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In recent years, there has been a significant influx of private equity capital into the registered investment advisor (RIA) sector. According to ECHELON’s M&A RIA Deal Report, private equity firms were involved in 62% of all transactions in 2023, either directly or indirectly (as financial partners to the acquirer).
While this trend may not affect firms that are not actively seeking capital, firms seeking to build a high-growth national platform should pay attention. To remain competitive and become a national brand, RIAs will almost certainly need the support of a capital partner. However, it’s important to critically evaluate those partners and ensure they are best equipped to offer support for a given RIA’s specific set of needs.
While cost of capital will always be an important consideration for RIAs assessing a new capital partner, growth-oriented firms should seek partners who bring more than just funding. The ideal investor will be able to offer firsthand experience and strategic insights that can help guide firms through their growth journey, differentiating them from others in the market. By partnering with an investor that has real world operational experience, RIAs can move faster and more quickly understand the key points of friction that they must overcome to take their business to the next level.
However, not all value-add partnerships are created equal, and not all RIAs are looking for the same type of partnership. Choosing the best capital investor will depend on the desired goals of the firm.
What’s your primary goal?
If an RIA’s main goal is simply to secure the highest valuation, then the primary factors they need to consider are price and governance. Broadly speaking, this group will include larger RIAs that are already well on their way to becoming large national brands. For these firms, it’s important to remember that focusing solely on obtaining the best price for capital may result in tighter governance controls. On the other hand, if they wish to secure substantial capital while maintaining maximum control over business decisions, they may need to accept a trade-off in pricing.
However, amid increased competition and reduced inefficiencies in the marketplace, price and governance have become highly commoditized, causing many deals to be structured in similar ways. This reality has paved the way for a new class of investor: the synergistic financial (or value-add) partner. RIAs seeking a partner that is more than just capital on the balance sheet should take a hard look at investors who can serve their growth in this way.
This type of investor offers competitive capital solutions and delivers significant value in the form of hands-on support and operational/strategic knowledge. Drawing from their invaluable experience, these partners provide critical guidance that can help the RIA scale from a $1 billion to $2 billion enterprise to a $15-20 plus billion powerhouse. Capital partners in this category can also be thought of as “for operators, by operators.” They are not just consultants, but experienced professionals who have played the game before with their own P&L on the line. They know what it feels like to take a hit – and how to get back up and move forward.
This kind of partner is especially valuable for high-growth firms. For example, a $2 billion RIA likely hasn’t been this size for long, and the journey from $2 billion to $10-$20 billion represents a dark alley of unknowns and potential challenges. By leveraging the expertise of a partner who has done it before, firms can circumvent the need for trial and error — a costly process that often results in lost revenue, lost time and delayed growth. A partner of this nature can also quickly identify the factors behind a firm’s potential stagnation at its current size and can likely help the firm front run these hurdles for growth before they show up.
An experienced guide
Climbing Mt. Everest is far more achievable with the expertise of a Sherpa – someone who has climbed the peak before. Similarly, firms can accelerate their growth and minimize missteps by partnering with experienced industry guides who have firsthand experience in building and scaling businesses, rather than those who have only invested or consulted from the sidelines.
With private equity money flowing into the RIA space, firms can target the next $10-20 billion in growth by evaluating their capital partners with a critical eye. Those with firsthand experience and a deep understanding of the journey ahead are poised to be invaluable resources in this ambitious climb.
Darius Mirshahzadeh is the co-founder and managing partner of Rise Growth Partners, a firm on a mission to partner with exceptional RIAs who want to become the next lighthouse brands.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
