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Edelman Financial Engines shuns an IPO, but (likely) raises hundreds of millions dollars at a staggering $7.3-billion IPO valuation, despite fresh DOL 401(k) headwinds

The willingness of Warburg Pincus to re-up on the $260-billion AUM manager of RIA and 401(k) assets means Hellman Friedman can de-risk and crank up growth.

Wednesday, March 17, 2021 – 2:08 AM by Lisa Shidler
Ric Edelman sold shares at the $7.3 billion valuation on a proportional basis to Hellman & Friedman.

Brooke's Note: It feels like an RIA milestone that a company with a private-company valuation of $7.3 billion is passing up the opportunity to do an IPO in a hot IPO market. Consider that Focus Financial has a market cap of $3.3 billion and Envestnet is at $3.8 billion. So Edelman Financial Engines is worth more than both combined based on this raise. But there are good reasons to stay private, if you are growing well and have the funds to keep growing. The owners of the venture -- especially Warburg Pincus -- seem to see it that way. But Larry Raffone and Ric Edelman are on their side. Each man lived as CEO of a public company, knows the benefits are overrated, and the hazards are real. Sometimes, private equity feels like a greater fool exercise where one PE firm is offloading a firm onto another before closing ranks to sell to a barely-comprehending public. This deal feels like an insider liking what they are privy to under the hood and doubling down -- probably a very positive proxy for the broader business of fiduciary wealth management under a big RIA.

Edelman Financial Engines dodged a bullet--the red tape of an IPO-- by attracting a Warburg Pincus investment that could be as much as $730 million, or 10% of the company's total value, analysts say. 

David DeVoe: Their marketing machine... is yielding over 200,000 wealth management prospects a year

Edelman Founder Ric Edelman confirmed that owners, including himself and Hellman & Friedman, sold pro-rata amounts to Warburg in this round based on their current stake percentages.

Edelman said in an email he's not stepping down and is still involved in the business.

Edelman Financial Engines president and CEO Larry Raffone, said the new investment from Warburg Pincus and Hellman & Friedman's continued support "demonstrates the abundance of opportunity ahead for our business." 

“Our record growth in 2020 created momentum that has continued into 2021. We are well-positioned and excited to take advantage of the opportunities in front us and to fulfill our long-term vision of helping more Americans meet all their financial goals,” he adds. 

Capital intensive

The New York City private-equity giant is buying private shares based on a $7.3 billion valuation reflective of an initial public offering (IPO) price. That's a 130% premium over the $3.02-billion valuation used as the basis for Hellman & Friedman's purchase of a majority stake in 2018.

David Selig
David Selig: Edelman has the look of a IPO, he says. 

But over time the purchase price compared to the yield on AUM is less because of the retirement assets, says Dan Seivert, CEO at ECHELON Partners, an RIA investment bank in Manhattan Beach, Calif.

The company now has $260 billion in client assets. Of that amount, 75% or more than $200 billion is in 401(k) accounts for some 1.1 million clients - many of whom the company is working hard to blend in as traditional clients. 

"From a purchase price/AUM perspective (yield on AUM) we benchmark this latest investment from Warburg at 2.8% ($7.3 billion/$260 billion ), which interestingly enough is below both Lee Equity’s take private deal in 2012 of 3.2%, and Hellman & Friedman’s majority investment in 2015 which yielded 5.3%," says Seivert.

Edelman has a ready purpose for the fresh capital. Raffone told Citywire the company is "cautiously optimistic" that it can acquire RIAs.

The private equity investor has a strong reputation in the RIA arena, says David Selig, CEO of Advice Dynamics Partners.

"Warburg Pincus understands our industry as well or better than any top-tier sponsor. Their track record backing solid platforms speak for itself." 

Edelman's own goal is to take those 401(k) accounts and turn them into wealth management accounts. 

Planning conflict

Clearly, one of the biggest growth engines is the 401(k) clients who are poised to become retail clients.

However, Edelman Financial Engines acknowledges in its own ADV that the firm must be careful when it comes to rollovers. For instance, the Department of Labor (DOL) just added new rollover restrictions. 

The new DOL fiduciary rule, finalized Feb. 16, prevents advisors at RIAs from advising on 401(k) assets in a way that benefits them without engaging in a rigorous exemption process. 

In its ADV, the company explains that while it welcomes rollovers, it "does not solicit rollovers from 401(k) plans.

"The firm has strict safeguards in place to ensure that the rollover is in the participant's best interest." See: The DOL's Trump-era reprieve from rollover fiduciary rigor is over with aspects of remedy that might 'scare the daylights' out of defense lawyers

The company also acknowledges its own planners have a conflict of interest to recommend a rollover. "A conflict of interest exists for our planners as they have an economic incentive to offer certain advisory services, including recommending rollovers, to clients." 


