Lovell Minnick sinks more capital into TurboTaxifying the RIA compliance market, with roll-up of NCS; but Brian Hamburger and other free-standers see no threat

The land grab for RIA compliance firms hit fever pitch yesterday with a private equity firm buying NCS Regulatory Compliance for the second time in three years -- raising the question of whether owner-operator firms like MarketCounsel and Cipperman will continue to thrive.

Lovell Minnick, through Foreside Financial Group, a giant asset management compliance firm it owns in Portland, ME, bought NCS Regulatory Compliance, LLC. The Londonderry, NH, firm will be wholly absorbed by Foreside as part of the deal.

As well as serving broker-dealers, Foreside has a sizeable $1 trillion stake in managing the distribution of mutual funds and ETFs through 19 limited purpose broker-dealers, and its own proprietary order management system.  ForesideXchange ensures trades meet compliance standards. Its 150 employees serve more than 400 clients and over 2,000 funds.

NCS, as well as its clients, will benefit, says Whitaker. "In Foreside, NCS gains a strategic partner that will provide experienced management, resources and scale."

In terms of M&A, as earlier noted, this is not NCS's first dance. The firm, as it currently exists, was formed after its Oct. 2015 merger with Regulatory Compliance, a 20-year-old privately held firm. 

The 2015 merger brought together NCS with a 75% RIA client-base -- most with less than $1 billion in assets under their management -- with one that specialized in serving broker-dealers.

Today, NCS's 80 employees provide ongoing compliance support, annual reviews, mock audits, risk assessments and a number of other services in addition to its core regulatory support.

"Big is better for the client,” Ken Kaltman, then NCS' chief operating officer, and now a partner at the firm, told RIABiz at the time of the prior merger.

Merger mania

The formation of the Portland-based powerhouse comes after a similar flurry of activity from private equity  that re-engineered RIA-in-a-Box. Both roll-ups claim to be making giant new investments in technology on the strength of scale.

"NCS’s leading technology-enabled financial services compliance solutions, paired with their deep industry expertise, both complements and drives forward our strategic plan to grow our market position and broaden our breadth of services globally," explains Foreside's president, David Whitaker in the release. 

RIA-in-a-Box's purchase by New York's Aquiline Capital Partners in May, 2018 was very much a matter of scaling for technology, says Barnaby Grist, RIA in a Box's executive chairman.

"Delivering that technology requires investment that is typically beyond the scale and technical capabilities of most compliance consultants."

Put simply, RIA regulation is no longer considered a netherworld for obsessive scourers of the small print and an endless litany of Mom and Pop shops, says Todd Cipperman, managing principal of Wayne, Pa.-based Cipperman Compliance Services.

"The entry of private equity is evidence that the industry is taking compliance as a business function more seriously," he says.

"If anything, the private-equity activity shows that compliance services firms have become a permanent fixture in the investment management industry," Cipperman adds.

Risky business?

It may well show that compliance firms are increasingly attractive, but such financing can bring huge downside risks to the firms who take the private equity shilling, says Brian Hamburger, president and CEO MarketCounsel in of Englewood, NJ, via email.

"Certain industries are capital intensive and can stand to benefit from this type of investment in a fast growing sector. I don’t think that professional services is one of them," Hamburger explains.

"The influx of private equity capital is not without its burdens, chief among them are current or imminent conflicts of interests ... The irony of it all is that the truly attractive investment opportunities are companies that don’t need private equity capital at all," he asserts. 

A risk in pairing Foreside and NCS is that the former specializes in complying with FINRA , and the latter, the SEC, says Grist.

"RIAs have distinct needs from broker-dealers and asset managers ... nowhere more than in compliance, given different regulators and a different behavioral standards," he explains. 

"[RIA in a Box's] clients tell us they believe they're best served at a firm focused exclusively on those needs," Grist adds.

But some RIAs are already clients of Foreside, Whitaker notes. "Foreside has always been a partner to RIAs, but with the combination with NCS we will now be able to offer more holistic solutions to these clients."

In the long-term, however, Foreside needs more RIA-derived revenues as it grows at the expense of Wall Street and fund firms, says Cipperman.

