Nicholas Schorsch, a dynamo in the nontraded-REIT business, is adamant that he will keep his hands off the operations of a leading independent broker-dealer, First Allied Securities Inc., which he and his team of managers agreed to acquire last week.
That means no First Allied enticements to recruit reps from other broker-dealers that sell the nontraded real estate investment trust from American Realty Capital, of which Mr. Schorsch is the chief executive, and no creation of special products exclusively for First Allied reps, Mr. Schorsch said in an interview.
“Some people think we're trying to buy distribution [with the First Allied purchase], and I think that's just silly,” Mr. Schorsch said. “I've had two calls in the past couple of days with 300 broker-dealers that sell our products, and I have a selling agreement with 370. That's why I don't need more distribution.”
1,500 REPS AND ADVISERS
RCAP Holdings LLC, which is controlled by Mr. Schorsch and a team of managers, said last Wednesday that it will acquire the outstanding shares of First Allied Holdings Inc. for an undisclosed sum from Lovell Minnick Partners LLC, a private-equity manager. In total, First Allied Holdings, which includes First Allied Securities and The Legend Group, has 1,500 independent-contractor registered reps and financial advisers who control $32 billion in client assets. First Allied Securities generated $233 million in gross revenue last year.
RCAP Holdings and First Allied will operate separately, though RCAP will have a presence on the board of First Allied, Mr. Schorsch said.
Over the past few years, Mr. Schorsch has shaken up the nontraded-REIT industry by delivering the speedy return of investors' capital through “liquidity events” such as mergers and share listings. He has also preached transparency of fees for such REITs, many of which saw their value plummet during the real estate collapse of 2007-08.
The goal to keep the operations of RCAP Holdings and First Allied distinct and separate is unlike that of many financial services firms, which manufacture products and then buy a broker-dealer to sell them, one industry analyst said.
Buying a broker-dealer is “easily an advantage, depending on how close they choose to integrate those firms,” said Alois Pirker, research director at Aite Group LLC, a consulting firm. “If you have the capability to integrate and don't leverage it, that could be foolish. But it depends on the corporate owner.
“It doesn't sound like First Allied is an asset that RCAP wants to flip,” Mr. Pirker said. “But does that mean it's a classic play of a product manufacturer seeking an in-house distribution arm to get product on the shelf?”
RCAP Holdings owns Realty Capital Securities LLC, the wholesale broker-dealer that distributes Mr. Schorsch's REITs. American Realty Capital is a REIT sponsor that currently has 13 investment offerings, most of them nontraded REITs. American Realty Capital has acquired and managed more than $10 billion in real estate since 2001.
MANAGEMENT STAYS
Mr. Schorsch declined to disclose how much he is paying for First Allied but said RCAP Holdings has made an initial commitment of $200 million for the purchase and growth of First Allied. He also said First Allied will operate as an independent company and continue to be led by its current management, including First Allied's CEO, Adam Antoniades.
“We approached First Allied because we thought this was a great team,” Mr. Schorsch said. “We weren't shopping for 15 broker-dealers. We were looking for a great one.”
“What was attractive for us in RCAP was seeing an organization that's willing to challenge the status quo and commit capital,” Mr. Antoniades said.
Emphasizing that the acquisition of First Allied is in no way a deal to broaden the distribution of the nontraded REITs he oversees, Mr. Schorsch pointed, as an example, to leading insurance companies such as American International Group Inc. that own independent broker-dealers that sell house products but also have advisers who demand open architecture to sell the products they choose.
“I don't think anyone can say we're buying distribution,” Mr. Schorsch said. “We sell only three products on First Allied's platform. They're not a huge distributor for us. We want to invest in a company that is focused on the mass affluent.”
It's been a busy June for Mr. Schorsch. Earlier in the month, American Realty Capital Properties Inc., a REIT that Mr. Schorsch runs, announced that it had signed a definitive merger agreement with a traded REIT, CapLease Inc., in a deal valued at $2.2 billion. A day later, American Realty Capital Trust IV Inc., one of Mr. Schorsch's net-lease real estate investment trusts, announced that it had agreed to buy a $1.45 billion collection of retail properties from GE Capital.
