$230b US investor to bankroll Aussie wealth firms
by Aleks Vickovich Wealth editor - Australian Financial Review
Wall Street private equity firm Merchant Investment Management has set up shop in Australia, pledging to provide much-needed capital to independent financial advice businesses following the big banks’ exit from the troubled wealth management market.
The New York-based firm has appointed local wealth industry figures Santi Burridge and David Haintz as founding partners of its new subsidiary, tasked with identifying firms well-poised to capitalise on surging demand for financial advice as millions of Baby Boomers approach retirement.
Mr Burridge, a co-founder of fintech Lumiant and investment consultancy Implemented Portfolios, and Mr Haintz, a founding director of the Shadforth Financial Group business sold to ASX-listed Insignia (then IOOF) in 2014, are understood to be in advanced discussions with a handful of local advice providers to join the Merchant network.
Visiting Sydney last week to meet with prospects and industry leaders, Merchant managing partners Matt Brinker and Rick D’Amico declined to put a dollar figure on the size of their Australian war-chest, but said they were bullish on the nation’s independent financial advice (IFA) movement.
“The size of the opportunity warrants an incredible amount of our time and energy to have [Australia] be a significant part of our future growth,” Mr Brinker told The Australian Financial Review.
“The big macro trends of the banks leaving the space and the volume of clients pining for quality, independent guidance seems to be completely [advantageous] to us right now.”
All four of the major retail banks have largely abandoned the business model of providing financial advice to retail clients, while adviser numbers at remaining institutions such as AMP have rapidly dwindled.
Coupled with soaring asset prices that have made Australians among the world’s richest people per capita, the exit of the banks from the wealth industry (dubbed the “Wexit”) has paved the way for a proliferation of quality independent and boutique firms, the investor said.
Independent insurgence
Merchant has been a beneficiary of the same trend in the US, as independent registered investment adviser (RIA) firms, licensed by the powerful Securities and Exchange Commission, have grown since the global financial crisis at the expense of large bank-owned broker-dealers and “wire-houses”. The number of RIAs in the market has grown in 19 of the past 21 years, according to the US Investment Adviser Association.
Starting with a deal in Austin, Texas, in 2017, Merchant (which was founded by Goldman Sachs alumni Marc Spilker and Scott Prince) now holds stakes in about 60 wealth managers across the US, Switzerland and Brazil, with combined assets under management of $US150 billion ($236 billion).
It is one of a number of private equity outfits specialising in RIAs and independent wealth firms that have emerged since the GFC, including Nasdaq-listed Focus Financial Partners, which entered the Australian market amid fanfare in 2017, but became tangled in a legal dispute with its first local investment.
Mr Brinker said Merchant’s insistence on minority, non-controlling stakes differentiated it from the so-called “roll-up” firms, which ordinarily buy 100 per cent of a prospect or at least a majority stake.
“When you leave the majority of the equity in the hands of the entrepreneurs … they’re positive and motivated and want to participate in the equity growth,” said the managing partner, who was formerly head of M&A at the storied United Capital wealth firm sold to Goldman Sachs for about $1 billion in 2019.
It also differs from the diversified private equity giants – which have also taken an interest in Aussie wealth, evidenced by KKR’s 55 per cent holding in Colonial First State, the Commonwealth Bank’s former superannuation and advice franchise – in its focus on long-term, patient capital.
“Private equity money often comes with a shot clock – they need to invest, create value and exit, and there is less of a mandate of long-term strategy and growth and development of people and branding,” Mr Brinker said. “Our capital is longer duration.”
Distance delusion
While he declined to comment on rival Focus, he said having Australian partners on the ground was a competitive advantage for Merchant. “It’s delusional to think you can sit in Manhattan and be an investor in Australia and call yourself ‘strategic’ without people who can help you implement here,” Mr Brinker said.
The launch comes as Treasury conducts a controversial review of financial advice policy settings, which could result in some deregulation of the sector, which has lost more than 10,000 professionals since mandatory ethics and education rules were introduced in 2017.
While the Quality of Advice Review, chaired by Allens lawyer Michelle Levy, may provide a boon to the sector by stripping out costs and expanding access to its services, Mr D’Amico said Merchant was hunting for quality firms unfazed by levels of red tape.
“If the regulatory pendulum shifts one way or the other, we’re trying to back durable businesses and entrepreneurs that will be able to adapt to the environment,” he said. “As long as we continue to find good people, we’ll continue to put money behind it.”
Aleks Vickovich is the wealth editor. He writes about financial advice, funds management, superannuation and banking, with a special interest in the next generation of investors. Connect with Aleks on Twitter. Email Aleks at aleks.vickovich@afr.com