Implicit in the agreements between RIAs and the aggregators who have acquired them in the last five years is the likelihood of a major liquidity event, very often an initial public offering (IPO), down the road. Acquired RIAs and the aggregators aren’t the only parties at the table. Most of the aggregators are backed by big private equity firms looking for lucrative exit strategies.

With a wave of RIA acquisitions completed in recent years, it remains to be seen how this next stage of the industry’s evolution plays out. Markets this year have not been propitious for IPOs in general, partly because of falling stock prices but also because many companies that went through IPOs in 2021 (in an array of industries) have performed poorly.

Nonetheless, several aggregation vehicles have indicated their intentions of doing IPOs. Services platform Dynasty Financial, backed by some of Wall Street’s leading luminaries, filed for a $100 million IPO in January, though no offering had been completed by press time. Canadian acquirer CI Financial, which has paid premium prices for many of America’s top RIA firms, has said it hopes to do an IPO for its American operations next year.

Few aggregators have the exact same business model, so it’s not clear how Wall Street will respond to disparate stock offerings or whether public investors will even have the interest to differentiate among them. Some consolidators buy minority stakes in RIAs, others purchase majority interests while leaving the advisors with substantial equity, and still others pay RIAs in cash along with stock in the holding companies. Those are only a few of the common configurations.

The limited experience of current publicly held RIAs isn’t disastrous, but it’s unlikely to raise much excitement among investors either. Silvercrest Asset Management Group, the investment advisory arm of investment bank DLJ, went public in June 2013 at $12 a share and traded just above $18 in mid-September of 2022. Silvercrest stresses investment research, portfolio construction for individuals and institutions, and wealth management for affluent families.

Focus Financial Partners went public at $38 a share in July 2018 and was trading at $38.50 in mid-September of this year. According to its website, Focus’s revenues, with its 85 partner firms, topped $1.8 billion in 2021 and it has expanded into Canada, Australia and the U.K. Both Silvercrest and Focus have managed to grow their businesses, a fact that private equity investors have clearly noticed.

The Private-Public Market Disconnect
What is obvious is that the RIA business model greatly appeals to private equity firms, which have flooded the advisory profession with capital and made many advisors wealthy in the process. Why?

First, PE managers like the stability of wealth management clientele. RIA firms typically retain more than 95% of their clients, and that’s eye-opening to private equity managers more used to seeing 30% to 50% client turnover when they look at a broad cross section of industries. Dan Seivert, CEO of M&A advisor Echelon Partners, says PE firms are also attracted to the space’s robust profit margins, low downside, multiple potential buyers and acquirers’ rising valuations as they grow the scale of the RIAs they’ve bought.

Finally, private equity investors have lots of money they must put to work to earn fees. Seivert notes PE firms already have 50 to 100 success stories in this space. If they need an exit strategy and the public markets aren’t receptive, they can always mark up their investments and sell them to rivals.

In July 2021, Bain Capital bought out Long Ridge Equity Partners’ 29% stake in Carson Group in a transaction that valued the RIA acquirer at more than $1 billion. Ron Carson held onto the majority stake in the Omaha-based firm, while it is estimated Long Ridge recouped seven times its original investment.

First « 1 2 » Next