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While Greenwich, Conn.-based Stone Point Capital has covered the wealth management sector for 20 years, the firm didn’t do its first deal in the industry until 2012 when it acquired a 24.9% stake in SCS Financial.
Why? After the global financial crisis of 2008, Stone Point saw how resilient wealth management businesses were to market volatility—clients looking for direction, or disappointed with the traditional brokerage model, moved to RIAs, which then came out of that period with more clients as markets recovered.
But while Stone Point saw how resilient the firms were, many struggled to scale. SCS seemed to have an answer: The firm was an early example of an RIA which disaggregated core business functions and teams around client service, investments, and operations. That gave it flexibility, and it grew quickly. In the five years since their investment, SCS had tripled in size—all organic, says Fayez Muhtadie, managing director and co-head of private equity at Stone Point.
In 2017, as SCS looked for additional investors and liquidity, the owners wanted “permanent capital.” Along came Focus Financial Partners, a fast-growing buyer of wealth management firms which could absorb some of the firms’ operational burden while helping them tap into a network of RIAs to bring additional, and more specialized, services to clients. Focus checked all the boxes Stone Point was looking for and seemed to build upon the “scale” solution, Muhtadie said.
“We asked ourselves, ‘How many other SCSs are there across the U.S., maybe even potentially globally?’” he said. “There’s really something here in the Focus business model.”
Stone Point concurrently sold SCS to Focus, and along with private equity firm KKR, took a majority stake in the firm.
“We believe this is one of the few industries where, notwithstanding all the capital that has come into the industry, the pace of tuck-in opportunities continues to accelerate. And so there are still more opportunities than there is capital,” he said. “That was a core part of our investment thesis back in 2017. And even until this day, I think it’s fair to say that they are probably the market leader. They’re a well-oiled machine when it comes to their ability to source and to execute M&A transactions.”
Stone Point kept its ownership stake through Focus’s IPO in 2018. Recently, Focus shareholders approved an executive team plan to take the firm private again via a sale to Clayton, Dubilier & Rice. The deal cashes out all but its largest investor, Stone Point. Muhtadie said there are things they can do with the business that would be much more difficult if it stayed under the glare of the public markets.
The Focus investment will roll out of one of Stone Point’s funds and into another, giving liquidity to existing LPs and restarting the clock with fresh capital. Once the deal closes, the private equity firm will own about 25% of Focus.
Along the way, Stone Point also picked up stakes in IEQ Capital, a $18.3 billion AUM RIA in San Francisco, and 401(k) service provider Ascensus.
One of Stone Point’s differentiators is the range of structures and deal terms the managers are willing to consider. The firm may be a minority or majority owner, but will never take 100% of a business.
Some companies may not even want to sell any equity; in those cases, Stone Point can help raise capital via its credit business. Wealth Enhancement Group, for instance, raised $250 million this year through a preferred security sourced from Stone Point’s credit fund. Preferred securities typically have provisions to convert the debt to equity and is increasingly a common deal structure in the RIA space, Muhtadie said.
“When you have a business that has strong cash flow characteristics that can withstand market volatility, you can prudently take on credit and leverage,” he said. “Investors are now coming to appreciate that these businesses are far more resilient and durable than people gave them credit for, say, 10 years ago. So that’s why you’re seeing more credit, more leverage into the space.”
With billions of dollars invested, PE firms are driving the industry’s rapid consolidation. Here are some of the most active participants:
Thomas H. Lee Partners – The Active Operators
Lightyear Capital – The Domain Experts
HGGC – The Co-Investor
Genstar – The Majority Partner
Bain – The Structured Dealmaker
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