OTPP Enters Wealth Management Business?
Investment funds affiliated with Lightyear Capital LLC (“Lightyear”), a New York-based private equity firm focused on financial services, and Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”), Canada's largest single-profession pension plan, announced today that they have agreed to acquire wealth management firm Allworth Financial (“Allworth” or the “Company”) from private equity funds managed by Parthenon Capital ("Parthenon"). The senior management team of Allworth will remain significant shareholders as part of this transaction. Financial terms were not disclosed. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions.
Founded in 1993 and based in Sacramento, CA, Allworth is a full-service independent investment and financial advisory firm that specializes in retirement planning, investment advising, tax planning and preparation and estate planning for the mass affluent. As one of the fastest growing Registered Investment Advisors in the United States, Allworth has completed ten acquisitions, has grown client assets under management from $2.4 billion to approximately $10 billion since 20171, and has been recognized as a top Registered Investment Advisor by several notable publications including Barron’s, the Financial Times, and Financial Advisor Magazine.
The investment by Lightyear and Ontario Teachers’ will enable Allworth to continue to build its national footprint through systematic acquisitions and multi-channel direct marketing efforts with the goal of becoming one of the premier wealth managers in the United States.
“We are thrilled to be working with Lightyear and Ontario Teachers’ and are looking forward to leveraging their extensive experience in the financial services and wealth management space,” said Scott Hanson, Co-Founder and Senior Partner of Allworth Financial. “We are proud of what we have been able to accomplish to date and believe Lightyear and Ontario Teachers’ will help accelerate our pursuit of becoming a national firm that brings unbiased, straightforward retirement planning guidance to thousands of families.”
“Over the past 27 years we have helped thousands of clients with their retirement planning needs and sought partners who understood the importance of putting clients first,” said Pat McClain, Co-Founder and Senior Partner of Allworth Financial. “Together with Lightyear and Ontario Teachers’, we look forward to the continued expansion of our client-first model across the country.”
“As fiduciaries to over 300,000 active and retired teachers in Ontario, we understand the critical role that Allworth and its advisors play in providing quality financial planning solutions to its clients. We believe the company is an attractive investment given its differentiated and retirement-centric business model as well as industry tailwinds including an aging population and increased demand for professional and holistic wealth planning services. We look forward to supporting management’s long-term value creation and growth aspirations for Allworth,” said Karen Frank, Senior Managing Director, Equities at Ontario Teachers’.
Mark F. Vassallo, Managing Partner of Lightyear, stated: “We believe we have identified another outstanding investment opportunity in wealth management and are very excited to partner with the Allworth team. Allworth has the opportunity to become a national brand name for providing financial advice. This investment is consistent not only with our long-term thesis around the growing need for financial advice, particularly in times of uncertainty, but also with our multiple prior successful investments in the space.”
Upon closing of the transaction, Allworth will become the fifth investment in wealth management by Lightyear’s affiliated investment funds, including successful realized investments in Cetera, Advisor Group, and Wealth Enhancement Group, as well as a current investment in Cerity Partners. Lightyear also has significant experience investing in companies that leverage technology in marketing to reach consumers, including current investments in Datalot and HealthPlanOne.
Davis Polk & Wardwell LLP and Truist Securities, Inc. are serving as advisors to Lightyear and Ontario Teachers’ and Torys LLP is serving as an advisor to Ontario Teachers’. Kirkland & Ellis LLP, Raymond James & Associates, Inc., and Moelis & Company LLC are serving as advisors to Allworth and Parthenon.
About Allworth Financial
Allworth Financial (www.AllworthFinancial.com) is an independent investment financial advisory firm that specializes in retirement planning, investment advising, and 401(k) management with a direct approach to financial planning. Allworth Financial delivers long- and short-term investment planning solutions and advice to help clients achieve their goals and plan strategically for retirement. In 2019, Allworth Financial was awarded the National Business Research Institute’s Circle of Excellence award for customer satisfaction.
About Ontario Teachers'
The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with C$204.7 billion in net assets (all figures at June 30, 2020 unless noted). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.5% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific regional offices are in Hong Kong and Singapore, and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded as of January 1, 2020, invests and administers the pensions of the province of Ontario's 329,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.
About Lightyear Capital LLC
Founded in 2000, Lightyear is a financial services-focused private equity firm based in New York. Through its affiliated private equity funds, Lightyear makes primarily control investments in North America-based, middle-market companies associated with financial services, including asset management and wealth management, banks and brokerage, commercial and consumer finance, financial technology, healthcare financial services, insurance, and tech-enabled business services. Lightyear brings focus and discipline to its investment process, as well as operating, transaction and strategic management experience, along with significant contacts and resources beyond capital. For more information, please visit www.lycap.com.
