RCS Capital Corp., known by its ticker symbol RCAP, is exiting the business of widely distributing financial products by wholesaling to focus on its retail brokerage, Cetera Financial Group.
Private equity giant Apollo Global Management agreed to buy RCAP's wholesaling business for $25 million in cash, RCAP said in a statement Thursday. RCAP's largest shareholder is Nicholas Schorsch, the company's former executive chairman, who began his buying binge of broker-dealers in 2013. RCAP will use the cash to pay down debt.
It appears RCAP is taking a bath on its wholesaling business. In May 2014, RCAP said it was buying Validus Strategic Capital Partners, which owned the wholesaling broker-dealer SC Distributors and an advisory company, Strategic Capital Advisory Services, for $80 million. That deal marked the final piece in putting together the business that Apollo has agreed to acquire.
Meanwhile, Mr. Schorsch and his partners are receiving a significant payday in a separate transaction set to give them $378 million in cash and Apollo stock while selling 60% ownership in a new company, AR Global Investments, that will own substantially all of the ongoing asset management business of AR Capital, or ARC. Mr. Schorsch is the largest shareholder of AR Capital, a private real estate investment company he launched in 2007. AR Global will have six Apollo executives on its board and four from AR Capital, including Mr. Schorsch.
AR Global will add $19 billion in assets under management to Apollo, including $16 billion in real estate and $3 billion in credit.
Investors were quick to react Thursday, sending the stock down 30% by the end of the trading day. The stock closed down 1.72 to 4.21 after climbing about 15% after the company said it was postponing its earnings call and rumors of an acquisition began to circulate through the market.
CEO, CFO OUT
In addition to the acquisition, Apollo will purchase $25 million of preferred RCAP stock and Luxor Capital Partners, a New York-based hedge fund, will buy $12.5 million of preferred shares. Two senior Apollo executives will join RCAP's board. The company is also searching for replacements for its CEO, Michael Weil, and chief financial officer, Brian Jones, according to a company statement.
The separation of retail brokerage, Cetera Financial Group, and wholesaling broker-dealers, “streamlines” RCAP, said Larry Roth, Cetera CEO, on a conference call Thursday afternoon. “The retail business is alive and well and healthy,” despite headwinds from commission business, he said.
As part of the deal, Cetera Financial Group will enter into a “strategic relationship” with Apollo, which has $160 billion in assets, to offer Apollo investment products through Cetera's network of 10,000 brokers and financial advisers.
RCAP LOSSES
RCAP has been posting losses of late.
The company reported a loss in the second quarter of $66.1 million compared to 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 Mr. Schorsch's brokerage empire. 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.
