Private Equity’s Role Continues, With Shifts, in Retirement/Wealth Convergence

Private equity has been a key player in fueling the convergence of advisory firms operating in workplace retirement plans, individual wealth management, insurance and other benefits. But as the space matures, plan advisers should be prepared for further sector disruption, according to industry players.

“It’s a natural trend for consolidators to consolidate, as not all firms can truly execute on the operational aspects of a successful strategy,” says Rob Madore, a vice president with MarshBerry Capital LLC. “The wealth and retirement industries are probably in the early second stage of the consolidation curve, so the next 10 years will show who is able to execute and who becomes a part of a larger whole.”

The private equity firms backing the consolidation are not, generally, in the deal headlines. But they remain active both in funding and behind-the-scenes management despite higher interest rates and market volatility. According to MarshBerry’s latest deal report, total wealth advisory transactions were off to a record start through February—38 of 51 deals included private capital-backed buyers—and the consultancy forecasted that more records will fall throughout 2024.

The retirement and wealth convergence is a strong fit for private equity’s general goals of taking successful businesses or investments and creating a “multiple” of value over time through “professionalization and inorganic growth,” Madore says. “Both of these ‘cousin’ industries fit this bill with large numbers of smaller, independent businesses that could be combined. Pair this with extremely high client retention, strong, recurring revenue and many back-office efficiencies to be realized, and you have a pretty ideal target market for PE.”

There is a robust field of PE engaged with the convergence, including a few repeat investors both at a single firm and across the sector. Last year alone:

• Carlyle Group Inc. led a funding round for CAPTRUST Financial Advisors;
• Charlesbank Capital Partners was part of a $1 billion capital infusion in World Insurance Associates LLC, which includes Pensionmark Financial Group;
• Leonard Green & Partners LP announced a minority investment in Hub International Ltd.; and
• Aquiline Capital Partners LLC led Series E fundraising for Smart Pension Ltd and is an equity partner for SageView Advisory Group.

Other active firms include Genstar, an investor in Alera Group; Onex, an investor in OneDigital; and Atlas Partners, an investor in Hub.

The above firms, when contacted for an interview, either did not respond or declined to comment beyond public statements surrounding their funding.

Peter Campagna, a partner in M&A advisory firm Wise Rhino Group, notes that the strategies being executed by private equity firms are starting to evolve with the market. Previously, there were more investors looking to get in early to help a firm grow and develop. Now, there are more dealmakers engaging firms that are more mature, but need polish and direction. Meanwhile, others may be funding firms they see as being the lead aggregators to pull various lines of business together.

“For those early investors,” he says, “Sometimes they take their triple and move on, but more and more you see these private equity investors that have already done very well stick around for at least another three-to-five-year period. Keep in mind they have already taken the rocket ride up and have full visibility into these growing aggregators and they think so highly of them they basically say ‘sure, we will double down because we think it can go even higher.’”

Oversold?

Scott Colangelo, chairman and managing partner of Prime Capital Investment Advisors and the creator of Qualified Plan Advisors, is a believer in PE’s ability to help professionalize an advisory firm and drive it forward, but he cautions that not all deals are equal.

“The wealth service acquisitions have been widely, overall, successful when the firms, such as ours, are bringing people into a scaled structure,” he says, including providing support ranging from human resources to personal branding, marketing and office management.

But, he says, when wealth managers are acquired and “left to run their own shops as they have in the past,” little value is added to the firm itself, the acquirer or the clients. In these scenarios, the acquiring firm is rolling up assets to grow its equity and add value to shareholders of the acquiring firm. Colangelo predicts an exodus of advisers from those situations to firms—including his own—as they become “more and more disenfranchised.”

Meanwhile, the success on the wealth side is not mirrored on the retirement end, according to Colangelo. For one, he believes the investment banking community has often pushed retirement plan advisory clients to join larger insurance brokerage firms that are aggregating retirement firms, giving them the impression that by joining, they will be able to send their benefits clients to the firm they are courting.

“My conversations with advisers who have joined such structures have been almost unanimous in their dissatisfaction with the actual delivery of such business,” Colangelo says.

Additionally, he says, converging workplace retirement plan management and wealth management services at scale is complex and takes time to build.

“If you purchase 10 wealth management firms, all of them manage money differently, have different trading technologies, have different client service philosophies, etc.,” he says. “How do you scale that and merge cultures at the same time, while introducing a new service that you never offered to your retirement plan participants before?” PE firms, he believes, are starting to “realize they are overpaying for assets based on the pitch that they can easily cross-sell wealth to participants in retirement plans.” 

Colangelo notes that the retirement-to-wealth setup has worked for his businesses due to the fact that both were started at the same time, with the same centralized investment committee and years of providing on-site education to their retirement plan clients and participants.

“At this point, it’s culturally engrained in our firm,” Colangelo says. “But it took us 15 years of growth, innovation and, candidly, learning from mistakes.”

Monitoring the Landscape

Madore, of MarshBerry, also notes the importance for independent adviser firms to monitor the marketplace. Such advisories can continue to be successful, he says, at a roughly 15% growth rate, but that will need “increasingly intentional” client strategies as the consolidation evolves.

“The independent adviser or firm really needs to understand how this type of professionalization impacts their competitive standing not just today, but three to five years from now: fees, services demanded, growth paths for employees, etc,” he says. “For retirement specialists, [they] likely have noted that PE’s impact is being felt at the client level. The average business we work with loses two to three plans a year … so you need to adjust to counter that.”

Wise Rhino’s Campagna says that, as many of the largest retirement plan advisers have already joined firms, activity is shifting to those “really great practitioners” looking to join a bigger firm that will be a good match for their growth and future.

But PE firms are also being more targeted in their funding decisions, he says. Some are focused on honing and executing on retirement and wealth. Others are going after the full spectrum of workplace benefit offerings, which Campagna equates to a pitcher in baseball who can throw a number of pitches well, as opposed to just one or two.

“The complexity is off the charts; the execution is very difficult,” he says. “But even if it only half works, it will still be very successful.”