Canadian teachers become unlikely owners of US advisory firm

After three years of private equity fuel guided Allworth Financial through 10 acquisitions and a 300% spike in assets under management, the Sacramento, California-based advisory firm is ready for new ownership partners.

Parthenon Capital, which acquired a controlling interest in Allworth in 2017 when it managed $2.5 billion, is selling that ownership stake in the now $10 billion firm to co-owners Lightyear Capital and the Ontario Teachers’ Pension Plan.

“It’s been a great run and we’re looking forward to partners who can bring some new ideas, because we’re in the early innings of the M&A game,” said Scott Hanson, Allworth co-founder and senior partner.

Founded in 1993, Allworth, like a growing list of advisory firms, went into extreme growth mode under the direction of private equity ownership. The unique twist of being partially owned by a pension fund is part of the appeal of the latest deal, Hanson said.

“It’s becoming more commonplace to see co-investors like this, but a pension plan’s timeframe is indefinite because their investments theoretically live in perpetuity,” he said. “Private equity usually has a four- to seven-year timeframe.”

Mark Bruno, managing director at Echelon Partners, said the new ownership arrangement is significant for both the pension plan and Canadian components.

The Ontario Teachers’ Pension Plan is Canada’s largest single-profession plan at more than $155 billion in U.S. dollars.

“A pension plan is the longest of long-term investors, and this says something about the growth potential in the U.S. wealth management space,” he said. “I can’t recall seeing a pension fund invest in an RIA this way, but looking at the way they manage the vast majority of their money directly in-house, they’re looking at Allworth the way they look at any other investment. They’re not just doing a quick hit, drive-by investment.”

Citing the recent example of Toronto, Canada-based CI Financial buying U.S. advisory firms this year, Bruno said he expects to see more Canadian buyers enter the U.S. market.

“The RIAs are really good businesses that are profitable with good cash flow and low volatility,” Bruno said. “I’m talking about the top 10% of RIAs that are the largest and most well-run, professionally managed firms. I don’t know if you would see a Canadian pension fund investing in a $150 million RIA.”

David DeVoe, managing director at DeVoe & Co., said Allworth was a “great success story” even before Parthenon took an ownership stake, and that those are the kinds of companies PE investors are going after.

“Organic and inorganic growth are both contributors to the trajectory,” he said. “Allworth has shown its stripes as a formidable consolidator, and it is differentiated from other acquirers in a number of ways.  They are on a short list of acquirers targeting RIAs under $500 million and their ideal target serves the mass affluent. Over the last several years, most seasoned buyers have ratcheted up their target acquisition size, leaving less competition for the sub-$500 million sellers. Allworth plays in a bluer ocean than most consolidators.”

Allworth now has offices in 17 states serving what Hanson described as “middle-class millionaires marching toward retirement.”

“I witnessed how well it can work for the people who became a part of us,” he said. “Advisers are spending their days doing things other than talking to clients, like working on making payroll and paying rent. Most of those smaller RIAs are not growing if you take out the market growth.”

Hanson said Allworth is generally targeting RIAs managing between $100 million and $500 million worth of client assets.

“There’s a lot of them out there, and we’ll even go smaller if we already have an office in that city,” he said.