Kestra sells minority stake to private equity firm Oak Hill Capital

An independent wealth manager who is seeing notable hiring gains in a giant-dominated industry has taken his latest private equity bet on the company’s future growth.

Kestra Holdings — the Austin, Texas-based parent company of wealth managers Kestra Financial and Grove Point Financial and their 2,400 financial advisors with $122 billion in client assets — added a new minority investor on September 30 when Oak Hill Capital purchased the stake in the company previously held by funds managed by Stone Point Capital. Companies once close to Kestra in size such as Investor signatories, Voya Financial Advisors and Waddell & Reed merged into giants like Advisor Group, Cetera Financial Group and LPL Financial in recent years.

By contrast, Kestra has built its own footprint steadily since Stone Point funds first invested in the company in 2016 and later sold majority to Warburg Pincus three years later. This 2019 agreement reportedly valued Kestra at $800 million, but the parties to its latest private equity deal did not disclose any financial information about the investment. As a formerly insurer-owned company, Kestra has shown a knack for moving with the times, in some cases ahead of rivals who have only embraced private equity capital and advisor escape channels in recent years and in other cases as a result of competitors who have made RIA M&A a huge source of expansion.

Kestra has seen “musical chairs from private equity owners” in recent years, industry recruiter Jon Henschen said in an interview. He pointed out that private equity deals often come with higher leverage funded by junk bonds that could “go south quickly” under certain economic conditions, but noted that Kestra has proven adept. to carve out its own place in a rapidly consolidating industry. “They have a catering niche for high-end advisors, and they seem to be really making progress with wire house advisors,” he added.

Citywire RIA first reported The Kestra recapitalization agreement. Kestra and Stone Point declined requests for interviews, and Oak Hill Capital did not respond to requests for information. Warburg is still the majority owner of Kestra.

Kestra management and around 120 advisers held shares in the company after the Warburg deal in 2019, so it is unclear whether any payment was received in the last transaction.

“Our ability to partner with leading finance professionals and the strength of our business allows us to attract world-class finance partners who want to be part of our growth,” said Kestra CEO James Poer. , in a press release. The agreement allows Kestra “to continue to evolve our platform, invest in our team, and bring new capabilities to finance professionals and the clients they serve,” he added.

In his last notes stock on Kestra’s debt in November 2021, Moody’s Investors Service affirmed its sub-grade status at “B3” and said the company’s outlook remains stable. At that time, a top-up loan and new note issuance totaling $290 million raised the company’s debt to $756 million with an expected year-end leverage ratio of 8.6 times its adjusted earnings before interest, taxes, depreciation and amortization. The agency predicted the ratio would drop to 7.4 times Kestra’s adjusted EBITDA by the end of this year.

The rating “reflects Kestra’s high debt, low profitability, but strong revenue and EBITDA growth driven by M&A and advisor hires,” Moody’s analyst Gabriel Hack wrote in the note. “Kestra’s strong growth in revenue streams and favorable customer assets over the past two years has resulted in increased EBITDA and cash flow generation. These positive trends are offset by the increase in the debt balance and the interest expense associated with the recapitalization.

Sellers engage with potential buyers amid these potential challenges and the continued record industry consolidation should seek “overall fit” in factors including technology, business model and customer service, according to Brad Bueermann, CEO of M&A advisory firm FP Transitions. Communication and respect during negotiations also play a role, he said.

“Perhaps the most important part of our process is going through possible future paths each party might want to take as we wait for the overall success of the relationship,” Bueermann said in an email. “Covering the ‘what ifs’ is equally important in these cases and having the right legal partner throughout will ensure that both parties work collectively towards their best outcome and consider all stakeholders: owners, employees and customers.”

Kestra’s stakeholders have benefited from the breadth of the company’s operations. Between its main wealth manager, Kestra Financial, and the mid-sized brokerage it also owns, Grove Point, the company generated $878 million in revenue in 2021 after double-digit growth at both businesses. according Financial planningThe IBD Elite study of. The year Stone Point funds first invested in the company that would be renamed Kestra from NFP Advisor Services, the company had 1,700 advisors and generated $423 million.

In addition to Kestra Financial and Grove Point, the family of companies now includes RIA M&A arm Bluespring Wealth Partners, breakaway channel Kestra Private Wealth Services, Arden Trust and Kestra Investment Management. Bluespring had acquired 26 businesses last month, and Kestra Financial and Kestra Private Wealth added more than 50 advisers with $4.1 billion in client assets in the first five months of the year.

“James and his team have built a formidable business in the wealth ecosystem with a compelling value proposition,” Oak Hill Director Nico Theofanis said in a statement. “We are thrilled to partner with both Kestra and Warburg and look forward to helping the platform accelerate.”

Oak Hill brings to the operation considerable experience in wealth management and capital from its own new minority investor. In addition to past investments in 401(k) and digital advisory firm Financial Engines and wealth manager Hilltop Holdings, Oak Hill is also one of the two PE supports from the RIA Mercer Advisors aggregator. The company has completed more than 100 transactions worth $19 billion in combined investments since 1986, according to its website. Earlier this week, an alternative investment manager backed by the sovereign wealth nation of Kuwait bought a minority stake in Oak Hill from a subsidiary of Jefferies Financial Group.