For the next decade, if not longer, private equity is going to play an ascendant role in the maturation of the advisory world. Given these institutional investors’ mixed record in a broad cross section of industries, it’s natural for advisors to question what the impact of PE will be on their own space.
If past performance is any sign of what the future holds, the answer is likely to be almost as varied as the kinds of PE firms in the industry. That’s because, as longtime PE investors will tell you, these funds exhibit returns with a much wider dispersion than mutual funds, which tend to cluster around the mean.
So far, the worst-case fears about private equity firms coming in and slashing costs and services haven’t materialized the way they have in other industries. But that doesn’t mean PE firms haven’t, in at least a few cases, eased out founders and restructured firms, often promoting younger homegrown leadership with an emphasis on operational skills.
It’s worth noting: These firms have come into the RIA business amid a long bull market. The biggest challenge they face is in capitalizing on that growth. Because it won’t last forever.
Last month, I enjoyed breakfast with David Bahnsen, head of the Bahnsen Group, a fast-growing RIA within Hightower’s network. He noted that, unlike publicly traded stocks, “private equity has no beta,” and he offered a nuanced analysis on how this phase of the industry’s evolution will play out.
It’s quite likely that this period of consolidation “will not end well for some, and that the specific acquisitions and specific business models matter. Ultimately, the challenge is in giving money to operators who are great growers—you risk diluting their incentive to continue growing,” he said. The multiples that acquirers have paid for RIA firms has been based on an assumed growth rate, but that rate might have been undermined by the very money the PE firms have given them, he said. “Not all deals are created equal,” he said, but some firms “with proper focus on organic growth and succession” will prosper.
The big structural risk Bahnsen sees is that PE firms will pay “for growth that doesn’t materialize.” It could require more than clever financial engineering to escape that potential quagmire.
For now, however, the sailing is smooth. As senior editor Eric Rasmussen reports in this year’s RIA survey, many firms are looking to upgrade their value proposition and expand services like tax prep and estate planning; some are starting to look like genuine multifamily offices. Meanwhile, Philip Palaveev takes a deep dive into the perennial organic growth problem and observes that firms with younger partners and outside owners are seeing better top-line growth than others.
Those are just two of the articles to read in this summer’s issue.
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