The Frogs Are Getting Bigger In Wealth Management

Captrust purchased a $3.29 billion RIA and expects to close on another $3 billion firm this week. It’s not a coincidence, says Rush Benton. The pool of sellers is evolving.

(Bigstock photo)

(Bigstock photo)

In 1997, Rush Benton founded WealthTrust, one of the first holding companies created to raise private equity capital and acquire wealth management firms. It succeeded. As CEO, he bought 14 separate companies managing an aggregate of more than $8 billion before a successor assumed his role in 2010.

“Back then, it was really just kind of a liquidity play” for the sellers and some succession planning, he said. Benton now leads the wealth management acquisition strategy at Captrust, a Raleigh, N.C.-based company that manages more $50 billion and advises on $409 billion.

A decade later, things are different. Independent wealth management firms are a fast-growing part of the financial services industry and the space has attracted everyone’s attention (even Goldman Sachs is getting into the RIA custody business). More businesses are aging and in need of succession plans. RIA buyers are bigger, better funded, and many intend to expand into national firms. They also have the resources to offer the technology platforms, marketing, and other supporting services that sellers have come to expect.

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All of that, combined with current equity markets, has altered the water in the RIA pond and sellers are evolving.

“In this business, they say you have to kiss a lot of frogs in order to get one to turn into a prince, or whatever the saying is. If anything, we’ve seen a shift toward larger frogs,” Benton said. “Like bullfrogs. Big firms are now in play.”

On Thursday, Captrust announced it acquired MRA Associates, a Phoenix-based RIA managing $3.29 billion and 59 employees. It also expects to close a deal for another $3 billion firm as soon as this week, Benton told RIA Intel.

Others are doing big deals, too. Mercer Advisors, a Denver-based RIA managing over $24 billion, said Thursday it acquired Atlanta Financial Associates, a firm managing $800 million. Hightower, a Chicago-based RIA managing $61.6 billion, announced its largest-ever acquisition this week in Bel Air Investment Advisors, an RIA in Los Angeles that manages $8 billion for super wealth families, trusts and foundations.

Benton expects Captrust will continue its acquisition rate from last year and acquire roughly five more firms in 2021. Since 2006, the firm has acquired 44 businesses. He also anticipates some of those sellers will also be large, even by new standards.

In 2020, the average assets under management transferred in a deal was $1.8 billion, up 24% from 2019’s average of $1.5 billion and the highest ever, according to Echelon Partners, a boutique investment bank that publishes the industry’s most inclusive report on mergers and acquisitions.

The record deal size, in terms of assets, also happened in a year with record deal volume. After M&A drastically slowed in the second quarter of 2020 due to the rapid spread of the Covis-19 virus in the U.S., deal volume bounced back in a big way. There were a record 69 deals in the fourth quarter, helping total volume for 2020 reach an all-time high of at least 203 deals, according to Echelon. The investment bank forecasts there will be at least 205 in 2021.

The price buyers are paying for these wealth managers can widely vary. Most RIAs bill clients a fee based on a percentage of the assets they manage for a client, which means the rise and fall of markets impact their revenue. That is a primary factor in determining the value of an RIA, but not the only one, Benton said.

Companies “do not sell just because you show up with a check. They do a transition when it’s right for them.”

The time is now or approaching for a lot of aging advisors at larger firms that haven’t seriously considered a sale in the past, according to Benton. When factoring in markets, it’s also a good time to transact. Even as a pandemic rages on and insurrection threatened the U.S. Capitol, markets have continued to rise.

“The more uncertainty there is, the more likely they are going to be thinking seriously about pulling the trigger,” Benton said about sellers.

Captrust’s scale has put it in a good position to win their favor, the dealmaker argues. It can afford to buy large RIAs and continues to build the platform and services that sellers are seeking. It also has the best acquisition philosophy, he says.

“To really build that kind of scale as an acquirer, in my humble opinion, you have to buy 100 percent of the business.”

Some sellers might scoff at the idea of selling 100% of their business and becoming an employee of Captrust. But the Captrust stock gained from a deal has enriched some employees while others have (although not regrettably) missed out.

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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