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PE Player Buys Stake in $18B Wealth Manager

By Murray Coleman April 3, 2017

This is shaping up as another banner year of heightened M&A activity in wealth management. Helping to fuel such growth, say industry analysts, is an influx of private equity players.

The latest case is Hartland & Co., a Cleveland-based wealth advisor and institutional consultant that oversees nearly $18 billion. On Monday, the 28-year-old privately-held firm is planning to announce a deal to sell a “significant” equity position to Rosemont Investment Partners, a private equity specialist in asset and wealth management.

The agreement represents a minority stake in Hartland, confirms David Fulton, the wealth manager’s chief executive. He declined to disclose financial terms of the Rosemont deal.

“We’ve been able to grow our client base over the years mainly through organic means,” Fulton tells FA-IQ. “But we’ve also made several key strategic acquisitions along the way.”

Those purchases of smaller RIAs helped to boost Hartland’s assets by several billion and gain a national footprint in more than 30 states, he adds. But it hasn’t been active in the M&A marketplace for nearly two years. Hartland last made an outside transaction in 2015 when it bought the former Lancaster Pollard Investment Advisory Group, an institutional consultant which helped to oversee about $1 billion.

The new deal by Hartland comes on the heels of a record 2016 for the industry. As previously reported, M&A consultant Echelon Partners estimates at least 138 independent advice firms changed hands in 2016. That represented a 10% jump from a year earlier in terms of deal activity.

In its full research piece, Echelon Partners credited a rise in mergers and acquisitions to an aging advisor workforce and improving overall market conditions. A key driver in such an uptick, notes Echelon, are private equity players.

In fact, so-called PE firms have been providing a steady drumbeat for wealth managers since the global financial crisis subsided in 2009 and 2010, notes Elizabeth Nesvold, managing partner of Silver Lane Advisors, the investment banker which brokered the Hartland deal.

“As markets recovered, private equity investors have been moving assets into the independent space amid growing opportunities to deploy capital in a high growth yet highly fragmented industry,” she says.

So far in 2017, Nesvold finds such deal-making “on pace” with 2016’s record transactional activity. First quarter estimates by Silver Lane’s analysts show some 65 RIA transactions taking place with about 35 involving pure-play wealth managers.

“In the wealth management space, we don’t see last year as a peak,” Nesvold says. She points out that less than 3% of independent RIAs in 2016 were involved in M&A activities and that succession planning remains a major focus of an aging population of firm owners. “So even if this year doesn’t move the needle much past 2016’s record activity,” she adds, “there are certainly a lot of deals left to be done.”

“There are certainly a lot of deals left to be done.”
Elizabeth Nesvold
Silver Lane Advisors

Hartland serves as an advisor to some 500 affluent families and individuals, according to the firm. It also works with about 150 institutions as both traditional and discretionary investment consultants to retirement plans, endowments, foundations and healthcare organizations.

The advisor currently has 72 employees and besides its headquarters location, Hartland also operates offices in Portland, Maine, and New York.

Besides opening part of the company to a PE player, Hartland is also recapitalizing by offering shares to employees. It’s part of a succession planning move by the firm, Hartland CEO Fulton explains.

Indeed, 28 current and new Hartland “employee-owners” will invest with Rosemont, he adds. “Over the last seven years we’ve started transitioning from our founders to our employees,” Fulton says. “This is really the final step in that succession planning process.”

He adds that employees will now hold a “sizeable” majority of Hartland’s equity and that Rosemont’s minority ownership represents a “distinct minority” of the company’s overall ownership.

“There’s a certain culture that we want to maintain in terms of showing clients we’re really operating in a transparent and objective environment,” Fulton says. “In our view, a big part of preserving that sense of independence is to make sure that our leadership remains in the hands of our employees.”

Indeed, giving too much financial leverage to outside investors has been an issue for some companies in the past – particularly those involved in technology sectors. For wealth managers, Nesvold believes that “investment windows” expected by PE players tend to average in the four- to five-year range.

That’s probably a “slightly” shorter timeframe than such outside investors typically give when entering into transactions with targets in other industries, Nesvold says.

Even so, she generally sees less pressure coming from PE investors to get their money back with deals targeting major indie advisors. In fact, the number of high-growth firms available to PE dealmakers is what’s helping to attract so much outside interest, according to Nesvold.

“Given the profitability of these wealth management companies, a typical investor can probably expect to realize a current return along the way,” she says. “So, for PE players, they’re generally able to get enough money back by investing in this industry to be repaid before a deal’s actual exit date.”