Dynasty Financial was like the roll-up with no financial engineering; now Shirl Penney is hacking capital left and right for an M&A machine and a poaching parlor

Dynasty Financial Partners is delving deeper into financial engineering -- rolling out an M&A department on a fairly grand scale and a '"Freedom Note" that some joke is quite the opposite for the advisor.

The St. Petersburg, Fla. firm of 70 employees, which has 47 big RIAs and their $35 billion of assets, is ready to pull out all stops for growth. It's putting a new emphasis on putting capital into RIA hands by either to allow them to buy back their own freedom from wirehouses or to aid the RIAs in buying other RIAs.

It changes the Dynasty persona a touch. Many observers saw it as a virtual roll-up in the sense of creating a $35 billion group of autonomous RIAs, unified by a common back and middle office facilitator. See: See: Shirl Penney flies south, taking Dynasty Financial Partners to St. Petersburg in advance of a hiring spree, but won't kiss-off the Big Apple just yet.

One factor setting Dynasty apart was it ability to do what roll-ups do without but without having to line up crazy amounts of capital -- a task that has long bedeviled the business model.

But as its CEO and founder Shirl Penney nears his company's 8th year since launch, he's clearly comfortable supplementing the very granola approach he's used thus far with inorganic growth.

The Freedom Note's introduction is but one sign he is no longer bringing a brochure knife to a write-a-check gunfight on Wall Street. (Not that Dynasty never helped RIAs with capital.)

But Penney's bigger play may be in in M&A. Just 11 days before the firm announced Freedom Note, he reported the birth of Dynasty Connect, a 10-person, one-stop M&A shop that handles everything from counsel to cash. At least 25 of its 47 partner RIAs are ready to spend -- in theory. See: Dynasty Financial 2.0 takes big RIAs and applies 'McKinsey' tenets to extrude grand growth -- a leap from midwifing brokers to RIA status then nursing them to health

Balance sheet cash

So far, 50 deals are in motion, and "a dozen" imminent, says Penney, via email. "If you have a firm you’re looking to sell, or if you want to get our support to become an acquirer, we’re now ready to scale M&A activity," he adds.

In a further sign of muscle, the Freedom Note scratch is coming right off the Dynasty "balance sheet." With a wink, Penney adds that his board of directors is "supportive."

The board includes people with substantial personal wealth, including Harvey Golub, former CEO of American Express and Todd Thomson, former head of wealth at Citi who was ousted in 2007. It also includes Bill Donaldson who founded Donaldson, Lufkin & Jenrette and went on to chair the SEC.

The Freedom Note will be overseen by chief operating officer, Ed Swenson.

Still, Penney pushes back against the notion that his firm is a roll-up in all but name.

"We are not in the owning advisors and telling them what to do in business nor are we in the direct to consumer business.  We are not a roll up; we are an integrated services business where advisors can get 20 different things from us including capital."

Deal danger

Dynasty's leap into M&A along with so many other newcomers could have adverse consequences at least for the RIAs, according to David DeVoe, founder and managing partner of San Francisco consultancy and investment bank DeVoe & Company, via email.

"The water is warm, so everyone is jumping in the M&A pool. Unfortunately, many 'buyers' will literally drown in the complexity and never get a deal done," he says.

Penney says he would welcome a cooling of the waters.

"A market pull back frankly would be good for our M&A business as we are sitting on capital with lots of network partner firms ready to deploy it at fair prices as valuations adjust in market slowdown," he says.

John Furey, principal and founder of Phoenix, Ariz.-based consultancy Advisor Growth Strategies, via email says that Dynasty firms doing deals without losing equity is a distinct value proposition.

"I don’t see much of a downside at this stage."

Dynasty Connect will be based in New York and Florida, headed-up by director of mergers and acquisitions Joe Rizzo. 

Deploying capital

The addition of tools for inorganic growth have themselves been added organically, Penney says. The firm was founded in 2010 but only launched in 2012. See: What exactly is Dynasty Financial Partners and why is the Smith Barney execs' startup gaining so much attention?

"We have deployed capital at over 35 client firms with no issues."

Some of that capital got deployed since 2017 under its sub-brand Dynasty Capital Strategies. See Dynasty Financial toes roll-up model's edge with new plan to buy revenue from its RIAs

The new freedom note is fairly niche, says Penney who adds he invented the financial contraption.

"There is demand for freedom note in particular with a team that is in year four to five on a forgivable note at wirehouse and wants to move now. Our note replaces their current one and allows them to launch their firm sooner."

Heavy payback

But Mike Wunderli, managing director of Manhattan Beach, Calif.-based investment bank and consultancy, Echelon Partners, says the deal has the smell of desperation. 

"It's for advisors who are very desperate" based on the tough terms, he told InvestmentNews. "'Freedom Note' is an oxymoron ... and you're paying it back in spades."

Penney says the terms he offers are "full stop" a good deal by anyone who knows the terms of such deals.

Would-be breakaways have the option of taking up to 100% of their trailing 12-month revenues up-front, and Dynasty then takes a 35% revenue cut for eight years.

Its share includes interest and the cost of its full outsourcing services. See: Shirl Penney and Brian Hamburger gang-tackle largest breakaway of 2019 as Jason Fertitta, Team Americana bolt Morgan Stanley to form Schwab RIA

It's meeting a market demand, says Penney.

"Our breakaway clients were telling us they wanted more liquidity options," he explains. "So we added the freedom note to all advisors to get more liquidity ... without giving up equity or freedom in running their own business." See: How a $500-million Commonwealth rep became a $5-billion-plus RIA in two years and where Dynasty's M&A war on roll-ups comes in

This neutralizes one of the wirehouses' biggest recruiting tools, Mike McGinley, executive vice president of small business banking at Live Oak Bank in Wilmington, N.C., told Wealthmanagement.com.

"[Reps get] a nice bonus to move to Morgan or Merrill ... this is to sort of counteract that ... 'You want a bonus? We'll give you a bonus'," he explains.

It's about giving tied-down brokers a faster means of escape, says a source with knowledge of the scheme's inception who prefers to remain anonymous.

"This replaces [a rep's] current [note] and allows them to launch sooner. It's also great for teams with senior partners ... in taking the money [they] lock in junior partners," the source explains.

"Now [juniors] can move and get liquidity to buy out the retiring partner ... without being held captive."