Fiduciary Network, a holding company created by former Undiscovered
Managers CEO Mark Hurley and New York investor Howard Milstein, has
agreed to acquire minority stakes in two leading wealth management
firms, RegentAtlantic Capital LLC of Chatham, N.J., and Evensky &
Katz of Coral Gables, Fla. Terms of the transactions were not disclosed.
Funded to the tune
of $600 million, Fiduciary Network currently is engaged in active
negotiations with several other large advisory firms.
According to
Hurley, his Dallas-based company is looking to make "passive long-term
intergenerational investments" in about 15 advisory shops through
Milstein's wholly owned Emigrant Savings Bank.
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.
This will leave
the advisor-owners in control, and will only give Hurley and Milstein
"certain veto rights" if the owners "try to re-cut the deal" in a way
that hurts the outside investors. In this aspect Fiduciary Network's
strategy illustrates an emerging trend in private equity, a willingness
to buy "strips," or percentages of a business's cash flow rather than
outright control.
As Hurley
describes it, owners of RIA firms face very few attractive succession
alternatives. "They can sell it to the next generation at only a de
minimis price like an 80% discount because that's all the next
generation can afford to pay. That gives the next generation a huge
incentive to flip the business very quickly."
The other
alternative facing RIA firm owners is to swap their shares for those of
roll-up firms and wait for an IPO. The problem is, if there is no IPO
in five to ten years, the roll-up operation probably would be sold to
another private equity firm at a discount, diluting the original RIA
firm's shares.
Fiduciary
Network's raison d'etre is to bridge the gap between what the next
generation can afford to pay and the true value that the first
generation has created. All transactions will involve cash, not equity
in a private entity, and there will be no interlocking ownership among
the different advisory firms.
In what seems a
departure from other private investments, Hurley claims that Milstein
wants no exit strategy, just a sound long-term investment. Fiduciary
Network also will provide loans for junior partners who need to buy
into their own businesses.
Given the extended
time horizons of these investments, shareholders in some of the bigger
firms that Fiduciary Network buys could see payouts that reach into the
nine figures over several decades. Since most of the payouts are
stretched out for a long time, their values hinge upon growth rates.
The Fiduciary
Network model isn't about cashing out. "Whether we own 1 percent or 99
percent of a firm, we don't want to step in," Hurley declares. "If we
think we might have to get involved, we won't do it [with running the
company]."
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.
"I am personally
honored that these two firms were the first two firms to agree to these
investments," Hurley says. "Both firms that we are buying into I've
recommended to friends and in some cases family members."