"The retail investment world has been trending to the fee-based model for the last 20 years, [and] I am very bullish on the long-term prospects of the compliance services industry," he says.

“There’s certainly opportunity in this market,” says Spencer Hoffman, a partner at Lovell Minnick Partners who oversaw its investment in Foreside.

Hoffman cites a report by Grand View Research that notes the governance, risk, and compliance market is currently valued at $22 billion, and should grow by 12.7% each year through to 2025.

Both NCS and Foreside provide outsourced compliance and regulatory services to the investment management industry.  But NCS's proprietary technology, and its not insignificant RIA chops -- it serves 1,800 RIA clients -- is very much part of the thinking behind the acquisition.

The 20% growth NCS posted in 2018 was also a factor that made it more attractive, Hoffman adds.

Rising trend

NCS' acquisition makes it the second RIA vendor of its type to enter private equity hands in the last twelve months.

Indeed, despite the fact that its acquisition was orchestrated by Foreside, it is very much the long-term brainchild of its Radnor, Penn.-based backer.

"Foreside is executing on a strategic plan to grow the business and broaden the scope of services the firm provides which was developed following the acquisition by Lovell Minnick," says Whitaker, via email. "NCS is a major step in fulfilling this plan.

Since it acquired Foreside in 2017, Lovell Minnick has pushed the firm to diversify the "scope" of the services it provides, a move evinced by the purchase of NCS, says Spencer Hoffman, partner at the private equity firm, via email.

Further RIA-linked acquisitions are possible, although not necessarily on the horizon, he adds. See: Purchase of RIA in a Box with reclaimed Barnaby Grist as overseer shows ambition of New York buyer to create compliance 'robo-advisor'.

The terms of the deal, which is expected to close this month, were not disclosed. 

Neither firm anticipates significant layoffs of “key personnel”, owing to “minimal overlap”, says Mark Alcaide, NCS' chief operating officer, via email. “Foreside sees value in NCS [in part] because of its employees.”

Scale or bust?

Grist asserts that the RIA compliance industry is increasingly subject to the kind of capital demands that are beyond the capability of mom-and-pop shops.

But the business is about far more than just regulatory compliance advice, says Hamburger.

"Our clients are growing stellar businesses and aren’t here to hear from us ‘how to survive a regulatory exam.’ They want help making difficult business decisions; they want to leverage our deep relationships," he says. 

But part of the benefit of NCS and Foreside’s union is precisely what Hamburger’s speaking of, says Alcaide.

“NCS’s current RIA clients will [now] have access to a full-suite of business solutions," he explains. "The combined platform will immediately compete at the highest levels, will have a larger geographical footprint and is well positioned for expedited organic growth.”

Hamburger cites his firm's 18 year history, its single-ownership structure, and its lack of debt as factors that assure "the objectivity and autonomy to give advice that's solely in [a] client's best interest."

Indeed, the problem with thinking that bigger is always better is that quality will out, if it knows the niche it operates in, regardless of scale, says Cipperman.

"There's always a place in the market for good compliance firms," he says. "We feel very confident about our short and long-term future, because we have staked out a leadership position in the outsourced chief compliance officer space."

Mission critical

In the long run, however, there will be real and tangible benefits to the NCS-Foreside tie-up beyond just financial clout, say analysts, including greater market reach, increased flexibility and more security.

On the broker-dealer side, if not the RIA side, there are definite advantages to the two firms combining, says Grist.

"Foreside has built its reputation in the broker-dealer and asset management space, [and] NCS has a strong presence in the broker-dealer world. This transaction likely strengthens the broker-dealer capability of the combined firms."

But RIAs stand to gain too, says Cipperman.

"This is great for RIAs. NCS is a great shop especially for new and emerging firms. Foreside presumably removes some uncertainty by offering long-term stability and complementary offerings," he says. 

The increasing attractiveness of the compliance industry is also linked to fee compression, a trend that's not going anywhere soon. 

As RIAs and broker-dealers continue to pursue ways to cut costs to retain their profit margins, the ability to play by the rules in the cheapest and most efficient manner possible is becoming more essential.