- Private-equity firms have increased their stakes in wealth-management firms over the last few years.
- The focus has been on RIAs, which collectively manage about $100 trillion of assets.
- A former UBS exec wants to help match RIAs that need cash with investors like family offices.
Vestria Capital is looking to give more investors access to the booming market of breakaway investment advisors.
Registered investment advisors, more commonly known in the industry as RIAs, are a segment of the wealth industry managing $110 trillions of assets made up of wealth managers that have typically launched after leaving a big brand like Merrill Lynch or Morgan Stanley.
Over the last few years, the industry’s largest RIAs have attracted investment from private-equity firms including KKR, Bain Capital, and Warburg Pincus. Meanwhile, smaller RIAs looking for cash tend to get acquired or opt for a minority investment from so-called service providers like Dynasty Financial Partners.
Vestria is setting out to fill a void its founder and CEO Paul Hatch says large services providers have left open in the wealth management industry.
“One of the things RIAs and people who are coming from the traditional space are all looking for is capital,” Hatch told Insider. Service providers, which offer back and middle-office support such as technology and compliance help to new or growing RIAs, “don’t really provide capital.”
Dallas-based Vestria has dubbed itself an “RIA accelerator,” a company that helps match select RIAs with growth capital providers like family offices, financial companies, and private-equity firms. It also gives the RIA an advisory board and access to wealth-management technology. Hatch, a former UBS Wealth Management director turned consultant to asset and wealth management firms, started Vestria with partner Paul Landaiche in 2021.
The case for investing in RIAs amid a gloomy market outlook
Many of the RIA industry’s largest firms focus on growth through acquisition. In a record year of wealth management mergers and acquisitions, private equity was involved in approximately 69%, or 209, of the 307 deals last year. In both 2019 and 2020, there were 135 such transactions, according to Echelon Partners RIA M&A Deal Report.
But 2020 and 2021 were years of low interest rates and an economy trying to get back on its feet from the pandemic. This year, the market looks bearish, inflation is high, and the Fed has been eyeing another interest-rate hike. Valuations will lower, ruining the deal-making environment for sellers. But buyers, particularly those looking to deploy capital, will find this period to be prime.
“The multiples have been very high. We benefit personally by having multiples and levels of asset revenues go down a little bit,” Hatch told Insider.
The fact that RIAs profits go up and down with the markets is not a major concern for companies investing in them, he also said. Growth investors usually focus on how reoccurring the returns are, the relatively minimal fixed expenses, and how predictable the business model is.
What growth investors like the most are RIAs looking to make strategic acquisitions and jack up their client numbers: “Good RIAs have a tendency to grab market share during this period of time,” so when the markets go back up, so does their lead over other RIAs, said Hatch.
The company will scout for RIAs that have $1 billion to $5 billion in client assets and aims to have 20 firms and around $100 billion in the next five years.
Vestria is focused on growing the RIAs not only to help the advisory firms but to also ensure investors get a return. He told Insider that any majority-stake deals will include compensation incentives to grow the RIA’s profits. Hatch mentioned stock in Vestria and compensation tied to profit levels as examples of how deals with RIAs may be structured.
RIA independence will still exist past a majority stake, he added, because the firm will still have their own brand and management team.
“We want the RIAs to manage themselves,” Hatch told Insider.