Evan Simonoff THE BIG PICTURE
Evan Simonoff THE BIG PICTURE
“ Historically , RIAs have not been balance-sheetheavy enterprises , since they ’ ve been able to fund current operations out of cash flow and haven ’ t needed to rely on debt and equity .”
— Mark Tibergien
Many wonder what would happen to many of today ’ s PE-backed firms if stocks were to enter a prolonged bear market , or even go sideways , and interest rates were to remain high . Some have even predicted bankruptcies . A more likely outcome is that original investors would cut their losses and sell their interests to other PE firms , massively diluting their own shares as well as those of advisors . cently decided to go from public to private , or CI Financial , which postponed an IPO for at least five years and instead took money from private equity firm Bain Capital , going public obviously isn ’ t the answer .
Public investors on Wall Street are decidedly less impressed with the RIA aggregation business than private equity is . The fact that a founder wants to cash out simply isn ’ t a compelling reason for public investors to put money in a business . Moreover , the equity market has rarely liked serial acquirers in any industry .
Former Pershing Advisor Solutions CEO Mark Tibergien has long questioned the logic of IPOs for RIA firms . “ Why are firms consolidating ?” he asks . “ Is it to finance the buyout of the founder ? To create continuity of the practice for the benefit of the clients and employees ? Is it to build a large regional or national brand ? To achieve scale ? If so , how would you measure success in each scenario ?”
Legal and accounting firms historical-
ly have managed to merge and scale their businesses largely via stock-swap transactions that require them to assume only small amounts of debt , which banks have no problem loaning them . “ Historically , RIAs have not been balance-sheet-heavy enterprises , since they ’ ve been able to fund current operations out of cash flow and haven ’ t needed to rely on debt and equity ,” Tibergien continues .
“ Why is going public even important ?” he asks . As the experience of the handful of RIAs that did IPOs proves , the markets clearly don ’ t value these enterprises the same way private investors do . Moreover , “ most are at such a small market cap that they are not particularly appealing to institutional investors , let alone the public .”
Bringing in private equity , on the other hand , creates an opportunity to increase leverage — and return on equity . Still , leverage can work against a business in a bear market — if the firm has to refinance debt at higher interest rates .
Future Growth Is Critical Ultimately , a big part of the question is whether firms can generate the organic growth to create career paths for younger advisors as well as attract outside capital . “ We can ’ t attract or retain talent if we don ’ t grow ,” Lazaroff says .
Yet the most talented young advisors aren ’ t likely to wait around to become an older advisor ’ s succession plan . Unless they are tied down by non-compete agreements , they could leave . Even if they do have non-competes , these might eventually be nullified in some states .
Private equity firms are already starting to assert their control . Cl Financial , for one , has ( gently ) eased a number of CEOs and founders into retirement ( some of whom probably wanted to go ) and promoted the next generation of leaders .
New issues arise , of course , when you bring in C-level executives from other industries and place them above longstanding advisors , something that ’ s likely to happen as organizations get bigger . But it remains to be seen if either younger advisors or executives from outside the profession can maintain double-digit growth rates for businesses that are much larger than past advisory firms .
For many firms , staying private probably is a more appealing way to raise capital without having to over-disclose to the public what ’ s actually happening in the business . That way they can stay out of the spotlight and they ’ ll face less short-term pressure to produce results , giving themselves time to integrate their diverse operations — and hope favorable markets eventually make the debt manageable .
16 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2023 WWW . FA-MAG . COM