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Instead of sitting out frothy M&A market for $4-billion-plus RIAs as AMG exec, the now former president of the RIA unit is hustling, with more diverse backers, to crack the chronically stagnant M&A market for small firms
July 12, 2017 — 6:11 PM UTC by Brooke Southall
Brooke's Note: This is the kind of story that only an industry as hyper-dynamic as the RIA business could produce. We saw something similar when LPL CEO Mark Casady spun his long-time co-exec Esther Stearns into NestWise. See: NestWise is starting to take shape and take flight under LPL's wing -- and from under Schwab's shadow. Many people believed John Copeland had the best job in the RIA business when he was given a pot of money by a proven roll-up success and told to have at it. In the end, he wanted more ... adventure ... and he and his employer, AMG, were able to work out a deal.
When John Copeland went to his bosses at Affiliated Managers Group Inc. a year ago with an overhauled plan of how to build the (now) $40-billion roll-up at a much higher pace of growth, the AMG bosses were unmoved.
But not unimpressed.
They essentially told him it was likely a good idea to switch gears to buying RIAs in the lower end of the market where valuations were attractive -- and to do so under a new structure -- but that it just wasn't appropriate to do it under the AMG corporate umbrella.
The result of that highly bifurcated corporate response has yielded an equally bifurcated product where the resulting business model is: All of the above.
AMG will keep its $40-billion roll-up in-house, scale back its internal roll-up staff and set loose Copeland and Rich Gill to execute on the newer, more opportunistic plan in an entirely different entity. AMG is a minority investor in the new roll-up.
Our story really begins with an act of inspired alchemy.
In 2011, Affiliated Managers Group hired Copeland and bestowed its brand and checkbook on him to build an RIA roll-up alongside its (now) $700-billion roll-up of asset managers. See: AMG delves deeper into the RIA business with second deal -- of $4-billion player in NY.
If résumé credentials are worth anything, then Copeland had everything. He earned his JD magna cum laude from Harvard Law School. He also holds an MS from MIT Sloan School of Management and a BA from Georgetown University.
The West Palm Beach-based aggregator's belief in Copeland's curriculum vitae was rewarded. Under Copeland, AMG Wealth Partners, the West Palm Beach, Fla.-based RIA roll-up subsidiary, snapped up five of the industry's biggest and best RIAs and grew to $40 billion -- placing it right near the top of the roll-up heap. See: AMG is suddenly among the RIA roll-up elite after the Baker Street deal pushes it past $25-billion of AUM.
Yet, after banging out the Baker Street deal in early 2015 and a $7-billion myCIO Wealth Partners LLC deal a few months later, the RIA deal machine mostly ground to a halt -- although it did bring aboard the Forbes Family Trust and its $3.6 billion of assets last fall.
The problem was applying an asset management model to an RIA market that has few large, organizationally mature RIAs for sale at attractive prices was an impediment to executing a higher volume of deals, says Copeland. (One expert points out that roll-ups are, in the raw sense, an arbitrage of buying independent RIAs for about seven times revenues and attaching them to an entity that gets valued at 14-times revenues. When those two valuation points converge, the arbitrage play breaks down.)
"We took that AMG model and applied it to RIAs, but the opportunity set is very limited," Copeland says, adding that the total universe is 300 firms tops and few, if any, are for sale -- or at least not for good prices with a variety of buyers bidding up the good ones. See: How many RIAs are there? No, seriously, how many?
Wrong, says Dan Seivert, CEO of ECHELON Partners, a succession planning and M&A firm in Manhattan Beach, Calif. There are usually about 5% to 10% of advisors at that $4-billion mark that "need a liquidity event."
"It's so easy to say that nobody is willing to sell. I would contend that if you're given a whole bunch of money and told to buy a bunch of whatever, it's just not that hard. But what you're cooking, nobody is buying," says Seivert. See: The 10 takeaways Chip Roame imparted at his Tiburon CEO Summit in NYC and other items I gleaned by gumshoe reporting.
The Copeland-AMG kitchen may have simply have had too many chefs, according to Jeff Spears, former CEO of Sanctuary Wealth Services LLC in San Francisco.
"Did AMG have illusions of grandeur or was Copeland ineffective?" he asks. "It was probably a little of both, but there's no doubt in my mind that it didn't work."
Nevertheless, the result of the perceived mismatch was that Copeland was sent packing -- albeit with a parting gift that could prove immensely lucrative if it functions according to plan.
