Now that RCS Capital Corp. has dumped its wholesaling business, the company can better focus on the 11 broker-dealers and 9,500 financial advisers that make up its Cetera Financial Group, according to the company's top executives. In other words, the cost-cutting and consolidation can begin in earnest.
RCAP announced Thursday that private equity giant Apollo Global Management agreed to buy RCAP's wholesaling business for $25 million in cash. That business includes 140 wholesalers and national accounts salespeople and more than 1,000 selling agreements with 300 independent broker-dealers. The business focused on selling nontraded real estate investment trusts.
As part of the deal, Apollo also agreed to buy $25 million in RCAP preferred shares and enter into a strategic relationship to have Cetera sell Apollo investment products. Two senior Apollo executives will join RCAP's board.
RCAP is searching for replacements for its chief executive, Michael Weil, and chief financial officer, Brian Jones, according to a company statement.
Second in headcount among independent broker-dealers to LPL Financial, Cetera has $239 billion of assets under administration and $47 billion in assets under management.
BENEFIT ADVISERS
On a conference call with RCAP investors and analysts after the deal was announced, RCAP's top executives made clear that a new, streamlined RCAP would benefit advisers.
“By separating wholesale distribution from our retail advisory platform, RCS Capital will be a more simplified and refocused company dedicated to providing outstanding service to our 9,500 financial advisors and their more than 2 million retail clients throughout the country,” said Mr. Weil.
Mr. Weil and Larry Roth, CEO of the Cetera unit, said further cost-cutting at the firms that comprise Cetera Financial Group will occur but they did not give specific details.
“We have significant additional opportunities for expense reduction,” said Mr. Roth. “There are traditional things that you would expect.”
Mr. Roth cited the recent consolidation of RCAP's legal, finance and due diligence groups and the potential $7 million in savings from
closing J.P. Turner & Co., one of the firm's retail broker-dealers. Some J.P. Turner advisers were given jobs in Summit, another Cetera broker-dealer.
“We've acquired 11 broker-dealers in 18 months,” said Mr. Weil. “We know and we're prepared to identify the opportunities around redundancies, call centers, etc. It's a reality; we're at that point in the evolution” of the company, he said.
SCHORSCH EBULLIENT
Meanwhile, Nicholas Schorsch, the former executive chairman of RCAP and its biggest shareholder, was ebullient. On a conference call with brokers Friday morning, he said the transaction with Apollo was “a one plus one equals infinity” deal, according to Rita Robbins, president of Affiliated Advisors Inc. “Nick meant that 'everything is possible'” for RCAP now that Apollo is taking a role in the company, including the two board seats, she said.
Separately, Mr. Schorsch and his partners agreed to sell a 60% stake in AR Capital, a private company that develops nontraded REITs, to Apollo for $378 million in cash and Apollo stock. The new company, AR Global Investments, will have six Apollo executives and four from the old company, including Mr. Schorsch.
Mr. Schorsch and his partners could increase their payday another $500 million for “performance-related considerations,” according to Apollo. Mr. Schorsch and his partners would earn that half billion dollars for raising $40 billion of fresh capital for Apollo within five years.
From an earnings perspective, RCAP has been posting losses of late. The company reported a loss in the second quarter of $66.1 million compared with income of $48.5 million for the second quarter last year.
Wholesaling investment products, particularly high commission nontraded real estate investment trusts, was the backbone of RCAP. But sales of nontraded REITs at RCAP have fallen since it was
revealed last October that accounting errors at another company Mr. Schorsch controlled, American Realty Capital Properties Inc., had been intentionally not corrected.
