Will a New Bank Syndicate Help RIAs Challenge Private Equity-Backed Competitors?

SkyView lenders join forces to offer outsized loans to wealth managers.

SkyView, a specialty lender to wealth managers in need of cash for mergers, acquisitions, and succession plans, has created a new bank syndicate to offer much larger traditional loans than those previously available. The outsized loans could fund purchases of even some of the biggest RIAs and help buyers compete against others backed by private equity firms, according to SkyView.

“I think it's an absolute game changer for the large RIA marketplace,” SkyView CEO Scott Wetzel told RIA Intel.

Founded in 2017, Minneapolis-based SkyView has created a growing network of 33 banks willing to loan money to wealth managers, a loan market effectively nonexistent until a few years prior. Since then, it has helped originate $1.8 billion in loans, a fraction of the $70 to $90 billion market SkyView estimates will materialize over the next 10 years. The lenders have helped finance more than 125 deals and made more than $300 million in loans. 

In 2020 alone, SkyView helped originate over $800 million in loans and doubled the number of closings from 2019.

To accelerate the growth of its lending business, SkyView has added other services. It created the Advisory Practice Board of Exchange, or APBOE, a website where investment banks, consultants, and independent broker-dealers can list their clients looking to do a deal. Last fall, the company also bought a boutique investment bank and broker-dealer, a move it considered necessary to provide investment banking services to clients. 

The SkyView Syndicate is the latest example of the company’s effort to make traditional loans the prominent source of capital for wealth managers.

Until now, SkyView’s network of banks have individually lent money to buyers purchasing small- and medium-sized advisory businesses managing $500 million in assets or less. Loans to wealth managers are usually low, single-digit million-dollar amounts. Anything larger is seen as a concentration of risk; all the network banks have between $2 billion and $18 billion in assets and having an outsized loan for $10 million or more could even raise questions from regulators, according to Wetzel.

But banks are getting increasingly comfortable with wealth managers as borrowers, especially after no SkyView-facilitated loans experienced a charge-off or late payment in 2020, Wetzel said. Most are expanding their commitments, or the sum of money they are prepared to loan out. One bank committed $25 million to start and is boosting that to $250 million in March. Another doubled its commitment to $50 million and is already planning on more than doubling it again in 2021.

To help satisfy their appetites, the syndicate enables the banks to team up (they can each individually choose) and fund part of an outsized loan. Last week, four banks sent the first syndicate term sheet for a $31 million loan. Wetzel said the group can easily fund deals in need of $10 million to $50 million.

It comes at a good time. Larger RIA sellers are going to market for the first time. In 2020, the average assets under management transferred in a deal was $1.8 billion, up 20% from 2019’s average of $1.5 billion and the highest ever, according to Echelon Partners, a boutique investment bank that publishes the industry’s most inclusive report on mergers and acquisitions. Last year also saw record deal volume, despite a second-quarter lull due to the Covid-19 pandemic and March selloff. 

Wetzel says access to the syndicate capital — at a lower price because of favorable interest rates and it doesn’t cost borrowers any equity — means more RIAs can afford to compete with other buyers backed by private equity firms and maintain ownership. 

The recipe will further drive up prices and could alter the mergers and acquisitions landscape in wealth management, Wetzel says.

The consensus is that more, cheaper sources of capital available to wealth managers is a good thing for everyone involved. But will the SkyView Syndicate really create challengers against the prolific private equity-back buyers? Not everyone is as optimistic at Wetzel.

“More capital competing for transactions in this low interest rate environment could increase the competitive buyer dynamics. It’s also important to understand that each capital source serves different business objectives,” said Scott Slater, vice president of Practice Management & Consulting at Fidelity Institutional, the financial services firm’s custody business.

“Debt enables a firm to remain fully independent and in control of its decisions and acquisitions, but many firms choose an equity partner for the expertise they’ll bring to help the business get to the next level, whether that is around M&A (such as strategy, sourcing and financing access) or other operating areas.”

John Langston, the founder and managing director of Republic Capital Group, a boutique investment bank that primarily advises wealth and asset managers on deals, said he believes private equity firms will forever have a place in the industry. He praised the emergence of traditional financing. But interactions with a private equity owner compared to a bank giving a loan are on opposite ends of a spectrum, he said. Even a minority owner of a company might be highly involved. A borrower might never hear from a bank unless they don’t make a payment on time.

Mercer Advisors, a Denver-based RIA managing over $24 billion and one of the busiest acquirers in the industry, is private equity sponsored. For that reason, it doesn’t need and wouldn’t seek traditional loans to fund deals, said Dave Barton, the vice chairman and head of M&A at Mercer. 

“If I were not PE-backed and an RIA looking to buy another firm, given the interest rates available to RIAs and the number of banks willing to provide capital for growth, I would consider it,” he said. 

But Barton doesn’t believe SkyView’s syndicate can extinguish private equity firms’ interest in buying large wealth managers. Partly because private equity firms are seeking a specific subset of even the largest RIAs. The number of RIAs also continues to grow despite some consolidation. “I think traditional debt in the space gives smaller RIAs capital to grow. I think that’s a good thing. Will that necessary impinge on PE or any other form of buyer? No,” Barton said.

He also cautioned would-be buyers. Loan payments come due regardless of a company’s health and over 1,400 wealth managers sought PPP loans in 2020 (although, no one knows exactly how many received a loan). Strings attached to capital can be a form of safety net when times are tough. 

“You really have to be a sophisticated finance person to bethinking about taking on serious debt as part of your operation,” Barton said.

Disruptive to private equity firms or not, there will be RIAs that take advantage of access to larger loans to maintain ownership, according to Slater. “Additional sources [of capital] from major banks or banking syndicates would likely help to increase activity, and it may enable some larger management teams to continue to remain independent longer and pursue their own inorganic growth strategy.” 

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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