This is the 26th installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.
The lava-hot wealth management M&A market is spilling into new currents of minority stake deals, with that infusion opening up other scorching channels in turn.
Those deals can bring registered investment advisory sellers ample capital, given the industry’s current high valuations, with no need to relinquish full control to an outside firm. But minority deals, which usually involve about 20% of the seller’s equity and no more than 49.9% of the RIA, can present complications. Terms often vary in their structures, depending on the buyer, and the deals usually call for at least some changes to a firm’s governance and operations.
While sellers typically keep their majority stake in the RIA, they frequently strike minority deals with the incoming resources and expertise from the outside investor in mind, experts say.
The rising volume of minority M&A deals reflects a “shift in mentality across advisors” amid so many private equity-backed rollup transactions by aggregators, said Nate Lenz, the CEO of Tampa, Florida-based RIA firm Concurrent, which has about 145 financial advisors with $32 billion in client assets under management or advisement. It also shows RIAs’ need for liquidity to invest in growth and transactions financed by a mix of cash and equity in the buyer, he said. Lenz’s firm is one out of a handful that are buying minority stakes in other RIAs after selling a non-controlling portion of their equity.
“You don’t necessarily have to sell the whole thing in order to be able to access some liquidity,” Lenz said. “That will allow us to really align as partners, versus an arms-length vendor relationship.”
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The thriving minority M&A market
Deals in which RIAs sell less than a controlling stake have been soaring in recent years. The ample deal volume comes from investors such as Merchant Investment Management, Emigrant Partners, Constellation Wealth Capital, Rise Growth Partners, Elevation Point and any number of private equity firms.
The capital is flowing so freely that some of these platforms, like Elevation Point and Concurrent, sold non-controlling stakes in themselves to outside investors and are now using that capital to pitch minority-stake deals to advisors they’re trying to recruit. And large wealth management firms that are eager to aid retiring advisors with succession deals and attract competitive teams are striking other minority-stake deals that often aren’t even publicly announced.
Regardless, the minority M&A represents “a continued trend of select firms seeking additional capital to drive growth,” according to investment bank and consulting firm Echelon Partner’s latest quarterly deal report. Last year, the number of minority deals in wealth management jumped 49% to a record 52 announced transactions, with non-controlling positions in Creative Planning, Fisher Investments, Mariner Wealth Advisors, Merchant and Dynasty changing hands, Echelon reported in its last annual deal tracker. The factors driving deals include the mixture of expansion capital with renewed control of the firm, high valuations, succession needs and incoming expertise via the external investors’ teams.
“These transactions are often highly structured but provide growth capital or liquidity while still allowing the company’s current owners and the management team to maintain some control of the business and to share in the majority of the new value created going forward,” Echelon’s 2024 deal report said. “Minority deals often involve intricate structuring, with some investors implementing preferred returns, participating debt and sophisticated governance protections given their lack of control in the company.”
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Different motives, same endgame
And possibly “the largest item to consider” out of those factors comes from the fact that many buyers require the minority sellers to give them the first right of refusal on any future M&A transactions, according to John Langston, the founder and CEO of investment bank and M&A advisory firm Republic Capital Group. The sellers are seeking liquidity to enable growth and address any debt challenges, while the buyers are recognizing that they are “solid firms to invest in” — even without majority control, Langston noted.
But the deals demand careful attention to language about any future M&A and the ownership of the firm’s client base.
“The usefulness of them and the impact of them is very clear and positive,” Langston said. “It’s very important to be thoughtful about the legal details and the structure of the transaction.”
Each party’s reasons for striking a minority deal can be very different, said Harris Baltch, the co-head of investment banking with RIA services firm Dynasty Financial Partners, which acquired a minority stake in the September launch of Atlanta-based OpenArc Corporate Advisory, an independent firm started by an ex-Merrill team that managed $129 billion in wealth and retirement-plan assets. In general, minority sellers want the autonomy “to continue to do things the way they want to do things,” Baltch noted. And the buyers are trying to get a stake in that business.
“You believe in them and how they serve clients,” he said. “The output of that is buying into a strong business. You’re doing it because you really believe in the people and the culture behind what’s really driving that growth.”
Minority deals also provide buyers with more opportunity to wade slowly into their investment, like a client who has $10 million in holdings but begins by bringing only the first $2 million to a new advisor, said Carolyn Armitage, a longtime industry executive and dealmaker who advises RIAs as the founder of Wealth Management Consulting. The sellers have often reached their debt capacities, and the deals feel less “emotionally difficult when it’s a minority sale, versus when it’s a full sale,” she noted. Still, the details of such sales may bind the seller to stipulations like the first right of refusal on any M&A deals.
“They can be pretty onerous,” Armitage said. “It really feels to me like a land grab out there right now. … If they can’t buy all of the firm, they’re happy with a portion of it, because they have a foot in the door and sometimes, contractually, even more control.”
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When a minority seller becomes a buyer
On the other hand, the bumper crop of investors means that sellers have many more options for a minority deal than they did a decade ago. Concurrent is one such investor.
The firm has completed roughly 100 minority deals for stakes in advisors’ businesses across 75 out of its 77 affiliated teams, and, since beginning to buy stakes in third-party advisory practices around a year ago, Concurrent has acquired minority equity positions in five other firms as part of its RIA Capital Partners Program. A former independent branch using Raymond James Financial Services, Concurrent has kick-started its expansion by selling its own minority stake in 2021 to wealth management growth financing firm Merchant Investment Management and subsequently leaving Raymond James two years later.
After Concurrent acquires a minority stake in an advisory practice, rather than require its approval for M&A, the firm is identifying possible succession deals and “actually bringing them in to do those deals,” instead of “stepping in front of them,” Lenz said. Minority deals are getting attention as not only a way to find more growth capital but also as a way to finance succession moves by less-tenured advisors, allowing them to buy the firm from a founder or longtime owner.
The alternative of a rollup deal with a consolidator could completely change the career tracks of the next generation of advisors, who may have been the “heir apparent” at their firms at the end of one week, Lenz said. “And they wake up on Monday morning an employee of another firm.”
