Retirement plan adviser firms are a hot commodity — so hot that private equity investors are falling over themselves to invest in the lucrative, high-growth businesses, according to mergers and acquisitions experts.
Large RPA “aggregator” firms — think CAPTRUST Financial Advisors, OneDigital Investment Advisors, and Hub International — have “dozens and dozens” of private equity firms wanting to engage or buy stakes in them, said Peter Campagna, managing partner at M&A consulting firm Wise Rhino Group.
“I get a call from a new private equity firm I’ve never heard of probably once a week that’s got $500 million to $1 billion burning a hole in their pocket,” he said.
The competition to partner with these colossal RPA firms is so fierce, he added, that there “are no bargains to be had,” with private equity firms paying a hefty price to buy stakes in the coveted businesses.
Retirement plan adviser firms focus primarily on advising organizations offering workplace retirement savings plans, but some also have strong wealth management practices. When they bring in new PE partners, the firms typically fetch multiples of 15 to 18 times EBITDA, a revenue metric that stands for earnings before interest, taxes, depreciation and amortization, experts said.
Today, almost all the “aggregators” — retirement plan advisory businesses that are bulking up through acquisitions to gain scale — are majority-owned by private equity firms. Hub International, an insurance-brokerage behemoth with more than $172 billion in retirement plan assets, for example, is majority owned by three private equity partners: Hellman & Friedman, Altas Partners and Leonard Green & Partners.
So, too, is OneDigital, an insurance brokerage firm with more than $100 billion in retirement plan assets, and SageView Advisory Group, a firm with more than $202 billion. OneDigital is majority owned by Onex and New Mountain Capital, while SageView is majority owned by Aquiline Capital Partners.
The only outlier is CAPTRUST, a firm with more than $700 billion in retirement plan assets, which is minority-owned — rather than majority-owned — by GTCR.
Private equity firms have not been disappointed with their investments.
The RPA firms in which they invested have typically tripled in value every five years, which Campagna said, is considered a “standard growth for the stock of a private equity firm.”
“CAPTRUST,” he said, “has done even more than that.”
Retirement plan adviser firms have what many industry experts see as a relatively straightforward, uncomplicated and predictable business model. The business revolves around fee-based, re-occurring revenue, meaning revenue grows as the assets that the firms manage grow. With steady inflows into 401(k) plans by plan participants, many experts see the business as a no-brainer.
“Just at a high level, it’s good business because it’s growing in assets every month,” said Mike Sullivan, co-founder and chief growth officer at OneDigital.
“If you service your clients well, your clients stay with you for a long time,” Sullivan added.
Cross selling, new technology
In addition, the retirement plan business offers cross-selling opportunities. Industry observers point to the millions of plan participants who may need financial planning or private wealth management services.
“They’re looking at the ability to work with high-net-worth executives and individuals within the plan,” said Rob Madore, vice president of business development at M&A advisory firm MarshBerry, referring to retirement plan adviser firms.
The cross-selling opportunities are particularly strong at firms that are part of large insurance brokerage companies, such as Hub and OneDigital.
Retirement plan advisers attached to insurance brokerage firms see synergies between their insurance and employee benefits-brokerage business and their retirement plan business. They can cross-sell their retirement plan services to their employee benefits-brokerage clients, Madore said.
In exchange for offering private equity firms a chance to earn big returns on their investments, RPA firms receive critical capital needed to grow and better serve their plan sponsor clients.
RPAs typically use the capital from private equity firms to acquire other firms, a necessity for any RPA looking to stay in business. “They do it so they have powder to acquire and make their visions even bigger,” said Wise Rhino’s Campagna.
RPAs also use the money to grow organically on their own. Some, for example, might invest in new technology, such as digital lead generation tools, that will help them “produce new clients faster,” said Madore.
RPAs might also turn to their private equity partners for help in making operational decisions, particularly around whether to build or buy technology.
“Most firms leverage technology solutions that exist in the marketplace. We’ve gotten to a point now where we’re building our own software, and they’re at the table in terms of what we’re doing and how we’re doing it,” OneDigital’s Sullivan said of the firm’s private equity partners, Onex and One Mountain Capital.
Sullivan noted that the firm is building dashboards for plan sponsor clients that “will present plan efficacy in a very simplistic way, so that it helps them make better decisions in terms of what asset managers are being chosen.”
“A lot of it has to do with analytics and dashboards that are being created to help plan sponsors make more informed decisions,” Sullivan said.
Private equity partners also bring what Sullivan describes as “strategic counsel” and “mindshare” to the business.
“When you’re deep in the business every single day, it’s very valuable to have folks who aren’t in the grind and the noise of the business and are simply providing perspective in a very unemotional way,” Sullivan said.
Recruitment help
Other firms reported that private equity firms act as recruiters of management talent.
“Some of our best hires, our most successful professionals over the years have come to us either through our private equity partners or through M&A, and that is critical in a business like ours, which is a human capital- related business,” said Chris Veber, president and head of financial sponsors and strategic investors group at Hub International.
Given the attractiveness of the retirement plan business, RPA firms report having smooth and mutually beneficial relationships with their private equity partners.
“Our PE partners have always been extraordinarily collative,” Veber said. “While I’m sure there’s been natural disagreements, the reality of the situation is that they’re value-added partners and worked successfully with our senior team over the last 10 years to enhance shareholder value.”
OneDigital’s Sullivan also reported no issues with its private equity partners, attributing the long smooth ride to the company’s growth.
“We haven’t had any negative experiences because for basically 24 years, our company has done really well,” he said, explaining that had the business been challenged economically, the relationship with private equity partners might not have been as smooth.
The problem with private equity partners arises when there’s a problem with the business, a situation that typically leads to private equity partners getting actively involved, Sullivan said.
“We have not experienced that,” he said.
Private equity partners do weigh in on acquisition targets, especially now with interest rates rising.
“Everyone is having to prioritize opportunities differently than in the past when it was almost free to borrow money,” Sullivan said.
“We have a finite number of deals to do. We’re no longer at a point where we can do all the deals we want to do,” he added, explaining that private equity firms are interested in understanding the firm’s thinking and weighing in with their perspective.
OneDigital has bimonthly “pipeline calls” with its PE partners, Sullivan said.
Even with the higher cost of capital, private equity interest in the retirement plan business shows no sign of abating, according to industry observers.
“If a 700-basis point increase in the cost of capital didn’t slow it down because these firms are all leveraged, then I don’t know what slows it down,” Wise Rhino’s Campagna said.
