It may have a track record in wealth management, but Warbug Pincus is entering the independent broker-dealer sector at a challenging time.
Stone Point Capital has agreed to sell a majority stake in Kestra Financial to the global private equity firm roughly three years after buying the ownership position, the firms
Beyond regulatory approval, the agreement must win over the 2,300 advisors who would balk at disruption to their practices at Kestra and subsidiaries Kestra Private Wealth and H. Beck. The deal also comes after the Dow
The agreement, which is expected to close in the second quarter, put questions to rest about the possibility that Kestra was seeking a new capital structure after
Warburg has a portfolio of 180 companies and $43 billion in assets under management and boasts more experience in wealth management than other
Experts predict Warburg will finance growth while allowing CEO James Poer and other executives the space they need to run the firm. However, Warburg has taken about 100 firms public, and the wealth management industry has changed since Yodlee and Mutual Fund sold for a combined $1.2 billion about three years ago.
In September, Warburg led a Series A funding of Facet
Warburg “made out like bandits” with Yodlee, says consultant Tim Welsh of Nexus Strategy. Envestnet
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The private equity giant with a track record of taking firms public would add the IBD to its list of more than 850 investments for $73 billion worldwide.
February 25 -
In an internal memo, CEO James Poer pledges that any change to the firm’s capital structure "would be made with your business in mind first."
December 21 -
The executive argues the firm’s ownership structure is giving it a leg up — rather than posing the issues for advisors decried by critics.
November 29
Times are good for RIAs, but a new study suggests firms should be monitoring fees more closely.
PE investment into the IBD space in recent years has coincided with a
“I would expect very good things from Warburg Pincus. I don’t think going IPO is as attractive a route as it used to be, say maybe 10 years ago, considering the cost not only of the initial public offering but the ongoing requirements,” Armitage says.
“There's so much private equity money available at attractive terms,” she continues, “that I don’t think the IPO road is something that should automatically be assumed for success going forward.”
Indeed, Poer has called any talk of an IPO “premature” while
The deal “is intended to make sure we have the cash flow necessary to fuel growth and invest in the ideal value stack” for advisors, he says.
NFP, the insurance firm that
“We are incredibly proud of [Kestra’s] success,” Fayez Muhtadie, a Stone Point senior principal,
Neither Stone Point nor Warburg were available for further comment, but Warburg Managing Directors Jeff Stein and Arjun Thimmaya issued statements expressing excitement about the deal and pledging to help advisors’ success.
The data aggregation software firm Yodlee — now a subsidiary of Envestnet — and current Mutual Fund RIA parent Edelman Financial Engines declined to discuss Warburg’s tenure as an investor. Baltimore-based Facet didn’t respond to an inquiry about Warburg.
Stein and Thimmaya serve in Warburg’s financial services practice, which lists 23 staff members on its
Longtime co-CEOs Joseph Landy and Charles Kaye lead the private equity firm. They
Asked who from Warburg will oversee its investment and sit on the IBD’s board, Kestra spokeswoman Jen Diehl said in an email that the firm expects to “work on all of these details between now and close.” Stone Point would retain its board seat as well.
“We’ve had such a great 2 1/2 years that it just made sense from a board standpoint that Stone Point [would] consider taking a partial gain,” Poer says. “We want to make sure that we have the ideal capital structure — that includes making sure that we're keeping a fresh perspective and bringing fresh capital and views.”
The PE firm has acted as the lead investor in almost 100 IPOs on the Nasdaq and NYSE, according to a Harvard Business School
The Business School states that case studies are not endorsements or definitive research but rather “a simplified summary of a company's business challenges, written only for teaching and classroom discussion purposes.” However, the study provides a brief glimpse into Warburg’s approach.
In it, then-Warburg Managing Director Jeffrey Harris compares Warburg’s quarterly meetings to the United Nations because they have “a lot of different languages and cultures represented.” He credits founding partner John Vogelstein for coming up with a decentralized method of deal approval.
“He was the senior partner and you’d sit down and walk him through a deal,” Harris says. “But you never spoke only with him and then wrote the check; you would have had a number of earlier conversations with others in the firm. Essentially it’s sensitivity testing and a quality control process, ensuring that you haven’t missed anything important in evaluating the risks of the deal.”
Welsh sees Warburg’s investment as a “good outcome” for Kestra while bringing “a ton of risk into the picture” for the acquiring firm. The falling margins at IBDs and equity market highs, along with the dearth of “prime assets” like Yodlee and those in the full RIA channel, display the challenge, Welsh says.
“Any normal investor would really be worried about the fundamental economics of independent broker-dealers, which are not good,” says Welsh, arguing Kestra should now acquire more IBDs. “If you're a private equity firm, you've got cash. You can actually get the capital to go out and buy these companies and really take advantage. To me, that's really the only strategic route that makes sense.”
Welsh and IBD recruiter Jon Henschen note Warburg’s global record of investing for growth in its portfolio as a positive. Stone Point and representatives with stock would make substantial money on the deal, according to Henschen, who says he heard the selling firm would receive double its investment.
While
“They're known for high-quality service and they attract high-quality advisors. I don't see that changing,” Henschen says. “The thing I've liked with Kestra is that, whatever private equity firm that's been involved with them, it's been financial support, otherwise hands off. They let the management do what they do, because that's not their area of expertise.”
Former Kestra advisor Lee Rawiszer of Westport, Connecticut-based Paradigm Financial Partners, who
Poer’s promise to advisors at the firm’s annual conference in February that any buyer would “invest money back into the company to make Kestra even stronger,” helped set them at ease, according to Rawiszer. They’re also confident Warburg won’t try to alter the firm’s payout to advisors, he says.
“That's the first thing that goes through an advisor’s mind,” says Rawiszer. “They're not worried about it, they'll take a wait-and-see. They're not planning on going anywhere."