The firm's ADV shows that the company is continuing to encourage 401(k) participants to become retail clients and offers online features to its traditional customers.

Dan Seivert
Dan Seivert: 'They were already a public company and were taken private.'

"As harmonization continues and additional changes occur, we will communicate them as appropriate to clients. The harmonization of fees, service offerings, and other aspects of how we engage with clients is expected to continue in 2020 and beyond," the ADV states. 

The company notes that online advice is also available to retail clients who can sign up online.

Edelman Financial Engines will likely continue to grow on the strength of its millions of 401(k) participants seeking advice after their rollover, said David DeVoe, CEO of DeVoe & Co., a San Francisco consulting firm and investment bank.

"Their marketing machine, which is both rooted in cutting-edge technology and leverages a nation 401k platform, is yielding over 200,000 wealth management prospects a year," he added. 

IPO wary

The last thing Edelman Financial Engines or its backers want to do is put that growth in jeopardy with the scrutiny and hoops of an IPO. See: Why Financial Engines undid its IPO, and what it says about the succession-phobia still paralyzing the RIA business

Michael Martin: 'We believe that the Edelman Financial Engines business model... uniquely positions the firm.

Even So, Edelman Financial Engines has the makings of an IPO because it's actually 20% to 30% larger than Focus Financial, says Seivert.

"Given the path Focus [Financial (FOCS)]  took to IPO, it seems logical Edelman and Warburg Pincus are following a similar script." 

Focus Financial is valued by public markets around 16- to 19-times EBITDA, but Edelman Financial Engines merits a higher price-to-earnings ratio, he says. 

"While multiples were not disclosed, our valuation estimates are within the 17- to 21-times EBITDA range, which is in line with public comparables and precedent transactions such as United Capital/Goldman and Allworth/Lightyear Capital." 

The gain in value reflects how the Palo-Alto, Calif., 401(k) advisor and RIA grew to $260 billion, up $70 billion in AUM in aggregate -- a 37% jump. or about in line with the ascent of the S&P 500 during that stretch. 

The large percentage of retirement plan assets does reduce the valuation, Seivert says. "Individual client AUM is more profitable than retirement plan assets and would thus increase yield from a purchase-price-to-AUM perspective."

Given the retirement mix along with the history of the company, the valuation is what he would expect, he says. 

"...That valuation was not low nor high and instead likely within a range that would be expected for a company with significant scale, history, and a high quality management team in an industry that boasts high recurring revenues and stable cash flows."

Balancing growth

Much of the early growth is presumed to have come from the legacy Financial Engines business. Founded in 1996, it is the grandaddy of all robo-advisors to 401(k) participants.

In 2018, at the time of its Warburg sale, Financial Engines had $169 billion of low margin 401(k) AUM and Edelman Financial had $21.7 billion of AUM at much higher retail margins. 

But the two firms had a plan to hotwire Financial Engines rollovers straight to Edelman to boost retention and profitability.

Warburg Pincus already has an owner's box seat on the 'machine's' efficiency and long-term promise. 

In 2011, the private equity firm purchased majority ownership in The Mutual Fund Store. In 2016, Financial Engines bought the company. Warburg Pincus sold its ownership sake in 2017.

"Warburg Pincus has come full circle after investing in The Mutual Fund Store. [It] was one of the key merged components of today’s Edelman Financial Engines. Clearly, they liked the characteristics of the firm and industry then and have returned for a second investment," said DeVoe. 

Solid model

Michael Martin, managing director of Warburg Pincus, spoke about his company's long-term relationship with Edelman Financial Engines in a release. 

“We believe that the Edelman Financial Engines business model, which spans workplace retirement plan advice and traditional financial planning and investment management services, uniquely positions the firm to help millions of Americans reach their financial goals.”

Edelman first went public in 1999 and became private in 2012  on a takeover by Lee Equity Partners. Financial Engines went public in 2010 and turned private in 2018 when it merged with Edelman. 

"They were already a public company and were taken private and have done much better since then," said Seivert. Public companies also have a much harder time balancing employee compensation, company culture and enterprise value growth."

Edelman Financial Engines' still has the look of an IPO-bound investment at a later date, he adds. 

Related Moves

How Edelman Financial Engines spin-off deal became a RetireOne engine that's heating up the RIA annuity game again

The fee-based annuities marketplace of Aria Retirement Solutions adds Edelman's broker-dealer, 6,000 clients, 'hundreds of millions' in client assets and an old hand

November 20, 2019 – 10:19 PM

John Bunch is out at Financial Engines Advisors after merger integration 80% complete; 'big reveal,' relaunch planned in coming months

The No. 2 man at the $181-billion RIA built a uniform client experience, but now has a chance to be CEO of VC-backed firm based in his hometown

July 11, 2019 – 4:26 AM

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Financial Engines
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