Shirl Penney lands hot cash in cold market, raising $100 million (says source) to 'charge onto the offensive' as competitors 'hunker down' under debt
The CEO and co-founder of Dynasty Financial Partners salves IPO pain by cobbling cash from existing backers, a Boston private equity firm, Abry, and even RIA custody partner, Schwab, at valuation near $500 million.
9 min read- Dynasty Financial secured $100 million in funding, valuing the company near $500 million.
- Abry Partners led the funding round with $50 million; Schwab contributed $20 million.
- Penney plans to use the capital to aggressively gain market share.
- Schwab's investment signals advocacy for independent advisors and their growth.
Brooke's Note: It's not how much money you raise. It's how much you can buy with what you raise. That seems to be the philosophy evinced from Dynasty taking at a valuation below what experts say it wanted from an IPO. Other big RIA hubs like Focus Financial and CI Financial just continue to pile on debt and invest either by borrowing more or, implicitly, postponing repayment. The share prices at the New York City and Toronto mega-rollups are seemingly too low to do a capital raise, though CI Financial still has its paperwork filed with the SEC to do just that. Dynasty has no debt, which wouldn't prove much if it didn't have capital to go on the offensive. Now it has much more than it did and seemingly has a shot at acquiring market share on the cheap when defense is the rule of the day. It will need to acquire prudently, but with a very Downeast Mainer like Shirl Penney manning the register I expect it to invest its pennies wisely.
Dynasty Financial Partners snatched "mission accomplished" from the jaws of lingering IPO futility with a raise that fell short of bourse dreams but blew away the expectations of some skeptics.
The St. Petersburg, Fla., RIA outsourcing hub for practices with about $75 billion combined assets administered drowned out its own unrequited IPO registration with news of an estimated $100 million raise based on a valuation near $500 million, according to sources.
The $500 million valuation is based on nearly 20 times EBITDA, a source adds. See: Dynasty Financial takes next logical step, using Wall Street powers and RIAs to beat Wall Street with an IPO, but timing surprises one expert.
Dynasty co-founder and CEO Shirl Penney declined to speak to the specific financial or deal terms "other than to say we are very pleased with the outcome and excited about the alignment for the future to all owners in the business and what it will mean to our clients and our abilities to support them.”
Abry Partners led the round with about $50 million of investment and Charles Schwab Corp. tossed in an additional $20 million, the sources elaborate. Abry was playing with some house money after exiting Beacon Pointe when KKR bought in. See: KKR rewards Beacon Pointe with mega recap after the roll-up made the leap from $10 billion to $20 billion in AUM in 18 months.
“Is it a win? I would characterize it more as ‘mission accomplished’ because they were able to get the capital needed. But if it came at too high a cost or from the wrong partners, it could cause issues down the road,” says Mike Wunderli, principal of ECHELON Partners in San Diego.
“I thought it was especially curious that they took money from Schwab -- I'm not sure what to make of that one yet. Perhaps there were other benefits attached to it. I wonder how Dynasty's other custodians will feel about it.”
Act of advocacy
Dynasty stayed with a familiar script in accepting Schwab money, said Dynasty’s Chairman, Harvey Golub.
"Similar to Envestnet’s strategic investment in Dynasty in 2020, we welcome Schwab’s minority investment in Dynasty to further align our commitment to the independent wealth management space,” he says. See: After finally knocking down a wall at LPL, Envestnet takes a minority stake in Dynasty Financial, puts Bill Crager on the board and prepares for future upmarket.
Schwab has never been known to invest in an RIA servicing partner before, and Bernie Clark, head of Schwab Advisor Services framed the investment as an act of advocacy.
“As advocates for independent advisors, we are thrilled to invest in a firm that shares our values of empowering advisors with the technology, tools, and resources they need to build even stronger businesses,” he said in a release.
Marty Bicknell, CEO of Mariner Holdings, suspects Schwab is using shrewder calculus than it lets on in tightening ties to Dynasty.
“I haven’t talked to Schwab yet about this, but this seems like a great opportunity to round out their offering for wirehouse advisors,” he says.
After finally knocking down a wall at LPL, Envestnet takes a minority stake in Dynasty Financial, puts Bill Crager on the board and prepares for future upmarket
“As someone who made that leap 16+ years ago, I have to assume there is comfort in partnering so advisors can focus on clients and not on the back office noise.”
Effective pairing
Indeed, not only is 50% or $37 billion of the Dynasty AUA held by Schwab Advisor Services, but the pairing continues to prove effective in extracting mega-wirehouse teams from UBS and Merrill Lynch Private Banking Investment Group, Penney says.
