Conventional wisdom across many industries, including wealth management, holds that a firm proceeds from an early stage with founders and startup investors, through a growth period with private ownership, culminating in a mature public company. While variations to the theme exist, the trend is a linear model that views public listing as the highest state of corporate evolution.
In recent years, however, the wealth management industry has witnessed some large firms make moves in the opposite direction – from public to private.
In July, Envestnet went private with a consortium of investors led by Bain Capital. In April, AssetMark announced an agreement to be acquired by private equity firm GTCR.
In September 2023, Clayton, Dubilier and Rice acquired Focus Financial. In May 2023, CI Financial sold a 20% stake in its U.S. wealth management unit to a group of investors.
Preceding all these moves, in 2019, Ladenburg Thalmann went private in a cash merger with Advisor Group (now Osaic), creating a combined firm that, at the time, had almost 11,500 advisors with over $450 billion in client assets.
Why Shift From Public To Private?
Private capital structures hold certain advantages over public listing. Joe Duran, Managing Partner at Rise Growth Partners, explains, “Private structure offers the flexibility to implement strategic shifts without the constant pressure of quarterly earnings scrutiny from public markets.”
Joe Faber, CFO of Steward Partners, points out the increased regulatory burden on modern publicly listed companies. “It used to be perfectly acceptable to be a public small cap company, but that’s much tougher these days. Regulatory and reporting burdens have become much more significant making it a more expensive proposition.”
Faber adds that private companies have no disadvantage bolstering their capital structures: “Public company benefits like equity research are less compelling while private markets can provide similar – if not better – access to debt and equity.”
Taking a similar view, Bruce Cameron, Partner and CEO of Berkshire Global Advisors, says, “Financing availability is not much different, if at all, relative to a public firm.” He adds that the more static valuations of private companies “can ease the use of equity as part of the acquisition currency.”
Cameron sees periods of high inorganic growth as favorable to private ownership, since inorganic growth “may impact near-term reported earnings and perhaps financial leverage.”
Gilbert Dychiao, Managing Director and Head of Financial Institutions Investment Banking at Oppenheimer & Co., sees a more balanced set of opportunities. “We believe wealth managers have many attractive options across both public and private markets.”
‘Patient’ Private Ownership
Dychiao states, “Going private can allow for a more flexible and patient capital structure, less reporting requirements and associated expenses, and agility as it relates to M&A and other strategic opportunities. Once public, there can be pressure to deliver consistent growth of AUM and profits.”
In a similar vein, Duran points out the patient, long-term character of private capital. “Private ownership offers greater flexibility, patience and long-term focus. Often, before the firm is taken private, there is already a well-considered plan that can be more effectively executed privately.”
Duran cautions that plans do not always proceed smoothly. “Those plans sometimes involve aggressive leverage or significant transitions, which are disruptive to clients and team members.”
Cameron elaborates on the benefits of a private firm’s static valuation to long-term planning. “Stable controlled valuations driven by past investors give management a more stable financing metric when structuring deals. Momentary sentiment changes that can cause public value fluctuations are generally not a factor for privately held businesses and these ‘preset’ valuations can be, to some degree, self-fulfilling.”
Faber also sees the benefits to long-term vision derived from the stability of private ownership. “I think it can be really challenging to implement multi-year strategic plans when you’re managing to quarterly earnings and reporting. It’s easier to drive strategic transformations when outside the lens of public markets, especially when these come along with near-term profitability limitations.”
Flexibility In Capital Structures
“Flexibility is key, and the traditional linear model may not always be the best path,” says Duran.
Cameron notes that flexible capital structures allow for companies to take advantage of financial markets that “are increasingly sophisticated, flexible and liquid enough to facilitate these business stage considerations.”
Faber gives the example of his firm as a partnership that benefits from a flexible capital structure. “At Steward, every employee is a true equity partner and it’s a critical part of our value proposition for our clients, advisors and home office employees. Steward Partners’ unique ownership structure, with patient, long-term outside investors who are not beholden to four to seven year investment time horizons has been great for our firm.”
Dychiao adds the example of AlTi Global, a client of his firm, that went public through a special purpose acquisition company (SPAC) last year. “AlTi Global was able to simplify their capital structure, leading to further growth by offering a warrant exchange, raising additional equity capital through a [private investment in public equity] and subsequently completing several strategic M&A acquisitions.”
Follow The Linear Model – Or Not
Whether a firm chooses to follow the traditional linear model or opt for a different capital structure can be driven by its circumstances and goals, as well as the current environment.
Cameron explains that firms wanting rapid change and aggressive inorganic growth should look to private markets, while public markets are better for more mature businesses or those that are readily understood by the public sector.
Dychiao says that scaled and normalized companies are better suited for the public markets, while it makes more sense to remain private and carry out growth initiatives when “management has strong visibility into a company’s growth that may be hard for potential public investors to underwrite.”
“The linear model is tried and tested, but it typically results in significant dilution for entrepreneurs and limited equity for employees and advisors,” says Faber. “If you can tap the credit markets, that can be a better outcome for shareholders and it’s one reason why we have focused on establishing and expanding our credit facility.”
“The linear model works best for firms with few owners and limited equity participation,” says Duran. “However, as ownership broadens, the model may need rethinking, particularly in larger, more complex organizations.”
The Future Of Capital Structures
“This trend may not be widespread,” Duran states, pointing out, “The majority of transactions are still sponsor-to-sponsor, but as firms grow larger, they may outgrow strategic buyers, with deal sizes becoming too large for private equity investors.”
“As financial sponsors continue to roll-up wealth managers under their portfolio companies, we expect the next stage of evolution of ownership to likely be in the public markets,” says Dychiao. “These businesses will be well-positioned from a perspective of scale and improved business models, benefitting from some of the lessons learned from their formerly public peers.”
Dychiao foresees both public and private capital in the following years “to fuel growth for wealth management firms, at varying terms and with increasing flexibility on structure. Secular tailwinds in the industry will continue to drive M&A activity and attract a wide spectrum of buyers and investors to the market.”
Julius Buchanan, Editor in Chief at Wealth Solutions Report, can be reached at jbuchanan@wealthsolutionsreport.com.