To wit: Copeland and outside private equity backers -- including the former overseer of Goldman Sachs's wealth management unit -- have launched a new roll-up venture -- Wealth Partners Capital Group LLC -- with AMG as a significant minority investor with the in-kind contribution of Forbes Family Trust and its assets. Copeland spent the bulk of his career at Goldman Sachs.
Following Copeland to Wealth Partners Capital is Rich Gill, who joined AMG from New York-based Focus Financial Partners LLC three years ago. Sean Bresnan also followed. Gill is located in San Francisco and Copeland remains in West Palm Beach. See: Why AMG's poach of Rich Gill could be the missing ingredient for its V-8 roll-up engine.
Wealth Partners Capital Group LLC hits the ground running as minority owner of MAI Capital Management LLC in Cleveland with its $3.5 billion of AUM, in addition to Forbes Family Trust with more than $3.5 billion, and EP Wealth Advisors Inc. of Torrance, Calif., with near to $2.6 billion. See: Looking for a second growth spurt, $1B EP Wealth hires away a Nuveen global ops man.
The design of the new roll-up model has these three firms, with a combined AUM in the $10-billion ballpark, doing all the buying up of RIAs and targeting ones with $200 million to $300 million in AUM.
The new model is highly interesting, Spears says. "It plays into the industry not getting any younger and the advisors coming aboard have the choice of three business models so it's not going to break as much glass and it'll make the firms worth a little more." See: How two deals struck last week show midsize RIAs reigniting the M&A and breakaway movements.
'Half that -- if that'
This scheme held enormous promise on the whiteboard, according to Seivert, who says that many sellers at that size are fed up.
"There's a huge population of RIA owners who met with buyers and were turned off and just went back to work," he says. "There is an enormous opportunity for someone positioned as a good buyer."
The problem, Spears says, isn't just the bad buyers but the bad attitude of the smaller sellers.
"The advisors see articles in publications like yours [about deals for big RIAs] and think: I should be worth this -- and they are worth half that -- if that," he says.
Topping the list of bad buyers for small RIAs, Seivert says, are roll-ups and banks, which give off an institutional vibe and a vast sense of uncertainty about the endgame combined with confusing and opaque financial terms. See: While Advisor Group's high-powered organic growth strategy unfurls, Valerie Brown unleashes Steve Chipman to do the inorganic wet work of rolling up IBD orphans and maybe even some RIAs.
He says a merger of equals with a fellow RIA with $200 million may also be a nonstarter because neither firm may have young managers to take over and there may not be sufficient cash for a real liquidity event. See: Seven RIAs tell what big project they spent money for in 2016 -- and why.
As part of his effort to create a good buyer, Copeland says he intentionally avoided taking capital from private equity firms in order to get RIAs off the seven-year clock of flipping the investment and other corporate-imposed circadian-ignoring rhythms. The capital behind his venture is from 12 investors including the Forbes family itself and from Eric Schwartz, a former Goldman Sachs managing partner who retired at age 44 in 2007.
Schwartz headed wealth management and investment management at Goldman.
What made the venture particularly enticing to these investors is the sheer volume of smaller RIAs for sale and attractive prices they command.
What's more, Copeland is adopting the Mark Hurley-style tactic of taking a backseat to RIA principals by letting them own a majority of their firms. See: With beginnings harking back to E*Trade's RIA roll-up liquidation, two Boston-adjacent RIAs of a certain age join to create a $4.7 billion firm.
"If an advisor is willing to sell a majority then they don't have the same ambition," Gill says. "Is there really an advisor-driven model out there today?"
Copeland adds that all the firms retained by AMG have organic strategies for growth, including Baker Street Advisors LLC in San Francisco and Veritable LP in Newtown Square, Pa. See: AMG makes a dramatic entry into wealth management arena, buying majority stake in $10B Veritable.
The organic strategies are perfectly OK for AMG and the firm will continue to hold and nurture them, according to a spokeswoman, who adds that AMG will still be in the market for big RIAs on an opportunistic basis.
In other words: "We look forward to continuing to selectively invest in additional wealth managers when opportunities arise with firms of meaningful scale and at valuations which align with our long-term discipline,” said Nathaniel Dalton, president and chief operating officer of AMG, in a release.
AMG's shares have hovered at about the same level of $170 since 2013, perhaps encouraging the firm to tighten its discipline.
Clarification: In an earlier version of this article, the headline suggested the impetus was AMG initiated Copeland's departure from its payroll. The headline and lead-in sequence of this article were changed to reflect the fact that John Copeland initiated this change.
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