For two years, SkyView, a specialty lender to RIAs in need of cash for mergers, acquisitions, and succession plans, was searching for its own company to buy.
In addition to helping connect financial advisors with banks willing to give them traditional loans, SkyView wanted to offer investment banking services. But to do that, SkyView felt it needed to be a broker-deal. Now, it can finally say it is.
On Monday, SkyView announced it acquired Grand Avenue Capital Partners, a boutique investment bank and broker-dealer in Los Angeles. The company received a letter approving the transaction from the Financial Industry Regulatory Authority, or Finra, Oct. 2. Terms of the deal were not disclosed.
SkyView CEO Scott Wetzel told RIA Intel that Grand Avenue Capital Partners had all the attributes SkyView was looking for. Most importantly, the investment bank has a long history of working on mergers and acquisitions — it has no other lines of business — and it gives SkyView the ability to extend those services to wealth managers.
The deal adds SkyView to a short list of investment banks and consultants competing to work on deals in the wealth management industry, including Echelon Partners, DeVoe & Company, FP Transitions, Republic Capital Group, and others. Wetzel though was hesitant to label those firms competitors. SkyView plans to focus on “small and mid-market” deals involving a transfer of assets under management less than $500 million. Some other banks and consultants focus on larger transactions and the growing RIA market is plenty big enough to accommodate another service provider, according to Wetzel.
“We've not entered the investment banking services world really from a revenue and or profitability standpoint. It really has a lot more to do with scaling our financing business and, more importantly, increasing the overall size of the marketplace,” Wetzel said.
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Too few RIAs are selling their business and retiring, according to Wetzel. Most don’t experience any liquidity event. Instead, many continue working late into their life (and their unwillingness to sell is creating perverse circumstances in the industry). But if RIAs were better educated on the emergence of traditional financing offered to them, more would seek loans, facilitating more deals, he argues.
Since Minneapolis-based SkyView was founded in 2017, it has helped originate $1.8 billion in loans, the total financing borrowers sought from its lending partners. But that might represent a small portion of the total market over the next decade, according to SkyView. It projects the market for loans will grow to between $70 and $90 billion over the next 10 years. Since 2017, SkyView has helped finance 124 deals with more than $260 million in loans.
This year has been even better for SkyView’s lending business. The Covid-19 pandemic and market downturn chilled M&A in the second quarter, but there were a record 55 deals in the third quarter and more wealth managers are seeking traditional financing. SkyView’s loan volume year-to-date is up 87% compared to all of 2019 (it expects volume will be up over 100% this year compared to last).
But SkyView is looking for ways to accelerate the growth of its lending business even more.
“As we built the finance business we recognized that the seller experience in the marketplace was not optimal. From a listing standpoint we had a lot of advisors that were going to market and they would list on one of the bulletin boards and then receive a deluge of emails and have a hard time sorting through the different buyers on their own, and would withdraw from the process,” Wetzel said.
To help buyers and sellers find one another, SkyView created the Advisory Practice Board of Exchange, or APBOE, a website where investment banks, consultants, and independent broker-dealers can list their clients looking to do a deal. (More than 1,500 buyers are using APBOE; 51 manage over $1 billion and 101 manage over $500 million.)
But matching buyers and sellers is only the beginning of the deal process. There was still friction between SkyView’s credit team and the firms representing buyers and sellers and putting together deals. “The problem we had experienced in the past is that many of the transactions that were structured by other firms lacked insight into what our banks required,” Wetzel said. So, SkyView sought to buy a broker-dealer and start an investment bank that understood the advantages of traditional financing and could help buyers get the financing they need.
“With our credit team working with the investment banking, buyer, and seller from the beginning, they're able to build a deal structure that's not only agreeable to buyer and seller, but also to bankers. So, when buyers and sellers show up for funding, it is a much more seamless process and certainly a more palatable transaction to the bank due to our insight into what our bankers are looking for,” Wetzel said.
Although SkyView’s investment bank and lending business are under the same corporate umbrella, they will operate as two separate entities to avoid any potential conflicts of interest. For example, the investment bank would not reach out to the credit group until a price was already agreed upon by the buyer and seller. SkyView also does not lend money directly to RIAs; its credit group only acts as a consultant and a go-between.
Any business referred between the lending and banking groups must also be presented with other options in addition to SkyView.
All SkyView employees, including the investment bankers, are paid a salary and can participate in a stock purchase program. Any other structure could encourage self-serving behavior, Wetzel said.
“At the end of the day, for our investment banking team, we are absolutely signed to retain the best buyer for the highest possible valuation that we can retain for our sellers. And for our buyers are looking for the best, the lowest cost of funds and in many cases buying the best practice at the most reasonable price,” Wetzel said.
SkyView Managing Partner Aaron Hasler and Managing Director Kara Miller worked on the credit team but will be transitioning to the new investment bank. Both had experience in investment banking prior to joining SkyView. The bank also announced Monday that it hired Nick Arellano, a banker with over 18 years of experience at Morgan Stanley and DeVoe & Company.
Traditional financing will “inject liquidity” into the marketplace and also improve valuations, Wetzel said. “It's our firm belief that valuations in the marketplace are low.”
Demand for traditional loans by wealth managers already existed but when SkyView started it was unknown if banks would be willing to lend them money. Wetzel recalls getting tossed out of board rooms in the beginning. Now, some banks are coming to him.
Wealth management falls under the commercial and industrial category of loans, which has become more difficult as small businesses have disappeared or consolidated to compete with larger ones. The restaurant industry, which is in the same category, is one of the best examples of this phenomenon. “We're seeing similar forces in the wealth management industry today. We think we've created a solution for buyer and seller to preserve that small business ownership,” Wetzel said.
Even after the second quarter of this year, SkyView has had zero loan losses in a portfolio that totals more than $250 million, and no payment delinquencies. As a result, interest from banks has turned a corner. SkyView is now getting unsolicited inquiries about lending to RIAs and existing bank partners are interested in growing that part of their loan books.
But hastening that growth required a new investment bank for RIAs.
The cost to buy Grand Avenue Capital Partners, the expenses related to the deal, and the ongoing costs to operate a broker-dealer are considerable. And not every company consulting on deals or offering investment banking-related services to wealth managers is a broker-dealer registered with Finra.
SkyView’s attorneys recommended that it acquire a broker-dealer prior to charging any fees for investment banking related advice.
“I believe that we had followed the advice of [counsel] on this and came to the conclusion that as expensive, and time consuming, and laborious as it is to acquire a broker-dealer, it was absolutely necessary.”
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.