Twenty-one months ago, a cover story in Financial Advisor predicted that prices for advisory businesses were about to go up big time over the next five years. That prediction turned out to be wrong, since 21 months later, it's already happened.
In the last six weeks, a newfangled type of acquirer has entered the advisory market. Fiduciary Network (FN), a holding company created by former Undiscovered Managers CEO Mark Hurley and New York investor Howard Milstein's Emigrant Savings Bank, has agreed to acquire minority stakes in two leading wealth management firms, Regent Atlantic Capital LLC of Chatham, N.J., and Evensky & Katz of Coral Gables, Fla. Terms of the transactions were not disclosed, but FN reportedly has about $600 million in capital and is looking to buy 15 to 17 firms.
Also in mid-February, Private Wealth Management (PWM) opened its doors. Founded by former Royal Alliance CEO Mark Goldberg, the New York- and Greenwich, Conn.-based firm has access to $250 million in capital with the objective of acquiring minority interests in successful wealth management firms.
Asked about the new metrics being used to value substantial advisory firms, longtime consultant and merger advisor to the profession, Mark Tibergien of Moss Adams LLC, offered a quick comment. "It's tulip mania," he said.
The multiples that Goldberg and Hurley cite, typically in the range of eight to 14 times cash flow, are double to triple the traditional yardsticks of four to five times cash flow and two times revenues. But is it really tulip mania?
"If you look at this business, assets go from custodian to custodian, broker-dealer to broker-dealer, but the relationship stays between the advisor and the client," Goldberg observes. "That's where the real value is. Over the next decade, there could be a value shift from broker-dealers and custodians to the real owners of the business [relationship]."
The financial engineering models of PWM and FN represent a sharp contrast to old-fashioned consolidators like National Financial Partners, Boston Private Financial Holdings and Focus Financial Partners. In this aspect, the new strategies illustrate an emerging trend in private equity, a willingness to buy "strips," or percentages of a business's cash flow over time, rather than outright control.
Borrowing a page from Norton Reamer's Asset Management Finance (AMF) , FN and PWM are not interested in controlling advisory firms or converting individual firms' shares into one common class of stock with an eye towards an initial public offering (IPO). Each transaction is a separate deal, so one acquired firm won't find its financial or regulatory fate linked to another's. Both FN and PWM also will provide loans for junior partners who want to buy into their own businesses.
While both firms share similarities, there are differences. FN is structured as a holding company, while PWM is a finance company. According to Hurley, his Dallas-based company is looking to make "passive, long-term intergenerational investments" over a 30- to 40-year horizon. PWM has an exit strategy of five to seven years, and firms in which it acquires stakes will participate in any upside.
Fiduciary Network takes a dogmatic stance in that it will only consider investing in fee-only firms. Hurley says that he and Milstein agree that it is "best for the client" and the best business model. For his part, Goldberg maintains PWM is agnostic on the fees versus commission issue, but it is seeking to invest in wealth management firms with between $500 million and $3 billion in assets. "We're interested in real firms, not books of business," he says.