A quick history lesson to get us started: Private equity made a substantial push into the wealth management arena in the late 2010s, into 2020 and 2021. This can be attributed, in part, to the realization that most RIAs have extremely low attrition rates and are buoyed over time by a rising market. Adding capital to either boost inorganic growth or invest into the business to boost organic growth seems like a surefire way for these investment firms to all but guarantee a strong return on investment over a relatively short time horizon.
Historically, private equity would primarily invest in mega-RIAs – those with hundreds of billions – but private equity has increasingly realized that smaller firms, such as those with five or ten billion of assets under management (AUM), are much easier to double or even triple in size than their investments of yore. This, in turn, has brought more private equity players to the table, capitalizing more RIAs than ever before.
So what does all of this mean to an independent wealth manager looking for a capital backer?
PE Flush With Cash
First of all, it means that many investment vintages, namely those from 2018 to 2021, are nearing completion. This is great news, as private equity firms will be exiting their investments, flush with cash, looking for their next wealth management partner. This offers sellers a wide variety of partners to choose from, which is important because not all private equity is built the same.
Some will take majority stakes; some will take minority stakes. Some will take board seats; others will act as silent partners. Some have expertise in inorganic growth, some will help build from within. Some will allow you to take “chips off the table,” some will require their investment to act solely as primary capital. It is incumbent on the seller to look within and determine what the goal of finding a partner is, because otherwise you may be left with less equity, a bunch of cash, and nothing to do.
It is incumbent on the seller to look within and determine what the goal of finding a partner is.
Gone are the days of private equity being considered the enemy of wealth management. Successful private equity understands that there is reputational and financial risk in making an investment, wiping out the management team, raising fees and hoping for the best. Sellers have the luxury now more than ever before to truly evaluate the landscape of potential partners, vet them for goal alignment, and make an educated decision based on overall fit, not on who is available and willing to invest.
More Achievable Than You Think
The second thing this private equity boon means to RIAs looking for an investor is that finding that partner may be more achievable than you think. The rule of thumb today is that if the firm is growing, has a clear understanding of what they want to do with the committed capital, a strong management team and EBITDA of about $5 million or more (with exceptions), there are likely to be several partners interested in exploring a partnership.
One of the most interesting parts of finding a partner is the evolution of the seller’s mindset as they become educated about the market. It is good practice to come up with a list of must-haves ahead of meeting with potential partners, but it is even better practice to recognize that that list will invariably change as you learn more about what is and isn’t available, where partners’ flexibility does and doesn’t exist, and what levers to pull in order to enact the most beneficial partnership on both sides of the table.
When The Buyer Is PE-Backed
What about sellers looking to find a strategic partner, who are selling not to private equity but to buyers owned by private equity?
Many of these same principles apply. Finding a partner means not just becoming comfortable with the buyer but also understanding their relationship with their capital backer and the role that they play in the day-to-day management of the firm. Take your time and build a trusting relationship with the decision makers at your partner’s company. Understand why they chose the private equity firm they work with, whether their expectations have been met, and what they think the future holds when this investment nears completion.
The capital backer will likely change over the course of your tenure at your new partner.
The capital backer will likely change over the course of your tenure at your new partner. These buyers tend to have a “type” when finding a capital backer. For example, it is less likely that a firm that chose a private equity partner that took a minority stake and no board seat will decide that their next backer will buy 70% of the business and take control of the business.
Regardless of whether you are looking to find a direct investor or sell to a larger firm that has capital backing, the most powerful advice to keep in mind is that the decision to sell is your own, and the process is in your control. At the end of the day, it’s your company and your decision. You don’t have to sign anything that makes you uncomfortable, and you should choose a partner that you can trust. A sale process is designed to help you understand the landscape, do your homework and ultimately pick the partner that is exactly right for you.
Jessica Polito is the Founder and Principal of Turkey Hill Management.