Before I give you my thoughts, let's go back to August of this year when Parthenon Capital announced its plans to put Allworth up for sale:
So Parthenon Capital is selling Allworth to Ontario Teachers' and Lightyear at the top of the market? That's what it sounds like when I read this:
Parthenon Capital is pursuing a sale of RIA aggregator Allworth Financial, sources familiar with the situation told Citywire.
The private equity firm has hired Raymond James to serve as its investment banker, one source said.
Spokespeople for Raymond James and Parthenon Capital did not immediately respond to requests for comment.
Scott Hanson (pictured, left), Allworth’s co-chief executive, declined to comment. Hanson and co-chief executive Pat McClain (pictured, right), founded the firm in 1993.
Allworth, which is based in Sacramento, Calif., manages roughly $8bn in assets. Formerly known as Hanson McClain, the firm sold a controlling stake to Parthenon Capital for an undisclosed sum in July of 2017. Allworth managed just $2.4bn at the time of the transaction, according to InvestmentNews.
The firm has become a serial acquirer of RIAs since it took the Parthenon Capital investment: Allworth has completed nine transactions in a roughly three-year span. It most recently acquired $100m Capstone Capital in May and $450m Houston Asset Management in April.
‘Allworth has aggressively grown through its organic marketing engine and a number of meaningful subacquisitions, so it makes sense they are seeking to capitalize on this momentum,’ said Louis Diamond, an executive vice president at advisor consulting and recruiting firm Diamond Consultants.
Private equity firms typically make their investments in portfolio companies with a five to seven-year time horizon. However, private equity investors have put RIA aggregators up for sale ahead of that schedule. In the summer of 2019, Genstar Capital put Mercer Global Advisors up for sale after four years invested in the company, as did Lightyear Capital with Wealth Enhancement Group.
Both of those RIAs eventually sold to other private equity firms. Oak Hill Capital invested in Mercer alongside Genstar Capital, while TA Associates acquired Wealth Enhancement Group.
High valuations in the RIA industry may be behind Parthenon Capital’s decision to pursue a sale of Allworth, explained Mike Papedis, chief executive of RIA consultancy Fusion Financial Partners.
‘With markets at all time highs, if you are a seller, now is your time,’ he said. ‘Foreign investors (CI Financial), private equity money and all the usual suspects (Hightower, Focus Financial Partners) are all incredibly active.’
Allworth is part of a handful of financial services investments for Parthenon Capital. The Boston-based firm’s suite of portfolio companies includes 401(k) custodian Millennium Trust Company, custodian and broker-dealer Mid Atlantic Capital Group and payment processing company Payroc.
‘With markets at all time highs, if you are a seller, now is your time,’ he said. ‘Foreign investors (CI Financial), private equity money and all the usual suspects (Hightower, Focus Financial Partners) are all incredibly active.’
Older Americans are selling the stock market, slowly but ceaselessly, to junior generations https://t.co/Sp0g12wgB9— Leo Kolivakis (@PensionPulse) October 17, 2020
I note this from the article:
Harley Bassman, a longtime fixed-income executive at Merrill Lynch and elsewhere who now writes the Convexity Maven newsletter, notes that a large and growing flow of selling is mandated by law. IRA assets, for instance, are subject to mandatory withdrawals beginning at age 72. More than a quarter-million Americans turn 70 each month. There is nearly $11 trillion in these accounts. Bassman calculates that this year $75 billion had to be sold, rising to $250 billion a year in 2030.
Those are not enormous totals in the context of a $30 trillion U.S. equity market, but represent a persistent and strengthening undertow of selling in the market.
Slow exodus from equities
Much of this systematic retreat comes by way of target-date retirement funds, a hugely popular asset-allocation vehicle that shifts from equities into bonds or cash gradually until a specified retirement year. There is nearly $3 trillion in these funds, which are often the default option in corporate 401(k) plans. More than 40% of that total is pegged to retirement years 2020, 2025 and 2030.
These funds, along with other mixed-asset approaches, also mechanically sell equities to rebalance to their proper allocations, so in a generally rising stock market such disciplined vehicles will be net sellers.
Again, this is all an overhang of supply of shares on the market but not in itself enough to drive sharp declines. For one thing, individuals control less than half of all U.S. equity value, so the demographic tidal shifts are one among many factors. But it helps explain the slow leakage of cash out of equity funds in recent years, illustrated here since the start of 2018.
There are a lot of people retiring over the next decade who need solid advice which is one reason why Allworth and other RIA aggregators have been growing organically and acquiring others in the process.
What I'm getting at is there are structural reasons why this is a great market and it explains why private equity funds have been very active in the space.
Yesterday, I read Brookfield Asset Management revealed a strategic partnership with American Equity Investment Life Holding (AEL), a retirement planning annuity provider:
The partnership establishes Brookfield as a 19.9% cornerstone investor and reinsurance counterparty of AEL, supporting continued growth opportunities for the business. American Equity Investment Life specializes in the sale, through independent agents, banks, and broker dealers, of fixed index annuities. These investment products support individuals in preserving their retirement dollars and provide a secure, predictable income.
