According to Hurley, Milstein is looking for a 40-year investment and is willing to accept a return in the teens, when most private equity firms are looking for returns in the twenties or thirties. As the owner of Emigrant, he also has access to very cheap capital and the ability to leverage it.
Like Hurley, Goldberg maintains that wealth management firms' value hasn't been understood by the market to date. "The market is paying 18 to 24 times earnings for big broker-dealers, amalgam firms that are only proxies for the real relationship. Custodians and investment managers also get rich multiples," Goldberg says. "Forget four or five times earnings. If I can get wealth managers two-thirds to three-quarters of the market multiple [for amalgam vehicles], that's a big step forward."
He is convinced this is fair economically. "Who is in the control position? Advisors are, and the value that's there should be unlocked," he continues, adding that the private equity community is intrigued. "When private equity firms see this, they understand it and they believe the capital markets will recognize it as well."
Hurley claims that Milstein doesn't want an exit strategy, just a sound, long-term investment. But 30 or 40 years is a long time for any investor. And the RIA business as it exists today has been around only for 20 years at most.
Sure, this business has been sporting 30% profit margins, 20%-plus growth rates and stunning client retention rates for most of the last decade. But the pharmaceutical business did much the same thing for 50 years-and look at it now. The folks at Regent Atlantic know this all too well, given that they have lots of clients who work for Pfizer, folks who, like much of the investment management community, never could conceive that once-great business' current condition.
So it's a good idea for everyone to keep their eyes wide open. The FN deal is very creative but it has an awful lot of moving parts, conceivably too many. In the meantime, both Hurley and Goldberg have become very popular guys and have tony new headquarters under construction in Dallas and Greenwich, Conn., respectively, spanning tens of thousands of square feet.