Company Profiles

Daunting UHNW Challenge: Can Pathstone Reach $50 Billion?

Charles Paikert April 5, 2021

Daunting UHNW Challenge: Can Pathstone Reach $50 Billion?

This news service has a detailed analysis of US multifamily office Pathstone, a firm that intends to be among the top firms of its type as big changes sweep through the sector.

Anticipating an increasing wave of consolidation in the advisory industry, Pathstone, the New Jersey-based RIA and multifamily office which has approximately $27 billion in assets under advisement, wants to be among the elite national firms left standing when the dust settles.

“The industry is rapidly changing,” said Matt Fleissig, president of the firm. “We think there will be around ten large national RIAs that will be dominant and we want to be one of them.”

But can Pathstone achieve this ambitious goal in a hyper-competitive marketplace?

For starters, the firm’s five-year goal is to reach $50 billion in assets, nearly double its current total.

Last year, Pathstone, which targets the ultra-high net worth market, had around $15 billion in AuM, but after two acquisitions it now manages $20 billion, according to the firm’s latest SEC Form ADV filing. 

One of those deals, the purchase of Cornerstone Capital Group, brought in over $3.5 billion of institutional assets along with the ESG credibility and expertise of Cornerstone founder and chief executive Erika Karp.

Heavy lift
Nonetheless, the path - and math - to reach $50 billion is daunting, said Brian Lauzon, managing director of InCap Group, an investing banking firm specializing in wealth and asset managers.

“It will be extremely hard,” Lauzon said. “If Pathstone wants to stay focused on the UHNW market, they would have to achieve enormous market share. To add $20 billion in assets, they would have to bring on 1,000 wealthy families at $20 million per family.”

What’s more, the competition for the UHNW market, loosely defined as clients having investible assets of at least $20 million, is fierce.

Venerable firms such as Goldman Sachs Private Wealth, Morgan Stanley and Northern Trust have built up nearly a century’s worth of brand recognition, combined with deep resources, and abundance of capital and a strong sales culture. 

Established family office/RIA rivals such as Bessemer Trust, Tiedemann Wealth Management and WE Family Offices offer clients a similar full service wealth management offering with a more boutique feel. And newcomers like Rockefeller Capital Management are carving out market share by spending heavily on luring wirehouse brokers with fat books of business to decamp along with their wealthy clients.

High flyer
Pathstone, which has a $10 million investible asset minimum for new clients, has no plans to deviate from the UHNW market that Fleissig estimates has around $2.5 trillion in assets.

“There’s plenty of room to grow in that area,” he maintained. “We don’t feel we need to go down market at this point.”

Other large RIAs, who also want to be among the dozen or so large national firms in a post-consolidation era, have targeted mass affluent and high net worth clients, however.

Aggregators including Focus Financial, Captrust, Mercer Advisors, HighTower and even Goldman Sachs, which bought United Capital two years ago and is about to roll out the rebranded firm to a mass market, have all made room for clients with less than $1 million in investible assets.

“If Goldman Sachs can’t avoid going down market, who can?” Lauzon asked.

Remaining committed to the ultra-high net worth market may be challenging, but Pathstone is “as well positioned as anyone,” according to industry consultant Jamie McLaughlin, a co-founder and board member of the UHNW Institute. (He is also a member of FWR’s editorial advisory board.)

Pathstone’s track record in the family office market since it was founded in 2010 is impressive. Average client size is $25 million and the average family office client is $114 million, according to Fleissig.

Dry powder
And Pathstone has a number of formidable weapons in its arsenal.

Foremost is an ample supply of capital, thanks to private equity firm Lovell Minnick Partners, which has owned a majority stake since November 2019.

The PE firm has helped Pathstone secure credit lines totaling over $100 million to date, which is being used for mergers and acquisitions, tech upgrades and other operational enhancements.

The credit line gives Pathstone “the capacity to significantly increase investment” in the firm, according to Brad Armstrong, partner for Lovell Minnick. The RIA has already tripled its tech budget, Armstrong said, as it strives to “be the best multifamily office for multigenerational clients.”

Acquiring Cornerstone gave Pathstone instant credibility in the burgeoning impact investing market as well as over $3.5 billion in assets from institutions such as endowments, family and community foundations and other not-for-profits.

Karp, who spent 25 years on Wall Street before starting Cornerstone in 2013 after leaving UBS as head of global sector research, is staying on as Pathstone’s chief impact officer. 

ESG investing will continue to grow and is “still misunderstood” by institutional investors, she said. “They still don’t realize that they don’t have to give up returns to align their assets with their mission.”

Pathstone is also convinced that its in-house software system, which ties performance reporting to general system ledger accounting, is the “Holy Grail of family office accounting,” as Fleissig puts it.

Pathstone’s executive team of Fleissig, co-CEOs and founders Steve Braverman and Alan Zachariah, executive managing director John Elmes and chairman emeritus John LaPann, the former chairman of Federal Street Advisors, is also a plus, according to McLaughlin.

“I don’t know of another firm that has that many quality leaders,” he said.

Last year Pathstone attracted two other notable executives to its board: former AssetMark CEO Ron Cordes and Mark Tibergien, the former CEO of Pershing Advisor Services.

Pathstone’s goal of becoming a top tier $50 billion RIA is “quite achievable,” Tibergien maintained. The high rate of wealth creation in the US and the corresponding need for help to deal with complex financial issues will drive more than enough demand, he asserted.

But any temptation to follow the lead of other top RIAs by appealing to a broader market segment should be avoided, Tibergien cautioned. If Pathstone goes “too far out of its lane,” the firm risks diluting its hard won branding, he cautioned.

Louis Diamond, president of recruiting firm Diamond Consultants, agreed.

“Pathstone is one of the more impressive firms in the industry,” Diamond said. “They’ve done a nice job integrating the high-end firms they’ve acquired and have a very successful service model for the UHNW market. I think they would be very careful about any strategic shift because they don’t want to dilute their brand.”

Missing link
Nonetheless, it seems unlikely that Pathstone can achieve its lofty goals without several more major M&A transactions.

Pathstone averages 10 per cent organic growth a year, according to Fleissig, but the firm’s big growth spurts have come from big M&A deals such as its 2016 merger with Federal Street, which added $4 billion to its AuM.

Without inorganic growth, reaching $50 billion by 2024 is “impossible,” according to McLaughlin. Pathstone is on track to do one or two deals a year to “get better not bigger,” Fleissig said. M&A is a “very important” secondary goal for the MFO, Armstrong said, but organic growth is a priority. 

Part of that growth will be adding “in-house trust capability” this year, Armstrong added. And Fleissig notes that all of Pathstone’s investments are designed to enhance the firm’s high touch model. “Spending more time with clients means you can deliver better service,” he said. “And that still gets you incredible referrals.”

PE time horizon
As for Lovell Minnick, the private equity firm sees itself as a seven-year investor, Armstrong said.

Lovell Minnick’s strategic planning framework has a five-year time horizon and is refreshed every year with Pathstone’s long-term future in mind, he said. The investment is “not just about doing well for us but also for the firm in the future,” he maintained. 

Short-term gains at the expense of long-term growth would just be “window dressing for a sale” and counter-productive, Armstrong said. “Buyers see right through it. They’re too smart.”


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