Although registered investment advisors have been around for many years, it is still a highly-fragmented and nascent industry. Youth aside, industry reports from Cerulli Associates indicate year-over-year growth for the RIA space and predict that trend to continue, further eroding the mass dominated by banks and brokerages.
While statistics and predictions serve as a conduit for credibility, they’ve yet to create that “watershed moment” that the Focus Financial IPO has. In fact, it’s not since First Republic Bank acquired Luminous Capital in 2012 that the RIA space has received so much widespread attention as a legitimate player in the wealth management industry.
What makes this IPO so “special”?
- Deals like this, along with high M&A activity across the space, make it clear that investors have an appetite for quality RIAs—and there is no shortage of sophisticated, well-capitalized buyers.
- For those on the cusp of launching their own firms, this is the best possible news. Focus provided the roadmap and is paving the way for industry peers to join them in the public markets with an eye-popping valuation. So, watch for emerging independent firms like Rockefeller, Steward Partners, Snowden Lane and Cresset—the path is now clear for them to blaze their own trails in the space.
- With the breakaway movement hotter than ever, the No. 1 question every advisor asks is, “How can I justify turning down a massive all-cash recruiting deal from a traditional firm for equity in a virtual unknown,” which many worry is akin to buying a lottery ticket. As private startups, the valuation of the equity is perpetually in question until there’s a liquidity event such as an acquisition or an IPO. To be sure, every firm in the RIA space is not a winning ticket, but an advisor who is either confident in building his own equity or rolling his into the “right firm” (that is, one that is well-capitalized, has a clear differentiated vision, scale, strong leadership and human capital, and a real growth trajectory) has an opportunity to really ring the register.
For example, a $300 million stand-alone firm is likely to sell for 4 to 6 times the earnings, while Focus just sold at a 16 to18 times the multiple. Especially for early shareholders, who also received significant cash and retained equity in their own business, this is a home run!
And if there’s any poetic justice in a story like this, it’s no doubt in the fact that Merrill Lynch and Goldman Sachs, among other major banks, underwrote the IPO.
Focus just gave the RIA space enormous validation that will have a positive impact on the momentum that has already begun. Stay tuned, as this is just the beginning of what is sure to be very exciting and lucrative times in the wealth management industry.
Louis Diamond is the executive vice president and senior consultant at Diamond Consultants.
