putting its treasured name at risk by making a bid for the mass-affluent wealth management market in buying United Capital.  We don’t think so.

Some may wonder whether Goldman Sachs is putting its treasured name at risk by making a bid for the mass-affluent wealth management market in buying United Capital.  We don’t think so.

The announcement last week that Goldman was buying United Capital for $750 million caught many people by surprise, but the more I think about it, the more it makes sense.  The opportunity of consolidating the wealth management industry is well publicized: a highly fragmented and inefficient community of small firms in need of effective ownership transition strategies.  Several different approaches to this consolidation have emerged, not all of which would have suited Goldman.  Some industry consolidators leave acquired firms with their own brands and SEC registrations, which theoretically maintains their sense of entrepreneurship – but also makes national marketing impossible, regulatory compliance more expensive, and may not ultimately govern the ownership transition process reliably.  Joe Duran’s approach was different: bring everyone under the United Capital brand and sell it, coast to coast, as a homogenous wealth management platform with a local presence in nearly 100 markets.

If there is one consistent story in these RIA rollups, it’s that building them takes longer than anybody expects.  Duran worked on building United Capital for nearly 15 years.  Some things require scale that cannot be acquired in one lifetime, however, and that’s where the CEO of Goldman Sachs, David Solomon, saw an opportunity.

This Really Starts with David Solomon, not Joe Duran

Imagine you’re David Solomon.  You’ve got a really good job heading a global organization known for producing innovative financial products, outsized profits, and Treasury secretaries.  Your predecessor, Lloyd Blankfein, became a public figure by building Goldman in the wake of a crisis that took down several major competitors.  But the financial universe never stops changing, and despite their high-brow successes, one thing Goldman Sachs doesn’t have is much reach beyond the very wealthy.

Solomon inherited a business that did well on large and risky trades but needed to transition into an era that is more staid and regulated.  In this environment, he’s looking to bring Wall Street to Main Street.  The opportunities Solomon sees are not upmarket, they’re mass-market.  Even as it celebrates 150 years of success as a powerhouse that profitably caters to the well-heeled, Goldman Sachs has plunged headlong into commercial banking, corporate cash management, and even a branded credit card, so it makes sense to prepare to court the mass-affluent through a wealth management advisory practice.  Goldman could have started from scratch, but buying United gives Goldman an established platform for outreach to the RIA community to seek other acquisitions, which it will undoubtedly begin to do.

Will Goldman Sachs Pay 18x EBITDA for Your RIA?

So, what does all this mean to you?

It has been suggested that the $750 million Goldman paid for United represents something on the order of 18x EBITDA.  The actual multiple isn’t public, but given United Capital’s AUM of $25 billion, total revenue including management fees should be between $200 million and $250 million on an ongoing basis.  A multiple of 18x EBITDA suggests an EBITDA margin in the mid-teens to just over 20%.  That’s a bit thin, so perhaps Goldman Sachs sees opportunities for margin enhancement that buy-down the multiple.  At a 30% margin and midpoint revenue estimate of $225 million, Goldman would have only paid 11x EBITDA.  On a pro forma basis, at least, that makes more sense.

United Capital is Duran’s accomplishment, but Duran’s accomplishment is now Goldman Sachs’s missionary effort.

In any event, David Solomon probably didn’t reach his bid on a spreadsheet – at least not looking at United Capital on a standalone basis.  The opportunity is to get a substantial but manageable RIA with consistent branding and systems across a national footprint that puts Goldman Sachs in a position to test the platform and grow it accordingly.  Plus, the deal comes with Joe Duran.  United Capital is Duran’s accomplishment, but Duran’s accomplishment is now Goldman Sachs’s missionary effort.  Goldman will need a front-man to pitch their narrative to skeptics and prospects in the RIA community.  Duran will have more credibility than someone who didn’t grow up in the independent channel.

This is Not Wirehouse 2.0

Some of the early backwash I’ve heard on the deal is that Wall Street money is sucking another example of entrepreneurship into the machine.  I think that’s flat wrong.  If Goldman just wanted to build a new mass-market wirehouse to push investment products, they could have paid much less for many, many broker-dealers with far more FAs than United Capital.  All signs suggest that Goldman is looking for distribution for existing GSAM products (no doubt to upper end clients of United) and also to develop new ones for the more typical mass-affluent client.  But this is not simply a distribution play.  The decision to do this through a fiduciary practice suggests that this isn’t about Wall Street infecting the RIA community, but that RIA culture has finally come home to infect Wall Street.  If Goldman puts its might behind the effort and builds a national brand investment advisory practice, it will be a game changer.

Focus + High Tower + Cap Trust + AMG + … + Goldman Sachs = More options for RIAs

Almost lost in the Goldman/United deal was that AMG recently announced their first acquisition (Garda Partners) in a couple of years.  And it was just earlier this month that a rebooted Hightower announced a plan to grow through investments in new RIAs.  With AMG back in the game, and Hightower muscling in on Focus Financial’s territory, the Goldman Sachs deal suggests that buyer competition is going to be heating up in the money management space – much to the benefit of sellers.  It further suggests that RIAs seeking an exit through a consolidation strategy are going to have a number of options depending on their perspective and needs.

Even if you’d rather stay independent, stay tuned.  As we all know, an option has value, even if you don’t exercise it.