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HighTower passes up $40 million capital raise, takes a big breather from deals and implements a pacing regimen

The Chicago-based gazelle may chase capital markets next year, but expect deals to resume in early 2013

Monday, December 17, 2012 – 4:39 PM by Brooke Southall
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Elliot Weissbluth: Because we didn't need the money, we passed.

Brooke’s Note: Pretty much from the day of its founding until September, HighTower has been nothing less than a force of nature. Getting a company off the ground is always a race against time because money and start-up fever can carry you only so far before the business needs to stand on its own. But if you’re building a wirehouse with a fiduciary-leaning model out of whole cloth, you are as Elliot Weissbluth says, creating a “category of one.” Not only has HighTower grown but it has done so the hard way, taking on Wall Street’s defense arsenal of retention bonuses and whatever Wall Street lawyers could dream up to stop it. But the firm has prevailed, with few hiccups, in making deal after deal. The industry has stood by in some awe and applauded such courage and ambition. So HighTower was — to an RIABiz watching this march — conspicuously quiet in not doing any deals for the past few months. Outside sources offered their thoughts and some details, and HighTower was helpful in letting us know some of what is behind the latest chapter in its ambitious development.

After taking a pass on a big new round of financing following one of the biggest deal-making tears in RIA history, HighTower Advisors LLC declared a mini-moratorium on purchases for the latter months of the year — and carried it out. It’s a relatively radical action taken by a company accustomed to announcing big deals every few weeks.

The round of funding with a private-equity group fell through in the late summer and early fall, HighTower confirmed to RIABiz. The reason was that mutually agreeable terms could not be reached at or near the time of closing, according to the company. HighTower declined to disclose the amount of the capital involved or the name of the would-be financier. Sources say that the funding in question was about $40 million. Weinberg Perella was the intermediary firm hired to secure the financing, sources say.

By the book

The stoppage in transactions by the Chicago-based serial buyer of advisory practices comes on the heels of CEO Elliot Weissbluth’s instituting a new long-term business plan based on the new Jim Collins book, Great by Choice: Uncertainty, Chaos, and Luck—Why Some Thrive Despite Them All” (HarperBusiness 2011). Weissbluth zeroed in on Collins’ idea that the best companies metaphorically focus on marching 20 miles every day on a trip, rather than worrying about the entire distance. It’s a modern-day tortoise-beats-hare parable. (One person who will no longer be marching in the HighTower battalion is Matthew Reynolds, a former chief compliance officer of the firm who also oversaw insurance and bank lending. He left in recent weeks. Weissbluth says that Reynolds remains a friend of the firm. His duties will be absorbed internally.)

Slow out of the gate

HighTower, which manages and advises $25 billion of assets, of which $10 billion is AUM, according to the firm’s ADV, has played the role of the hare in its first three years in business as it sprinted to No. 13 on Inc. magazine’s list of the 500 fastest-growing private companies. Now, according to Weissbluth, it has found its inner tortoise. It has imposed an off-season on itself. The company will henceforth buy and transition in advisory teams during the first nine months of each year then cease deal-making for three months as a period of digestion, he says. Freed of the distractions relating to making deals, HighTower has spent the last few months making certain that it was delivering on its promise to advisor partners in terms of products, technology, relationships and service, Weissbluth says.

Since suspending deal closings in September after bringing on some Merrill Lynch advisors in Las Vegas, the firm has seen business development activity continue apace and has been augmenting its pipeline — both for purchases of advisory practices and for HighTower Alliance, a program the company announced in September. See: HighTower throws open its doors to non-partner firms who want service and/or brand. In that program, an advisor can either choose to simply use HighTower as an outsourcer or, by paying more, use the company as a more comprehensive outsourcer that includes its brand name.

Skirting a 'cramdown’?

The company cast a net through an intermediary this summer that it worked down to a few potential financiers and then to a single one. It also opened that round of financing to existing advisors, executives and people close to the company. In the end, there was funding available but not on the terms that HighTower viewed as acceptable — especially because there was not a financial necessity to obtain the cash. Without the outside funding, the insiders also lost the chance to invest but may be allowed to participate when HighTower seeks funding the next time.

“Because we didn’t need the money, we passed,” Weissbluth says. He adds that the company is hitting its stride both on the top and bottom lines by not only experiencing its fifth consecutive profitable quarter but also the fifth in a row of increasing profit margins. Its critical mass is shown by its positioning in the Inc. ratings, he says.

Still, a number of sources from outside the company who asked not to be identified say that HighTower’s shift in gears may indicate that it is experiencing some challenges with its original business model. They say that the fact that HighTower turned down the cash likely indicates it would have been on terms that were less favorable than the original financing. This could have resulted in a “cramdown” in deal parlance, or reduction in equity.

Awkward years

John Furey, principal of Advisor Growth Strategies LLC of Phoenix, says that what HighTower is experiencing “sounds like growing pains” that any young, high-flying company would experience. Still, he says it is cause for some concern because — bottom line — a company like Weissbluth’s needs to do a high volume of deals to succeed and will almost certainly need further rounds of capital to accomplish that. “Their growth can’t be as robust. They’re not going to spin enough cash operationally [to get to the asset level necessary for a big liquidity event like a merger or initial public offering].”

John Furey: Sounds like growing pains.
John Furey: Sounds like growing pains.

HighTower’s difficulty in finding capital on the right terms has parallels with what Focus Financial Partners LLC experienced when it tried to get its financier, Summit Partners, cashed out. See: Focus Financial VC backer says IPO still on the table after private auction yields no sale.