The other 50% or $37 billion is split between Pershing and Fidelity and Penney adds that the financial deal with Schwab won't retard the growth of those vendor relationships.
“I very much value our relationships with Fidelity and Pershing and we'll continue to grow those relationships and we're fully committed to multi-custody.”
Share bump
Abry, which manages $13.7 billion, had to vet the investment with a more complex analysis, Wunderli says.
“Abry are savvy and opportunistic investors,” he says. "They’d be willing to board a sinking ship as long as the ticket is cheap enough and the leak can be fixed.
"Along those same lines, if they can get a reputable asset in a highly attractive industry at a discount, they will jump on it as long as they believe any problems the asset may be experiencing can be mitigated.
“At that point, the risk is worth the potential reward.”
The other $30 million consisted of investments by new board members, some existing investors and directors and RIAs themselves. RIAs also invested by trading equity in their firms for equity in the Dynasty mothership.
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Though many investors re-upped and doubled down, the source adds, the proceeds will also be used to cash out other investors.
Bicknell, an investor, says he likes the bump his private shares got in value from the up round.
“I will say that as an investor I’m thrilled with the outcome and what the future holds for the company and its clients,” he says in an email.
“This is a very difficult environment to raise capital. The roster of partners speaks volumes to Shirl’s leadership and the quality of the business at Dynasty.”
Letting go
KKR rewards Beacon Pointe with mega recap after the roll-up made the leap from $10 billion to $20 billion in AUM in 18 months
Certainly, letting go of the nearly year-long push for – and expense related to – an initial public offering was not easy but likely very wise, say analysts.
“To me, it looks like Dynasty planned on raising a bunch of money through an IPO to finance their growth initiatives,” says Wunderli.
"Planning on getting that capital, they may have made some aggressive commitments, then had to scramble when the IPO market dried up.
“There is still plenty of PE interest so they could get a deal done, but I would’ve expected a much higher valuation than that $500 million, especially if that’s a post-money valuation."
Dynasty wasn't under the gun to take capital, Penney says.
“We didn't have to take any money,” he says. “I did it to invest in building out our data lakes, our proprietary software and building out a call center that will deliver leads to RIAs.”
Opportunities
Better yet, Dynasty can steal a march on competitors handcuffed by debt and rising interest rates, according to Justin Weinkle, Dynasty’s chief financial officer.
“At a time when many businesses in the space are forced to hunker down and play defense, dragged down by leverage and rising interest rates, Dynasty is positioned to charge onto the offensive with fresh, friendly capital, a fortress balance sheet, and favorable margins," he says.
Fresh, friendly capital is an RIA eco-dweller's best friend heading into 2023, adds Bicknell, who set a head-exploding goal for his own firm next year. See: Cheryl Bicknell drops the largest on-stage news bomb, and Dan Seivert's revenge event in sparkling San Diego got a WTH explanation for those 20-times multiples
“I also think it speaks well to the entrepreneurial opportunities that are available in the RIA ecosystem," he says. "There has never been a better time to be in this space than right now.”
Penney, 46, was able to cash out some shares, says the source familiar with the deal. He co-founded the company at age 32 and launched it at 34.
No debt
The raise will also reinforce other objectives like M&A deals, perhaps a TAMP, and it will obviate the need to tap its recently obtained credit line of $50 million. See: Amid poor IPO conditions and literal incoming hurricane, Dynasty Financial gets $50 million credit line, calling it 'dry powder' for 'strategic investments' to bridge to eventual public offering.
Dynasty continues to toe the line between being a rollup and an outsourcer. It holds a stake in about half the firms it supports as a vendor, though it owns no more than 20% of any given firm, Penney says.
Yet it has one glaring advantage over the rollups like Focus Financial and CI Financial, which it's compared to and indirectly competes with.
“We have no debt," Penney says. See: CI Financial will cut off U.S. RIA unit from Canadian cash infusions as part of 2023 IPO but with a giant parting gift -- total forgiveness of its substantial mountain of debt.
Dynasty was wise both in cutting losses on the IPO bid and in accepting the private equity round, says Matt Crow, president of Mercer Capital.
“It's a smart move,” he says. “It gives them some room to breathe and time to work on their business model. The public markets haven’t been kind to investment management this year, and there’s no reason to think that will change anytime soon.
"Maintaining an S-1 is expensive and distracting - I wouldn’t want to have to keep updating one in this environment.”
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