Private capital, which has been one of Wall Street's hottest sectors this year, is playing a greater role in mergers and acquisitions involving wealth management firms, according to an expert panel at the BNY Mellon Pershing INSITE 2024 conference in Nashville, Tenn.
They noted that about three-quarters of such M&A deals have involved private funding so far this year.
“What is interesting is that over the course of the last few years, the industry that once was guarded towards private equity has now embraced it,” said Sean Keenan, head of business development at BNY Mellon Pershing and moderator of a panel on maximizing value through private equity. “For wealth managers, private equity could inject additional resources, expertise and help fuel growth. I think when we looked at the last Cerulli report, the estimated opportunity for RIA acquisitions was about $3.7 trillion.”
The panel focused on how the role of private equity has grown, what buyers and sellers are looking for in a partnership and what the key success factors are for raising capital. Keenan was joined by Rush Benton, managing director and head of wealth acquisitions for CAPTRUST Advisors; Adam Levy, managing director at consultant DeVoe & Company; and Christine Swingler, a principal at the Carlyle Group.
Levy noted that private equity has been an important driver within the wealth management space, which is on pace for 101 transactions so far this year—about the same as the number by this time last year.
“If you look at the percentage of transactions that PE was involved in through May, it’s 76%,” Levy said. “So PE is very, very involved in the M&A, whether it’s a minority stake or it’s through a secondary investment in an existing investment.”
Swingler and Benton cited the 2023 deal in which Carlyle Group bought a stake in CAPTRUST.
“We had done a first round of private equity in 2020 with GTCR out of Chicago,” Benton said, adding that the capital was quickly deployed because of the number of opportunities CAPTRUST found. “And so it was time to raise more equity capital. We did an extensive search, looked at a lot of firms that were trying to get into the industry. We were very fortunate that Carlyle was as interested as they were.”
What made the difference to CAPTRUST, Benton said, was that Carlyle had its own expertise in addition to capital.
“The move of PE into this industry for me is professionalizing the industry in a big way, and quickly,” he said. “CAPTRUST is one of the larger independent RIAs, but we have 1,700 employees. That’s a small firm when you look at American business. So we’re all going to be much bigger at some point.”
Private equity firms have the experience, he said, of taking smaller companies and helping them get very large through acquisitions and complicated organizational structures.
“So it’s more than just capital, and I think Carlyle is at the top of the list in terms of the support they provide to their portfolio companies,” he said.
Swingler said that as an investor, she looks for firms with organic growth potential, integration potential and a cultural alignment with management.
“Organic growth will always be first and foremost,” she said. “I don’t think you can have a business proposition without organic growth. It’s also culturally the hardest thing to ingrain in a sales force if you don’t already have it there.”
And without cultural alignment with management, Swingler said there can be no deal.
“If you don’t have that alignment with management in terms of how you’re going to drive value, what the future of the organization will look like, how you’re going to grow and develop the junior talent, how you’re going to really look to create a place that people want to work in the future—it can be a minority investment, it could be a majority investment, but it’s going to be a headache for the entire ownership period, and that’s not what anyone wants,” she said.
Not only is it unpleasant, she continued, but it decreases the value of the firm.
Advisory practices that want to grow need access to capital and won’t be successful without it, Levy said. It’s not enough to join with another firm or two and have instant valuation success, he said.
“I would really caution against that because investors are looking for a cohesive business. If you just pulled a bunch of people together that have never really worked together, where there is no consolidated platform, you don’t have a business, you just have a collection of independent operating units,” he said. “I think private equity looks at that and doesn’t quite see the value proposition that justifies a multiple in the high teens or higher.”
For success in raising capital, Levy said key criteria are knowing what the particular private equity group is about, whether it specializes in offering back-office support, M&A support or organic growth and making sure that’s a good fit with the advisory practice.