Reaching the critical mass to market an initial public offering that attracts an institutional investor following means the consolidator needs to have a minimum market capitalization of $1 billion. That means the roll-up vehicle needs to have EBITDA of about $100 million without the lion's share of cash flow coming from amortization. "Otherwise, you are just another small-cap company without institutional coverage," Tibergien says, adding that a consolidator with a bunch of aging advisors in their 50s and 60s isn't a very sexy or compelling IPO compared to Facebook.
Even if a roll-up is convinced it doesn't need an institutional following to go public, the bar has risen. John Temple, managing director at Cambridge International, an investment bank specializing in financial services firms, says that since the 2008 crisis, a company undertaking an IPO now needs $50 million, not the pre-crisis $20 million, in EBITDA. Furthermore, the financial services business may have bounced back, but it doesn't possess the allure it once did.
Moreover, the most successful roll-up vehicles that have managed to go public have erratic stock price histories that may not help future IPO candidates. Like all financial services shares, National Financial Partners (NFP) and Boston Private Financial Holdings got slam-dunked during the financial crisis. NFP, which once traded above $58 a share, fell to below $2, while Boston Private fell from an all-time high north of $33 a share to about $3.50 a share.
Both companies' shares have recovered some fraction of their losses-NFP recently traded at about $13.40 a share, and Boston Private, which also owns a troubled real estate lender, changed hands at $6.65. One institutional investor notes that if this is how the two most successful roll-ups performed, why should they even consider investing in lesser organizations?
With a shortage of financial buyers, many advisors are exploring other alternatives, including internal succession planning and regional expansion through tuck-in acquisitions. An advantage to this approach is that an RIA firm can eventually reach the critical mass and financial scale to develop an internal succession that it can self-finance.
One firm that has experimented with this alternative is Long Beach, Calif.-based Halbert Hargrove, which has 30 employees and $1.8 billion in assets under management. "We made the decision not to sell to Focus or Fiduciary Network," says Russ Hill, Halbert Hargrove's chairman and CEO.
One luxury that the firm has is "a fairly young president," Hill explains. John Abusaid, who is 44 years old, also serves as chief operating officer. Halbert Hargrove has extensive regional reach in the western United States, operating offices in San Diego, Denver, Phoenix and the Seattle suburb of Bellevue, Wash.
In late 2003, the firm entered the San Diego market when it acquired-or, as Hill puts it, "affiliated"-with Klosterman Capital. Like Hill, Steven Klosterman was a Stanford M.B.A. and they shared a similar investment philosophy. Halbert Hargrove also bought the firm in Bellevue. "It is the first [non-home] office that causes the problems," Hill explains.
While the San Diego and Bellevue acquisitions have worked out for Halbert Hargrove, two other deals in eastern Washington and the Chicago suburbs did not and were subsequently unwound. "Getting the right cultural fit" and sharing the same investment perspective are important, Hill says.
"You have to be in the same tent to make it work," he continues. That means being willing to spend "a lot of time" in exploratory, pre-merger discussions. "You have to be willing to kiss a lot of frogs and walk away from deals even when they are nice guys."