Forget Bitcoin. The red-hot M&A market for RIAs (Registered Investment Advisors) shows no signs of slowing down. Research and investment banking firm Echelon Partners reports deal volumes in 2017 were on track to set a new record breaking 150 transactions. According to industry estimates, there are between 10 to 20 qualified buyers are lined up for every current seller. So much for buying low and selling high.
Private Equity (PE) firms are now investing more than $3 billion a year into the advisory space and PE firms do not suffer fools. Once an RIA accepts PE money, that RIA will be held to very high –and often escalating expectations. In almost every case, the PE ownership is limited to a term of about a half-dozen years before the private equity fund needs to provide its investors with liquidity. This means the RIA will have a “carousel” relationship with new PE firms which will have even higher expectations – not to mention potential changes to management team or philosophy. This is akin to dating a different version of the J.K. Simmons’ character in the movie Whiplash (watch it ASAP) every 6 years – “Do you think you’re out of tune?”
SEC Commissioner Kara Stein, believes ownership concentration affects the willingness of companies to compete. A study by Jose Azar (IESE Business School), stated common ownership by institutional shareholders pushed up air fares by as much as 7% over the 14 years starting in 2001 because the shared holdings put less pressure on the airlines to compete. So, as RIA firms take on more cheap debt or PE ownership investment to purchase growth, ask yourself how will that affect the quality of services and the availability of your advisor, as they will be forced to do more with less.
Keep in mind, PE firms have a fiduciary obligation to the investors in their funds – and not to you. PE firms typically extract fees and “special dividends” from their portfolio companies which will fund them with additional debt. These fees and special dividends are tools with which PE firms use to extract profits up front. Lenders and other creditors carry the risks. Effectively extracting equity and income that can be used to reduce fees or improve services from clients to the passive investors.