EP Wealth buys billion-dollar firm in second deal of the year

EP Wealth Advisors acquired a billion-dollar registered investment advisory firm that was seeking a larger partner to provide operational and administrative support.

Media, Pennsylvania-based Lehman & DeRafelo Financial Resources, which has four financial advisors, two other employees and $1.1 billion in assets under management, folded into Torrance, California-based EP Wealth as the firm's second acquisition of the year and second team around Philadelphia, the firms said on April 5. The parties didn't disclose financial terms.

With more than $16 billion in client assets at the end of 2022, EP Wealth is the No. 9 company on Financial Planning's rankings of the largest fee-only RIAs in the industry.

The number of billion-dollar RIAs more than tripled over a decade to 1,447 in 2021, but the number of M&A deals involving sellers that have at least $1 billion in client assets tumbled last year. Dealmakers such as EP Wealth Managing Director Brian Parker say they haven't noticed much of an impact to their pipelines from fears of a potential recession in the larger economy or the rising cost of capital, though. Factors like succession planning, a desire for greater scale and removing burdensome tasks continue driving deals.

Last year, the team led by Lehman & DeRafelo owners Rich DeRafelo and Ron Lehman found when mapping out their goals for 2023 that their plan "was going to involve a lot of hiring, a lot of training," DeRafelo said in an interview.

"We love what we do; we love rolling up our sleeves and working with clients," he said. "We don't really love all the ancillary sort of stuff that comes with running a business every day."

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The parties also found that Lehman & DeRafelo's firm's private investment expertise would be "additive to what we're already doing and give us additional leadership in the northeast," EP Wealth's Parker said. With minority investments from private equity firm Berkshire Partners and financial services holding company Wealth Partners Capital Group, EP Wealth judges potential deals "much more around the team and the firm than the city they're in," Parker said.

"It's as robust as it's ever been," he said in an interview about the marketplace for potential transactions. "Sometimes when markets do slow in general, that's a great time to accelerate your push into finding the right firm."

Deals that saw billion-dollar firms change hands fell by 19% last year to 118, according to investment bank and consulting firm Echelon Partners. A higher number of potential buyers competing for smaller sellers, elevated volumes of "add-on" deals as compared to direct investments in big players and the effects of falling stock and bond values last year were the "three key reasons," for the lower number of billion-dollar deals in 2022, Echelon said.  

"This reversion to a more normalized growth rate is to be expected given capital market volatility and possible avoidance of larger transactions by some buyers due to increasing cost of capital," Echelon's annual deal report said. "We foresee these types of transactions bouncing back as financial markets begin to normalize."

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Many big firms keep seeking out buyers for reasons that have nothing to do with stock prices and bond yields. Last June, Malvern, Pennsylvania-based Wharton Business Group and its $3.5 billion in client assets sold to Deerfield, Illinois-based Alera Group Wealth Services in Alera's first-ever deal in wealth management, Wharton Managing Partner B.J. Webster and Alera Wealth Management Practice Leader Tina Hohman recalled on a webinar held this month by M&A advisory firm DeVoe & Co.

"Our clients were asking us, what would happen if something happened to one of the three partners?" Webster said. "When you start hearing that over and over and over again, as advisors and planners ourselves, you sit up and take notice. And so, as we were getting older, we really decided that it was time. You spend 30 years building a business like ours, and then, in a very condensed period of time, you try to figure out who you're going to partner with for the future of your clients and your employees and the partners of the firm."

Buyers and sellers alike should find a "core value alignment" in approaching any deal, Hohman said. 

"If you are absolutely certain that you can't be somebody who can work for someone else, maybe you're looking for a minority investor or maybe you're looking for someone that keeps you as an independent," she said. Other types of firms might say, she added, "Gosh, I got into this business to work with clients or to focus on the investments, but not to run my business, to worry about HR, not to make every decision on what kind of soda to put in the soda machine."

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Lehman & DeRafelo observed that cultural alignment in its talks with EP, which had a "strong appetite" for bringing the advisory practice's private investments to bear across its organization, DeRafelo said. The firm caters to utility company executives as its largest client niche, with a typical customer having around $1 million in assets. His partner, Lehman, had an outside accounting firm that will technically shut down with the close of the deal at the end of last month.

The potential for a more seamless business formed the motivation for Lehman & DeRafelo to seek out a buyer, DeRafelo said.

"We were solely focused on the back-office support and the synergies and efficiencies that we might be able to gain through a merger," he said.