Private Equity House Agrees To Buy "Significant Stake" In HighTower, Inject Equity

Tom Burroughes

26 October 2017

A private equity firm, Thomas H Lee Partners, has bought a "significant stake" in US wealth management advisory house HighTower and pledged to commit $100 million in new equity capital once the acquisition is completed, giving another twist to corporate action in a sector going through major change.

The transaction is subject to customary regulatory approvals and closing conditions, and is expected to close in Q4 2017 or Q1 2018.

The transaction highlights how private equity firms, seeking ways to deploy funds in a market where inflows to the asset class have been strong in recent years, see the wealth management sector as an attractive target, given continued consolidation and growth in the market over recent months.

The involvement of private equity in backing wealth management firms can be controversial, because such investors typically seek to exit after, say, five years and push hard to improve returns, a time-frame that might not fit with the long-term horizons required for wealth advice. On the other hand, it can be argued that private equity's multi-year timeframe, and lack of pressure from a listed firm to put up strong quarterly results, is a suitable discipline. About two years ago Edelman Financial Services, one of the largest independent RIAs in the US, agreed to sell a majority interest to private equity house Hellman & Friedman. In 2016, it was announced that NFP was selling a majority stake in its independent broker/dealer NFP Advisor Services to Stone Point Capital, a Greenwich, Conn.-based private equity firm that invests in financial services companies.

An industry adapting to forces such as the Department of Labor Fiduciary Rule - which pushes the sector away from commission-based sales towards fee-based advice, as well as rising regulatory costs and client demands, is producing consolidation and a need for capital to drive growth.

Among recent high-profile deals has been that of Tiedemann Wealth Management, a New York-based wealth advisor with about $12 billion in assets under advisement, which in early October agreed to buy Seattle-headquartered Threshold Group, a wealth-advisory firm and family office with $3.4 billion in assets under management.

As part of the deal, a number of institutional investors will sell their equity interests in HighTower, a statement by the firms said yesterday.

A decade
“For ten years, HighTower has set a new standard for investors, delivering sophisticated financial advice without the conflicts of the conventional financial services firms,” said HighTower CEO and founder Elliot Weissbluth. “THL fully supports our mission of delivering objectivity, transparency and independent thinking to investors, while always putting their best interests first. Our partnership will help us reach more advisors and clients who refuse to settle for the industry’s status quo," Weissbluth said in a statement.

Dave Pottruck, the former chief executive of Charles Schwab and chairman of HighTower’s board of directors, remains one of the largest individual investors in the company. Weissbluth and Doug Brown of DLB Capital, HighTower’s first large institutional investor, are not selling any equity in this transaction, the statement said.

In recent months HighTower has continued to add advisor teams. In May, it executed its biggest acquisition to date, buying 10 financial advisor teams from WealthTrust. The new teams, plus organic growth, has seen total client assets rise to around $50 billion, a 27 per cent increase of $10 billion since the beginning of 2017.

JP Morgan Securities served as exclusive financial advisor to HighTower. Wells Fargo Securities served as exclusive financial advisor to THL. THL was represented by Kirkland & Ellis, the company was represented by Benesch, Friedlander, Coplan & Aronoff and certain of the Company’s institutional investors were represented by Willkie Farr & Gallagher.

Recent data underscores a busy M&A trend. Merger and acquisitions in the US Registered Investment Adviser space are projected to rise significantly this year, with average deal sizes also rising, figures from investment bank ECHELON Partners showed recently.

According to ECHELON’s report, RIA breakaways continue from wire-houses, as the latters’ recruiting bonuses are squeezed amid an industry shift to fee-based advice. Through the third quarter of 2017, 302 breakaways had taken place with an additional 88 expected in the final quarter of this year.