You can read more details on this deal here.
Brookfield Annuity is in the pension de-risking business and it deals with a lot of underfunded DB pensions looking to transfer their pension risk.
Again, it's not the same business as Allworth but you get my point, there's big business in managing pension and retirement assets and top line private equity funds want a part of it, be it DB or DC pensions.
Ontario Teachers' is one of the best DB plans in the world so it's entering into a deal in a space it knows all too well.
As Karen Frank, Senior Managing Director, Equities at Ontario Teachers’ put it: "As fiduciaries to over 300,000 active and retired teachers in Ontario, we understand the critical role that Allworth and its advisors play in providing quality financial planning solutions to its clients. We believe the company is an attractive investment given its differentiated and retirement-centric business model as well as industry tailwinds including an aging population and increased demand for professional and holistic wealth planning services. We look forward to supporting management’s long-term value creation and growth aspirations for Allworth.”
By the way, Karen Frank officially joined Ontario Teachers’ as Senior Managing Director, Equities two weeks ago. Based in the London office, she will lead the Equities team, which as at December 31, 2019, managed $47 billion in net assets, with a portfolio including more than 60 private companies, significant investments in public companies and relationships with more than 30 private equity funds.
She brings to the role significant leadership skills, diverse thinking and in-depth knowledge of global markets that will help Teachers' continue to scale its business internationally and build on its track record of success in private and public equity markets.
Congratulations to Karen Frank, Senior Managing Director and Global Head of Equities, who has been named as one of the Most Influential Women in European Finance for 2020 by @FinancialNews! #WomeninFinance— OTPP (@OtppInfo) October 19, 2020
Read more here: https://t.co/9VpE0Wvqfc
Now, let me take a minute here to share something critically important, so please pay attention.
Following my last comment on CalPERS, a former Canadian pension fund manager shared his take on co-investments and how Canada's large pensions are not disclosing their performance in this area relative to fund investments (see long update at the end of the comment here).
Today I learned that several years ago, Ontario Teachers' Private Capital did a detailed attribution analysis on all their private equity deals and here's how they ranked them by profitability from worst to best:
- Fund investments were the worst because carry and management fees ate up most of the returns
- Minority syndication (a lower form of co-investments where you get a some slice of a deal, say 5%) were second worst because these deals are typically done in bad vintage years when deal activity is high and GPs are looking to unload investments.
- Teachers' purely direct deals were the second most profitable deals but they weren't plentiful.
- And the most profitable deals by far were jointly sponsored co-investments (50/50) where Teachers' and their partners sourced and underwrote deals jointly, reducing fee drag. For example, Teachers' deals in Dematic (with AEA Investors) and CPG International (with Ares), both returned roughly 8x the money. These are phenomenal deals.
What is critical to understand is Ontario Teachers', just like CPP Investments, has a specialized PE staff doing jointly sponsored co-investments which is where they get their best bang for their pension buck.
And as was explained to me, not all co-investments are profitable, especially not minority co-investments which are considered direct deals but are really nothing more than syndication where GPs unload small stakes to smaller LPs who can't do jointly sponsored co-investments (and sometimes to larger LPs).
Fascinating stuff, the reason I love this blog is because I learn something new every day talking to the best pension minds in the world.
This Allworth Financial deal with Lightyear Capital sounds like a jointly sponsored co-investment where both Teachers' Private Capital and Lightyear sourced and underwrote the deal.
Anyway, I really like this deal a lot over the long run as I like the deal Ontario Teachers’ announced yesterday leading a US$360M investment round into Princeton Digital Group, Asia’s leading data center company:
Singapore-based Princeton Digital Group (PDG) has entered into definitive agreement for a new US$360M equity investment led by Ontario Teachers’ Pension Plan Board (Ontario Teachers’). Warburg Pincus, which has been the largest institutional investor of PDG, is also participating in this new round of fundraising.
PDG is an investor, operator, and developer of data centers with presence in the key digital economies of Asia. Since its founding three years ago, PDG has built a portfolio of 18 data centers across four countries – China, Singapore, Indonesia, and India. The company serves top hyperscalers, internet and cloud companies as they expand across the region. PDG has grown through a combination of acquisitions, carve-outs, and development, and will continue to execute on this strategy in its existing and new markets.
“We are delighted to have Ontario Teachers’ as an investor in PDG. Their track record of long-term investments combined with deep data center experience makes them a great partner as we continue to scale our business. We are also heartened by the continued trust and confidence placed by Warburg Pincus in PDG,” said Rangu Salgame, co-founder, Chairman and CEO of PDG.
