SPACs - special purpose acquisition companies - are the hottest story of the year in the mergers and acquisitions world.

Despite the global pandemic, more than 240 SPACs were introduced in 2020, quadruple the number raised last year, according to SPACInsider. The average size of a SPAC was $335 million, nearly 10 times the amount in 2009.

The winning formula: buyers get a 20 per cent stake in the financing vehicle at a low cost, which turns into a big stake in the target company after a merger. Sellers can go public without the hassles and restrictions of a traditional IPO.

But whether the structure will work in the US RIA market remains to be seen.

Larry Roth, the former CEO of two major independent broker-dealer firms, Cetera and Advisor Group, is betting it will.

Many others in the RIA business are skeptical.

Roth has teamed up with UK-based Kingswood Group, through its US holding company, to launch Kingswood Acquisition Group, which closed a $115 million IPO late last month, after initially targeting $150 million. Kingswood’s US arm is led by another IBD veteran, former LPL Financial executive Derek Bruton.

Roth says he’s looking for “a large, high quality, single-branded RIA that wants to continue to grow.” The owners would continue to run the business but merge with a public company that has access to capital and can provide integrated services to achieve scale as more acquisitions are made.

Kingswood offers a combination of cash and equity, and owners can negotiate what portion of the business they want to sell, according to Roth. That flexibility, access to what Roth calls “permanent capital” and becoming part of a public company appear to be Kingswood’s major selling points.

Headwinds for SPACs
But Kingswood’s SPAC pitch faces significant headwinds, most notably brutal competition in the RIA M&A space.

The hyper-competitive seller’s market is approaching the end of what appears to be another record year marked by bidding wars and steadily-climbing valuations.

And the established buyers, many backed by deep-pocketed private equity firms, are formidable. 

Hightower Advisors, Focus Financial, Captrust, Mercer Advisors, WEG, Emigrant Partners/Fiduciary Network, Creative Planning, Merchant Investment Management and Goldman Sachs, to name a few, are all well capitalized and have a proven track record of providing capital funding, services, succession planning and, in some cases, minority shares.

What’s more, the business was upended this year by the emergence of CI Financial, the Canadian asset manager. CI was an unknown entity in the US advisory business at the beginning of the year and used its cash reserves to outbid competitors and gobble up a jaw dropping 13 firms and over $20 billion in AuM in only ten months, an unprecedented accomplishment in the industry.

CI’s success underscored the need for capital - lots of capital - to be able to outbid the competition if necessary. Roth said Kingswood is willing to pay “full value” for acquisition targets. 

But CI is also offering RIA sellers access to its 330,000 Canadian clients, a number of whom need the services of a US advisor after they establish a residence in the states.

As RIA M&A consultant David DeVoe puts it, “the economics of a deal is rarely an exclusive decision driver for an RIA to sell.”

Who wants to go public?
What about the appeal of being part of a public company?

There are only two publicly traded companies in the RIA space: Silvercrest, a high-end wealth management firm and family office and Focus Financial, a holding company which came to market in 2018 after aggregating dozens of firms over a decade.

“I’m not aware of many RIA owners who want to be a public company,” says Karl Heckenberg, CEO of Emigrant Partners and Fiduciary Network. “Regulations and compliance make it extremely challenging for advisors. And if big firms like Hightower with a big PE backer like TH Lee had wanted to go public, they would have already. I think it’s going to be a tough sell.”

Nonetheless, “it was only a matter of time before SPACs started to pop up in the wealth management industry,” according to M&A veteran Peter Nesvold, who heads the merchant bank Nesvold Capital Partners. “It’s another example of how Wall Street is institutionalizing the RIA market, and yet another liquidity option that the industry can choose from.”

But executing a SPAC in the wealth management industry is “not a slam dunk,” Nesvold argued.

One problem is that “there aren’t a lot of platforms out there in wealth management that are big enough to be public,” he explained. “I would argue that a public company would want to have a market cap of at least $500 million so that it can attract research coverage and institutional investors. That threshold suggests a relatively short list of targets.”
 

Questions
RIA owners may also be wary of Kingswood’s lack of experience in the RIA market, said Brad Bueermann, CEO of M&A consulting firm FP Transitions. 

“Owners want to know what you’re bringing to the party,” Bueermann said. “Where is the shareholder value and what is the benefit to the client?”

Purely financial players, he continued, have had a difficult time only competing on price. “The purpose of a SPAC is right there in the name: the purpose is to acquire,” Bueermann explained. “Firms are bundled, then sold to make more money. What is the value proposition to the client? And if a firm is sold to a SPAC, will advisors stay?”

John Eubanks, vice president at New York investment bank Park Sutton Advisors, agreed.

“RIA founders and partners typically want to make sure of three things when they consider a sale or merger,” Eubanks said. “That it’s good for their clients, their employees and that it accomplishes exit, succession, growth or other goals for the founders and owner.”

An acquirer’s funding source, he maintained, doesn’t matter as much as its ability to “enhance offerings for clients, add operational resources, and accomplish partner goals.”

Odds of success
So can Kingswood pull it off?

Roth believes that offering sellers a combination of “cash, stability and a board seat” is a winning proposition. The SPAC hasn’t set a target for how many firms it wants to sign on next year, he said. “We’re still looking for our first one.”

Eubanks thinks Roth has a chance.

“He obviously has a history of expertise and of building and integrating in his time with Cetera, so I do think the story could resonate with RIAs considering a sale,” Eubanks said.

DeVoe is more cautious.

“One could argue that a SPAC is a financial instrument, as opposed to a business strategy,” he said. “It is an efficient way to potentially achieve a private to public arbitrage opportunity, but it is not in itself a business model.” 

Competitors, not surprisingly, are skeptical.

“I don’t think the structure works in this space,” says Heckenberg. “The multiples are too high and the revenues are too low.”