That’s a big difference from just a few years ago when the multiples were closer to 10 and the implied rate of return was about 10%. The private equity firms that came to the party early in the last decade are now sitting on handsome gains, luring in many latecomers.
Take the case of the Carson Group in Omaha, Neb. In 2016, Long Ridge Partners purchased a 29% stake in the firm for $35 million. Last July, Long Ridge sold that interest to Bain Capital for $290 million, or more than seven times its original investment, valuing Carson at about $1 billion.
Those are the type of returns private equity firms dream about. But the reality is likely to be quite different for new institutional investors and the firms they invest in. Tibergien’s view is that “the business is going to have to row fast in earnings and value.”
What happens if financial markets stop providing a tailwind to the gravy train? The second quarter of 2020 provided a glimpse of what could happen, Tibergien says. Deals temporarily dried up because “no one wants to be a seller in a down market.” Markets recovered with alacrity, and deals came roaring back. The prospect of higher capital gains tax rates following President Biden’s election only accelerated the M&A boom.
Meanwhile, the fundamentals of the RIA business model remain sound. There are simply too few advisors and too many Americans seeking advice. The best advisors were always in the business to help clients with difficult choices, not to hit some jackpot.