There’s no doubt about it: the wealth management industry is in full growth mode. Through the chaos and uncertainty of 2020, we saw a record year for RIA mergers and acquisitions—according to ECHELON, the average AUM acquired per transaction grew to more than $1.8 billion, a 24% increase over 2019’s average of $1.5 billion, making it the highest annual average to date.
In last month’s column, I spoke to some common concerns that I hear from RIA-owners who are considering taking advantage of this hot market by plugging into an existing, larger firm who can help them focus on meeting growth goals. Which begs the question: is there a middle-ground solution for owners who are growth-minded, but don’t want to give away ownership of their entire business?
The answer is simply, yes. It’s called recapitalization, and it might just be the smartest thing an RIA owner can do right now.
What’s Recapitalization?
Just recently, the term “recapitalization” made headlines as the powerhouse fintech platform Riskalyze announced they sold part-ownership of the company to private equity firm Hg Capital.
While the deal created a lot of buzz, it also had some wondering, what in the world is recapitalization, and how is it different from an acquisition?
This approach reallocates part of a company’s ownership to an institution that can provide capital, sales support, and operational efficiency. It’s a way for active owners to maintain control and domain over the company—just with added rocket fuel.
Consider this: you’re the owner of a $500M RIA. You’ve had success over the last 10 years growing your business and building a loyal client base. You want to take the firm to the next level, but growth has stagnated due to limited resources and time. As an owner, you’ve taken all of the risk and poured your heart into running your business. You fear that if you sell your business, no one will be able to run it like you do. What are your options?
Don’t think of selling your businesses as all-in or nothing. Instead, what if you decided to bet on a like-minded firm that is growing at an astronomical rate (say from $100M-$5B in the last few years) and do an equity exchange of 20 percent? This approach allows you to keep control of the majority of your business, while aligning part of it with a team that has more resources and a proven track record of growth.
What does it take to embark on an equity swap?
Leave Your Ego At The Door
When I first suggest this solution to advisors who’ve reached critical mass in their current firms, I’m often met with a “yeah, right” response. And it’s understandable—firm-owners have taken all of the risk, built a company in their own image, and created a client experience they feel is unmatched. But I ask those advisors: if you left your Ego at the door, could you envision the opportunity in front of you? Often, if the advisor is truly growth-minded, it becomes clear that betting on another firm is betting on themself.