“We are excited to invest in PDG alongside Warburg Pincus. We see data centers as a compelling investment opportunity given their essential role in the rapid digitalization and growth of data occurring in Asia and around the world. We have been impressed by PDG’s high-quality management team, unique strategy and track record of success, and look forward to leveraging our experience to help the company continue to scale across Asia” said Ben Chan, Regional Managing Director for Asia-Pacific at Ontario Teachers’.
“Since backing the founders in PDG’s formative days, we have been impressed with their ability to build a leading pan-Asian presence within a short period of time. We see a tremendous opportunity for PDG to continue to grow across the largest and fastest growing markets in Asia. We are excited to welcome Ontario Teachers’ as a like-minded and value-adding partner to this venture as PDG embarks on its next phase of growth,” said Ellen Ng, Managing Director, Head of China Real Estate, Warburg Pincus.
About Princeton Digital Group
Princeton Digital Group (PDG), headquartered in Singapore, is a leading investor, developer, and operator of internet infrastructure. PDG partners with global hyperscalers and enterprises to serve their data center needs across Asia. PDG currently has presence and operations in China, Singapore, India, and Indonesia. The company is led by a world-class team with extensive operating experience in the global telecom, internet, cloud, and real estate sectors, bringing together a unique combination of strategic, operations and technology capabilities. For more information please visit www.princetondg.com
The explosive growth of digital data in Asia is a secular theme which will only grow with population growth, more people entering the middle class and more people doing e-commerce online and on their smartphones.
Princeton Digital Group (PDG), headquartered in Singapore, seems like the ideal partner to have in Asia to capitalize on this explosive growth.
Let me end this comment with a few more things related to Ontario Teachers' Pension Plan.
It came to my attention that there was a major restructuring that took place last week in the Capital Markets group headed by Gillian Brown.
I heard that there was a reshuffling, some activities were cut and others brought internally, all part of a major strategy shift as OTPP grows its assets and shifts its attention to Asia Pacific.
I can't comment more except to say it was mostly juniors who got cut and as one person put it to me: "If there was a major strategy shift, why are only juniors cut and MDs and senior MDs making the strategy spared?".
Like I said, I don't know the details and it's a shame this restructuring took place during a pandemic but it was needed to execute on the long-term strategic initiatives.
Lastly, a note on Ontario's teachers, the clients of OTPP.
I don't know if people realize but teachers are front line workers and like nurses, they're mostly women and don't get the attention or appreciation they deserve during this pandemic.
I'm going to let you all in on a little secret which governments are trying to suppress. COVID-19 is rampant at our elementary and high schools, there are a lot of cases popping up at a lot of schools here in Quebec and when they test asymptomatic kids which were near symptomatic ones, they discover they too have COVID.
It's not a "fluke" that COVID cases are on the rise in the fall when kids go back to school and I'm tired of the media saying it's because of the "cold weather" and "more people congregating indoors".
No doubt, it plays a role but transmissions at schools are on the rise. I know this is a fact, so be on guard if you're a teacher in Ontario or elsewhere and take all necessary precautions.
Apart from masks, washing your hands often, social distancing (not easy when you're teaching young kids), open your classroom window a little to have air circulating, and take a minimum of 1,000 IUs of vitamin D a day, if not twice or three times this amount.
Over the weekend, I heard an infectious disease doctor in Ontario on CTV News who once again repeated the virus is extremely contagious. She also said transmission at schools is on the rise. As far as immunity, she specified you can get reinfected with a different strain of COVID-19 and there are more cases of this happening all over the world.
Bottom line: be extra vigilant over next six months, you might do everything right and still catch it but the longer you go without catching it, the better your chances of surviving it as new treatments get approved. Once again, don’t forget to take your daily dose of vitamin D, a minimum of 1,000 IUs a day but I recommend up to three times that amount in winter months.
Alright, I better stop there but let me salute teachers and nurses throughout our country who work tirelessly during this pandemic, contributing to the betterment of our society.
In my opinion, they are grossly underpaid for the work they are doing.
Below, a couple of clips featuring Scott Hanson, co-founder and co-CEO, discussing why they are changing their name and why he loves California where Allworth is headquartered in Sacramento.
I also embedded a longer clip from Allworth's Money Matters which took place recently where Scott Hanson and Pat McClain look back at some calls they received from the height of the pandemic and discuss the key reasons why more Americans want to work in retirement.
Great clip, listen to their comments carefully.
Lastly, take a look inside Princeton Digital Group's (PDG) existing and upcoming carrier and cloud-neutral data centers across Asia and listen to Rangu Salgame, Chairman & CEO, discuss the growth of the data center market in Asia on CNBC's Squawk Box Asia.
Like I said, if you're investing in Asia, you want to have strong partners who are best of breed in the activities they're doing. Princeton Digital Group is definitely a great partner to have in the region.