HighTower has thus far raised $165 million. In its last round, it raised $100 million, much of which came from Asset Management Finance LLC of Boston and New York, in which Credit Suisse is significant investor. HighTower partners, including David S. Pottruck, former CEO of The Charles Schwab Corp., and Philip J. Purcell, Morgan Stanley’s former CEO, contributed the remainder. See: Weissbluth lands war chest for HighTower Advisors [Updated].

The bad thing about not closing on the new round of financing, sources say, is that it could make it more difficult the next time around. “The next PE firm will say: What did I miss?” says a source who asked not to be identified.

This source adds that it also isn’t a good sign that HighTower’s current financiers don’t want to put in more capital and that it is seeking capital from its advisors, executives and friends of the company.

“You’re not giving them money; you’re asking for money,” he says.

New year, new deals

HighTower might test the market for capital at the same time next year, but Weissbluth says he is in no rush. HighTower has sufficient capital reserves to continue to do deals, and deals will resume in the first quarter of 2013, according to Weissbluth.

Critics also say that the decision to bring the HighTower Alliance model into the mix isn’t necessarily a good sign either — pointing out that a company wouldn’t make such a leap if its core business was hitting on all cylinders.

Weissbluth says that his company has been strengthened considerably by the new HighTower Alliance and HighTower Network offerings. It allows HighTower sales staff to sit down with virtually any prospect and know that it has an offering for them. Advisors not geographically located near a physical HighTower office can now sign on as part of the new programs, deepening the pool of prospects.

“The financial advisory community has become more sophisticated about the [many] offerings,” Weissbluth says. “We are now more of a one-stop shop for advisors seeking solutions.”

Weissbluth says his company is “in a category of one” in terms of having all the strength and sophistication of a Wall Street firm with the ability to deliver a level of fiduciary care. “More and more people are inquiring about our success,” he says.

A highlight of the fall, he adds, was bringing together all the firm’s advisors for a meeting in late October in Phoenix to discuss strategy. This differed from a more celebratory event earlier this year in Chicago that included a more diverse guest list — including RIABiz reporter Lisa Shidler who wrote this article: What happened when HighTower assembled its RIAs at Trump Tower.

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Mentioned in this article:

Advisor Growth Strategies, LLC
Consulting Firm
Top Executive: John Furey

Stephen Winks

Stephen Winks

December 17, 2012 — 6:35 PM

Whoever thinks HighTowers core business is not hitting on all 12 cyllnders and expansion of its offering is a sign of weakness—has no clue about advisory services, the inability of the brokerage model to support advice or business in general.

Leveraging its existing ownership business model with non owner users is genius and works well for both as the emphasis is on the depth and breadth of counsel supported as Wall Street can not answer in kind.

Elliot is even more unique than his firm as he understands the constancy of purpose is the key to success. Wall Street is too self absorbed to serve the best interest of the investing public. Thus, it is very easy to compet with large lumbering bureaucracies where self interests preclude the necessary innovation in the consumer’s best interest, now requitred by statute.

The next step for HighTower is authenticated prudent process that gives meaning to technology in the interests of the investing public. Hightower can not loose in competing with our industrys largest firms and ultimately everyone wins because of it.


Elmer Rich III

Elmer Rich III

December 19, 2012 — 6:02 PM

Whether the specific demand for the services of a specific business model is separate from wider industry trends or different market segments. By definition, demand for some services growing and others shrinking.

It is very easy to get led astray by media reports and the business thought leaders and books who we pay time, money and attention to always be optimistic and preach simple ideas.

Demographics assures growth of financial services, however the demand for a specific firms model may be out of synch with the market. Markets “vote with their feet. Good research suggests that if a firm is not growing it is not a result of execution and operations but lack of demand.

That is logical but debunks most of our naive beliefs and business theory, really ideology, so will not be seriously integrated for decades likely. “Progress processeds one funeral at a time.”

This may seem abstract but the immediate practical usefulness is captured in the idea of not “pushing a string.” Spending money and time into weak demand is a waste.

Elmer Rich III

Elmer Rich III

December 17, 2012 — 6:16 PM

“There is more money than good ideas.” A good idea is pretty simple: it is serving market demand that is growing. Good research suggest that business organization is of little consequence. There is either market demand pulling the company along — or not.

If there is no demand – smart money divests first. If there is demand – acquisitions are the optimal way to grow. There appears to be no way to create demand.

“Category of one”, while a nice marketing phrase, would be concerning to my clients. If there isn’t broad and growing demand, thus competitors, can the business be sustained?

Rather than using airport business books to guide behavior, I would sure want the best data and evidence-based research. The Granularity of Growth is a place to start. There is also other decent work but it takes time and study. Unfortunately, the b-schools and business press/books are filled with pop business opinions and platitudes — mainly telling everyone what they want to hear. Yes, even the Harvard Biz Review!

Very nice reporting.

Elmer Rich III

Elmer Rich III

December 18, 2012 — 8:45 PM

“Constancy of purpose” into a shrinking market or one that is not growing is leadership and business failure — by definition.

Everyone has self-interests – especially those who pretend they don’t.

Stephen Winks

Stephen Winks

December 18, 2012 — 9:20 PM
I am surprised that anyone believes the advisory services industry is shrinking, it is certainly not the case for Merrill, Morgan Stanley or any RIA I know.


Stephen Winks

Stephen Winks

December 19, 2012 — 7:09 PM

Stating the onvious does not establish relevency.

Elmer Rich III

Elmer Rich III

December 19, 2012 — 7:42 PM

Missing the obvious always needs to be pointed out.

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