M and A

What’s Wrong With Envestnet, Goldman Sachs And CI Financial?

Charles Paikert New York December 22, 2022

What’s Wrong With Envestnet, Goldman Sachs And CI Financial?

Family Wealth Report's US correspondent Charles Paikert takes a hard look at three firms that have been through big changes and M&A decisions, and talks to industry figures about how their strategies are working out. This is the third in a set of articles examining the M&A landscape.

This is the third and final article in a series that has featured highlights of the RIA business in 2022 and prospects for 2023. (See the previous two parts here and here.) This analysis may prompt reactions and comments and if readers want to respond, please jump into the debate - that's what FWR is for! Email tom.burroughes@wealthbriefing.com

All three companies are leaders in their respective fields. But when it comes to the RIA business, they are all facing major challenges in the year ahead.

Envestnet: Indispensable industry utility or unwieldy mess?
To be sure, the back office/software/TAMP and data giant has had a tumultuous year, marked by a sagging stock price, nasty attacks from an activist investor, key executive departures, an aborted attempt to go private, more acquisitions, ESG missteps and a major reorganization.

“Their many acquisitions have resulted in a lot of different enterprises,” said Mark Tibergien, the former CEO of Pershing Advisor Services. “The question people are asking is how much is tied together and what exactly is the business model?”

In an open letter to Envestnet’s board of directors last month, hedge fund Impactive Capital accused the company of “subpar performance” and “egregious spending with seemingly no accountability for returns.”

The activist investors, who have accumulated a 7.2 per cent stake in Envestnet, cited “management incompetence,” a clear indication that CEO Bill Crager, who took over the company three years ago following the death of Jud Bergman, is in their crosshairs.

A reckoning is likely to come by next spring. Impactive has said it plans to name an alternative slate of board members and wage a proxy fight if it isn’t given a seat on the board.

Envestnet “has a lot to get their hands around,” said Gib Watson, a former vice chair at the firm and now a strategic consultant. The company may have “spend too much on too many things without enough profit,” Watson said, adding that “a bear market with rising interest rates causes a lot of margin compression for the core TAMP business.”

But Envestnet’s reorganization and strengths in its asset management platform, data, analytics and “investments in AI-driven decision making” have moved the firm in the “right direction,” Watson said.

Envestnet’s proposed move into the custody business also looms as a major test next year. Skeptics note that Envestnet risks “pissing off Schwab and Fidelity, two of its biggest clients,” as industry consultant Tim Welsh, CEO of Nexus Strategy puts it.

But Wall Street analysts were more optimistic. The move “could be one of Envestnet’s biggest opportunities to date,” according to a research note sent out by JMP Securities.

Goldman Sachs: Has the RIA business gone missing?
Maybe buying United Capital for $750 million in 2019 seemed like a good idea at the time.

But three years later, many industry executives wonder why Goldman Sachs bothered.

The investment banking powerhouse clearly has been preoccupied this year, undergoing a major reorganization and coming to grips with a depressed market with widely anticipated layoffs looming.
Many observers expected Goldman to flex its considerable muscles this year to boost its RIA business with re-branding, a marketing push and deal making to stake a claim as the first true national brand.
Instead, United has faded into Goldman’s anodyne “Personal Financial Management” division with a presence in the industry about as visible as Halley’s Comet.

"Goldman recognized the opportunity in retail,” said Dan Seivert, CEO of RIA M&A specialists Echelon Partners. “But after investment banking, everything is next tier. They have the money and the brand to crush it, but some reason they are complacent.”

If Goldman does have a strategy to actively develop its RIA business, “they haven’t done it yet,” said Matt Crow, president of Memphis-based M&A valuation firm Mercer Capital. “Maybe they have bigger fish to fry.”

Goldman’s strategic realignment may be diverting attention from its RIA division, said Tibergien, the former Pershing chief. “The big question is: What is their priority for corporate investment?” Tibergien said.
“Even Goldman Sachs has finite resources.”

The New York bank runs a notoriously tight ship, and the RIA business may be receiving more attention than is currently evident, other executives speculate.

“I never count out the smart folks in the room,” said attorney Brian Hamburger, CEO of the New Jersey-based compliance consulting firm MarketCounsel. “They may be playing a game I can’t see. But they have the potential to be so much more.” 

Does CI Financial have a digestion problem?
Last year at this time, CI Financial was riding high. The Canadian asset manager had stunned the US RIA industry by swooping in and buying over two dozen firms managing over $100 billion in assets in less than two years, an unprecedented feat.

Sure CI paid premium prices, but it was a sellers’ market and the Canadian company got US beachfront property their rivals coveted. This year, however, the Canadian juggernaught, saddled with a plummeting stock price, slowed considerably, doing only a handful of deals and sweating out a heavy $3 billion debt load as interest rates rose.

2023 looms as a trial by fire for the company. It wants to take a portion of its new wealth management business public but unfavorable market conditions have left that plan in limbo. And CI has yet to disclose how it will integrate the disparate RIAs it paid an estimated $1.3 billion for and who will run the unified operation.

“They bought a lot of good firms and they have a lot of work to do,” said investment banker Steve Levitt, managing director of Park Sutton Advisors.
Indeed, the road ahead may be steep.

“We suspect that CI has paid a higher multiple for many of its wealth management acquisitions than it trades at itself,” Zachary Milam, vice president for Mercer Capital, a Memphis-based M&A valuation firm wrote in a report to clients. “Undoing that reverse multiple arbitrage is something that CI’s management hopes will happen with the spinout, but the current market environment will likely make this an uphill battle.”

Multiples for  publicly traded asset and wealth managers have declined this year, Milam noted, adding that even CI Financial CEO Kurt MacAlpine acknowledged that private market valuations have dropped “in lockstep” with the public markets.

“All of this suggests,” Milam concluded, “that achieving an attractive valuation for the US wealth management business may prove difficult.”

And if CI Financial doesn’t begin to integrate its advisory firms, its RIA venture is doomed, asserted rival aggregator Mercer Advisors, this year’s largest RIA buyer.

“The only way CI comes out smelling like a rose is with one brand,” said Dave Barton, Mercer’s vice chair and head of M&A. “If they hold the firms they bought like cats without scale or leverage they will fail.”

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