Part of the reason is that Lightyear acquired Advisor Group in 2016 from AIG at a bargain price of $400 million, of which no more than $200 million was likely Lightyear equity. Given that both Lightyear and Genstar deemed a $2 billion pricetag as reasonable for Advisor Group, Lightyear is sitting on a potentially huge capital gain.
While Lightyear doesn’t have to enter any transaction at all, a deal that returns 500 percent to 800 percent in a few years would be viewed a brilliant investment in the private equity world. In recent years, there have been fewer and fewer “seven-baggers” among private equity funds.
However, there is a growing belief on Wall Street that both the valuation Genstar paid for Cetera and the contemplated valuation for Advisor Group were extremely rich. Both Lightyear and LPL Financial Services had considered buying Cetera last summer for $1.4 billion or $1.5 billion. Both reportedly dropped out when told there weren’t in the ballpark and LPL could have easily financed the deal.
What isn’t clear is how much equity capital Genstar and Lightyear have in their existing funds to do future investments. This desire to conserve cash apparently was a major reason why the two parties discussed Genstar buying a majority stake in Advisor Group and letting Lightyear retain substantial minority stake in the combined entity.
There were other attractions of Advisor Group to Genstar. Many senior executives at Advisor Group held similar positions at Cetera, when it was owned by Lightyear from 2010 to 2014. That year it was acquired by real estate tycoon Nicholas Schorsch for $1.1 billion. Schorsch promptly went on an IBD acquisition binge that ended up with Cetera filing for bankruptcy only a little more than one year later.
Financial woes prevented Cetera from making needed technology investment during part of that period. Since emerging from bankruptcy, Cetera reportedly has made several intriguing investments in futuristic technology, but they have “yet to materialize,” according to one Cetera advisor.
While Advisor Group’s technology investments may be less ambitious, its platform is more efficient when it comes to “the buts and bolts needs” of advisor and their IBD supervisors.