June 12, 2014
by Diana Britton, WealthManagement.com
Most people in the industry know Nick Schorsch, CEO of RCAP Holdings, as the head of non-traded REIT sponsor American Realty Capital, which has 51 percent market share in real estate direct investment and $10 billion in capital. So it came as a surprise to many when Schorsch announced his plans to acquire independent broker/dealer First Allied this morning.
“It’s very surprising that it’s that type of firm buying [First Allied],” said Ryan Shanks, CEO and founder of Finetooth Consulting.
Why would Schorsch and his four partners make such a big leap into the IBD space? Quite simply, he believes it’s a good investment and believes in the open architecture of the independent space.
“We believe in diversifying our holdings,” he said, during a conference call with his firm’s broker/dealer partners.
Owning First Allied provides another source of revenue for the company and another financial services firm to round out their portfolio. RCS Capital, in which RCAP has a majority share, is a $560 million market capitalization company, recently taken public by Schorsch. RCS includes investment banking and a wholesale broker/dealer. RCAP, Schorsch said, is a separate entity from American Realty and is not connected to the real estate capabilities.
Other Acquisitions in the Pipeline
But RCAP doesn’t plan to stop with First Allied. Schorsch told WealthManagement.com that the company also wants to get in the mutual fund space and invest more in investment banking and possibly research firms.
“We’re looking at broad-based investment across the entire financial services sector.”
During the conference call, he told b/ds that they had even looked into buying alternative mutual fund shop Altegris Investments, which Genworth recently sold to private equity firms Aquiline Capital Partners and Genstar Capital.
But many have speculated that this must be a move to add a distribution arm, as insurance firms have done over the years.
“There’s a pandora’s box that could be opened here that could affect objectivity of products chosen for the reps,” said Jonathan Henschen, president of the recruiting firm Henschen & Associates.
But Schorsch insists that the purchase of First Allied and the Legend Group from private equity firm Lovell Minnick is not a move to distribute or push its real estate products on the b/d’s 1,500 advisors.
“This is not about buying distribution,” he said. “We already have 51 percent market share in the wholesale business, and we just shut down one of our selling groups because we couldn’t take any more demand. So the last thing we need is more sales in that space.”
“I think if they were trying to buy a broker/dealer based on distribution, they wouldn’t have chosen First Allied because First Allied has sold some of their products, but not all of them,” said Jodie Papike, executive vice president of Cross-Search in Jamul, Calif.
First Allied is not known to be aggressive in the non-traded REIT area, Papike added.
“RCAP/American Realty Capital already has a selling agreement with nearly every IBD out there,” said Bradley Fay, president of IBDSearch. “I believe this is a diversification play. The value they likely saw is that First Allied is well run, Adam Antoniades, the CEO, is a respected, seasoned pro and every indication is that they will operate First Allied as an independent company and continue with its current management.”
“This distribution model, it was sort of lost a long time ago,” Shanks said.
First Allied’s Attractiveness
Whether distribution is a motive or not, First Allied, which encompasses 1,500 advisors and $32 billion in assets, is an attractive firm. Schorsch said it is one of the last IBDs at the top that is independently run and operated. Most other IBDs in the top five are owned by product sponsors, he said.
First Allied has been known to have a high average production per rep, Henschen said. Adam Antoniades, CEO and president of First Allied, said average production per advisor is around $340,000, but it’s as high as $650,000 per team.
“First Allied is a highly regarded firm and it should be attractive for someone to own it,” said Philip Palaveev, CEO and founder of The Ensemble Practice.
The IBD’s back office and senior management will remain intact, and they may actually add people, Schorsch said. The firm will also continue to be run autonomously by Antoniades.
“We are not taking an operating role in this company,” Schorsch said.
RCAP will, however, invest in First Allied’s technology, professionals and support personnel, as well as its 401(k) and 403(b) platforms. Schorsch said he and his partners have invested $200 million into First Allied so far, including the acquisition price, growth capital and working capital. The price paid to Lovell Minnick was not made public.
“Where this REIT company ends up, if they’re flush with money and want to invest into the broker/dealer, that’ll be a good thing for the reps,” Henschen said.
But Shanks sees the change of ownership differently, especially since its last owner didn’t last very long. First Allied spun out from its venture capital-focused parent Advanced Equities in August 2011 to focus more on its core business—helping its advisors grow their practices. At that time, Lovell Minnick bought a majority stake in the firm.
“On one level, it makes me kind of wonder, can someone make a strategic decision on behalf of the company and then stick with it for any extended period of time?” Shanks said. “As these different things happen, no matter what the silver lining might be, it’s disruptive to the advisors. The advisors have got to now gather this information, learn why, and then if a client or a prospective clients asks the question, they’ve got to explain what it is.”