4 Things to Consider When Evaluating a PE Investment in Your RIA

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Every week, it seems like a new deal is announced in the RIA space. Private equity firms in particular represent a rising share of these investments, especially for the $1 billion-plus RIA category, and while these firms represent only 3% of the industry, they control 56% of assets and 51% of revenue, according to research from Echelon Partners. The research also shows that nearly two-thirds of these $1B+ deals are private equity investments in RIAs. Drawn by the high returns and diverse service offerings RIAs provide, combined with a growing number of appealing targets as firms grow in scale and the advisor population continues to age, these investors are eager to get in on the action.

While it can be tempting to just say yes when private equity comes knocking at your door, it’s important to approach such decisions with a level head and clear assessment of the potential benefits and risks. This spring, Steward Partners Global Advisory, made the decision to partner with The Cynosure Group, a Salt Lake City-based private equity firm—but only after a lengthy vetting process on both sides to ensure the partnership made sense for both Steward and Cynosure, and aligned with our firm values and long-term goals.

Here are a few things for RIAs to remember when evaluating a potential private equity investment:

  1. Look for a Partner – Not a Boss 

Deciding to accept someone’s investment means more than just depositing a check and adding someone to your board. You’re making a decision to partner with this firm, which means finding an investor you are excited to work with, not for. While private equity firms can provide significant resources to RIAs, they also come with the most strings attached out of all potential investors. Be sure to meet with their team, and the folks you’ll be working with most closely, to assess whether you can picture working well with them over the next few years to grow your firm and support your clients.

2. Evaluate Their Resources

Not all private equity firms are created equal. Look for an investor with prior experience and a strong track record investing in the wealth management space. Know the private equity firm’s history of working with companies (both within wealth management and outside of it) and how those companies have fared. How are they planning to change your current business plan and strategy? Are you on board with this approach? Don’t get dollar signs in your eyes and rush through a deal just to get a check. It’s critical any potential partner understand the industry and can help you navigate the challenges and opportunities you might encounter as you grow. Otherwise, you may find yourself hampered by their greenness later on.

3. Be Sure You’re Aligned

Check if the private equity firm’s values dovetail with your own:

  • Does their culture fit with yours?
  • Will they support you in your company’s growth initiatives, such as investing in technological updates or expanding to new markets, or will they be focused on just the bottom line?
  • What are you hoping to gain from this new partnership?
  • Is the investment structure aligned so that everyone wins?

If you take someone’s capital, you are giving them a voice in the company’s operations—be sure it’s a voice you want in the room.

4. Understand the Valuation Opportunity

At a little more than ten years out from the global financial crisis, we’re currently enjoying history’s longest bull market. While valuation is an art, not a science, investors and RIAs alike agree that valuations are stronger than ever before. As more and more PE firms seek entrance into the space, now is the time to capitalize on your success to-date and take in private equity investment on terms that are favorable to you.

Whether you’re already in talks with a potential private equity partner or just beginning to search for one, keeping these four key considerations in mind will help you avoid common issues and ensure that you are best positioning yourself and your firm for success. Remember that these private equity firms want to ensure the companies they invest in are a fit for them too, so don’t ever feel bad doing your due diligence and remember that if things don’t feel right, don’t force it. There is a lot of private equity money out there up for grabs, but you should never feel you need to undercut your firm’s values or mission to acquire it.

Steward Partners Global Advisory, LLC maintains a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory, LLC. This information is for general information purposes only and is not meant to be legal advice. Be sure to consult with the appropriate legal counsel in regards to your situation.

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