Fiduciary Network's deals are being structured with two classes of equity in a manner similar to the structure at Dow Jones & Co. and the New York Times, leaving the advisor/owners in control. "If we think there's any chance we might have to step in and take control, we won't do the deal," Hurley says, adding that his control is limited to certain "veto rights" that would prevent advisor/owners from "recutting" the transaction without Emigrant's consent.
The private equity firms backing PWM aren't seeking to control wealth management firms, either. "They want investment in them because they see small businesses providing excellent service with high-quality earnings, margins double or triple broker-dealers' and growth rates at least as high," Goldberg says.
What both FN and PWM are keenly interested in is growth, with the goal of purchasing a piece of an advisors' cash flow in return for providing capital for the firm's growth and succession plans. This strategy differs from AMF's in that they are looking for real equity investments; Reamer will buy a portion of an asset management firm's cash flow for a predetermined time period, say 20 years.
Hurley, in particular, says he is interested in allowing firms to stay independent by financing the gap between what the next generation of advisors can afford to pay and the firm's true value, while allowing the founding partners to monetize their equity. "The risk is that if we don't grow, we owe the bank a lot of money," says Regent Atlantic partner David Bugen, speaking on an afternoon when the Dow Jones Industrial Average was down more than 400 points. "Hurley may be a character, but he has been very honest and listened very hard."
FN's deal terms also worked for Evensky & Katz. "There are other good people and good deals out there but their return needs were different," says Harold Evensky, CEO of the Coral Gables firm. "This is exactly what we wanted and it fits us, our people and clients. Hurley is talking with some of the best firms in the country."
John Temple, managing director at New York-based Cambridge International, which advised Regent Atlantic, says the FN offer had several attractive components. "First, management remains independent. Second, it established a very complex equity recycling mechanism allowing new partners to buy stock in perpetuity that is not replicated in other models," Temple explains. "Third, it commits to pay at pre-agreed prices and multiples over the first ten years. AMF is a wonderful financing resource for this business, but they don't do all these things and it didn't work as well in this situation."
Hurley says the payouts to Regent Atlantic principals could reach into nine figures over the next decade. However, Temple cautions such payouts would require the firm's staggering growth to continue. Remember, Regent Atlantic is a firm with more than $1.5 billion in assets and 740 clients. Of that, 106 first retained the firm in 2006. Using a general rule of thumb that asset management businesses are worth 2% of assets, Regent Atlantic today would be worth $32 million.
Its blistering growth rate probably also merits a premium. Back in 2000, its assets stood at $270 million. "They've gotten seven people [partners] to work together and subordinate their own egos for the good of the firm. They also have to start transitioning to the next generation or they will have a prison riot," Hurley notes, with his characteristic under-statement.
The dynamic financial and interpersonal characteristics of a firm growing as fast as Regent Atlantic don't lend themselves to a single, one-time financial transaction, Temple observes. "The present value of the business' future cash flows is worth a lot more than near-term cash flow," Bugen adds.
With three partners in their sixties, one in his fifties, another in his forties and two in their thirties, the situation is very fluid. "The monetization of the founders is too big for the next generation, and the transition of ownership is going to be over 20 years," Temple says. "They don't know who all of the new partners are going to be."