Kestra expanding business and debt leverage with latest recapitalization

An independent wealth manager that's notching notable recruiting gains in an industry dominated by the giants picked up its latest private equity bet on the future growth of the firm.

Kestra Holdings — the Austin, Texas-based parent company of wealth managers Kestra Financial and Grove Point Financial and their 2,400 financial advisors with $122 billion in client assets — added a new minority investor on Sept. 30 when Oak Hill Capital purchased the stake in the firm previously held by funds managed by Stone Point Capital. Firms once near to Kestra in size such as Signator Investors, Voya Financial Advisors and Waddell & Reed have merged into giants like Advisor Group, Cetera Financial Group and LPL Financial in recent years.

In contrast, Kestra has built its own footprint steadily since the Stone Point funds first invested in the firm in 2016 and later sold the majority to Warburg Pincus three years later. That 2019 deal reportedly valued Kestra at $800 million, but the parties to its latest PE transaction didn't disclose any financial information about the investment. As a onetime insurer-owned firm, Kestra has displayed a knack for changing with the times, in some cases ahead of rivals who only have embraced PE capital and advisor breakaway channels in the last few years and in other instances following competitors that made RIA M&A a huge source of expansion.

Kestra has seen "musical chairs of private equity owners" in recent years, industry recruiter Jon Henschen said in an interview. He pointed out that PE deals often come with higher debt loads financed by junk bonds that could "go south quickly" in certain economic conditions but noted that Kestra has proven adept at carving out its own space in a rapidly consolidating industry. "They have a niche of catering to higher-end advisors, and they seem to be really making headway with the wirehouse advisors," he added.

Citywire RIA first reported Kestra's recapitalization deal. Kestra and Stone Point declined requests for interviews, and Oak Hill Capital didn't respond to inquiries. Warburg is still the majority owner of Kestra. 

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Kestra's management and about 120 advisors held shares in the firm after the Warburg deal in 2019, so it's not clear whether any received payment as part of the latest transaction.

"Our ability to partner with industry-leading financial professionals and the strength of our business allows us to attract world-class capital partners who want to be part of our growth," Kestra CEO James Poer said in a statement. The deal enables Kestra "to continue to scale our platform, invest in our team and bring new capabilities to financial professionals and the clients they serve," he added.

In its last ratings action on Kestra's debt in November 2021, Moody's Investors Service affirmed its below investment-grade status of "B3" and said the firm's outlook remained stable. At that time, an add-on loan and a new issuance of notes totaling $290 million raised the company's debt to $756 million with a projected year-end leverage ratio of 8.6 times its adjusted earnings before interest, taxes, depreciation and amortization. The agency predicted the ratio would fall to 7.4 times Kestra's adjusted EBITDA by the end of this year.

The grade "reflects Kestra's high leverage, low profitability, but strong revenue and EBITDA growth driven by M&A and advisor recruiting," Moody's analyst Gabriel Hack wrote in the note. "Kestra's solid growth in favorable revenue streams and client assets over the past two years has resulted in higher EBITDA and cash flow generation. These positive trends are offset by the higher debt balance and interest burden associated with the recapitalization."

Sellers engaging with potential buyers amid those potential challenges and the industry's continuing record consolidation should seek an "overall fit" in factors like technology, business model and client service, according to Brad Bueermann, the CEO of M&A consulting firm FP Transitions. Communication and respect in the course of negotiations also plays a role, he said.

"Arguably the most important part of our process is navigating the possible future paths each party may want to take pending the overall success of the relationship," Bueermann said in an email. "Covering the 'what if's' is just as important in these instances and having the right legal partner throughout will ensure both parties work collectively towards their best outcome and take into account all stakeholders: owners, employees, and clients."

Kestra's stakeholders have reaped benefits from the company's breadth of business. Between its primary wealth manager, Kestra Financial, and the midsize brokerage it also owns, Grove Point, the company generated $878 million in revenue in 2021 after double-digit growth at both firms, according to Financial Planning's IBD Elite study. The year Stone Point's funds first invested in the firm that would be rebranded as Kestra from NFP Advisor Services, the firm had 1,700 advisors and generated $423 million. 

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Besides Kestra Financial and Grove Point, the family of companies now includes RIA M&A arm Bluespring Wealth Partners, wirehouse breakaway channel Kestra Private Wealth Services, Arden Trust and Kestra Investment Management. Bluespring had acquired 26 firms as of last month, and Kestra Financial and Kestra Private Wealth recruited more than 50 advisors with $4.1 billion in client assets through the first five months of the year.  

"James and his team have built a terrific business in the wealth ecosystem with a compelling value proposition," Oak Hill principal Nico Theofanis said in a statement. "We are excited to partner with both Kestra and Warburg and look forward to helping the platform accelerate."

Oak Hill brings substantial experience in wealth management and the capital of its own new minority investor to the deal. Besides past investments in 401(k) and digital advice firm Financial Engines and wealth manager Hilltop Holdings, Oak Hill is also one of the two PE backers of RIA aggregator Mercer Advisors. The firm has completed more than 100 transactions worth $19 billion in combined investments since 1986, according to its website. Earlier this week, an alternative investments manager backed by the nation of Kuwait's sovereign wealth bought a minority stake in Oak Hill from an affiliate of Jefferies Financial Group.