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.

With returns like that, one might assume public markets would be more receptive to RIAs. What’s the disconnect? After all, it seems difficult to fathom that Wall Street couldn’t figure out an adjacent market like the RIA business.

But as Steve Sanduski writes on page 35 of this month’s issue of Financial Advisor, most RIAs are experiencing anemic organic growth. That’s a critical metric for public investors. RIAs’ slow growth comes as they continue to gain market share from Wall Street brokers, many of which are shrinking.

Organic growth has been a challenge for the entire financial services business, including mutual funds and other asset managers. As baby boomers enter the phase of unwinding their investments, the problem is likely to become more acute across many financial sectors.

Former Pershing Advisor Solutions CEO Mark Tibergien has long been a skeptic about all the IPO chatter in the advisory world. He believes the RIA business remains relatively immature.

“It is important to remember where we are in the consolidation cycle,” he maintains, noting the industry is still in the fragmentation phase. Firms “have not invested much in people and infrastructure, so their actual profitability is somewhat camouflaged.”

In other words, firms are making real money, but questions remain about what happens after the founding owners wind down or die. The M&A boom of the last five years has also prompted many RIAs to focus on deals instead of upgrades to their operations and infrastructure.

The Next Phase
The next phase, in Tibergien’s view, entails building platforms that include “systems, processes, consistent branding and other elements that provide for greater efficiency,” ultimately making the firms more sustainable. “Not all the RIA consolidators will remain standing,” he predicts. “Some will merge with each other.”

Tibergien concedes it’s hard to tell whether there will be only two giant firms remaining—the same kind of duopoly controlling the beer industry—or if the industry would look more like banking, where 19 firms control 60% of the nation’s deposits. Eventually, he believes Wall Street will get a chance to invest in the big RIA model.

Ask any head of a billion-dollar RIA what the biggest constraint to their growth is and they are likely to say that it’s finding talented young advisors. Since they run service-oriented businesses, they depend on human capital, and skilled personnel is in short supply here as it is elsewhere in American business.

If a giant wealth manager went public, however, and turned into the kind of growth business Wall Street loves, that would be a game changer. Such a firm would have to enjoy consistent organic growth while posting predictable financial gains year after year. Think Microsoft, AIG, Coca-Cola or GE in the 1990s. Of course, Microsoft and Coke stagnated, while GE and AIG ran into accounting and leverage issues.

But there is a chance advisors may get a sneak peek in 2023. CI Financial has spent a fortune acquiring several dozen of the best RIAs around. The Canadian firm paid premium prices to do this and leveraged itself in the process, causing its stock to drop 50% in the last year. But if it follows through and attempts an IPO next year, it will have on its side many subsidiary organizations that boast deep management structures and impressive organic growth.

For the time being, however, Wall Street investors are still wary of RIA firms’ revenues being too dependent on buoyant equity markets. Seivert notes that RIAs don’t need IPOs to be successful. Right now, the combination of rising rates and falling multiples may cause some firms to refocus on internal business dynamics instead of exit strategies in the next 12 months. That's likely to be a positive development.