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New Russell Owners Likely to Keep Only Indexing Unit

Author: James Comtois

Source: Pensions & Investments

Russell Investments' asset management and consulting businesses will most likely be sold by the London Stock Exchange Group PLC, which is purchasing the entire firm for $2.7 billion, sources say.

The price tag for those business lines could be between $700 million and $1 billion, the sources estimate.

Sources suggest that State Street Corp., Boston; Vanguard Group Inc., Malvern, Pa.; Legal & General Group PLC, London; and SEI Investments Co., London, would be possible bidders.

Most agree Russell's indexing arm is the plum sought by the LSE Group. Russell first introduced its indexes in 1984. The firm, which was originally formed in 1936, began investment consulting in 1969 and managing money in 1980. Russell, Seattle, is owned by Northwestern Mutual Life Insurance Co., which bought the firm in 1999.

“Without a doubt, the legacy business will be spun out of the London Stock Exchange,” said Donald Putnam, a San Francisco-based managing partner of investment bank Grail Partners. “They had to buy the bath water with the baby. They had to do a single deal and separate the companies later.”

Mr. Putnam said Russell's core money management and consulting businesses are “not compatible with the indexing business,” because the primary purpose of an exchange is to have a “neutral venue for transacting.”

Jeffrey MacLean, Los Angeles-based CEO at Wurts & Associates, agreed: “The people I've talked to think that the stock exchange won't have any use for the asset management and consultant divisions.”

Mr. Putnam also said he believed the two businesses would be sold as a single unit and could fetch up to $1 billion.

Who is most likely to step up for the sale and what will they do with the businesses? “Those are difficult questions that I don't know the answer to,” Mr. MacLean said. “There's speculation as to whether the asset management and consultant divisions will be spun off as one unit or sold in pieces.”

LSE spokesman Tom Gilbert said the stock exchange group will conduct a review of Russell's $256 billion investment management and consulting divisions to see how they fit with the overall organization. That review is expected after the deal's completion at the end of 2014 or beginning of 2015. He declined to provide additional details.

Russell spokesman Tim Benedict referred inquiries to the LSE.

Limited information

“Right now there's very limited information out. But if there was a sale announced, it wouldn't surprise me at all,” said Peter K. Lenardos, an analyst at RBC Capital Markets LLC's London office, who covers diversified financials in its global equity division.

“The London Stock Exchange has carved out a reputation for being a best-in-class operator in the niche that they're in, and I don't know if asset management is where their skill set lies,” Mr. Lenardos added.

A June 26 report co-authored by Mr. Lenardos said the Russell acquisition will enable the exchange “to compete more effectively with (global index provider) MSCI, will improve liquidity in LSEG's shares and will provide more recurring revenue that is typically assigned a higher multiple by the market.”

“The London Stock Exchange now owns a big asset management firm,” said Fernand Schoppig, president of the money management consulting firm FS Associates, Inc., West Orange, N.J. “It's very likely that they'll sell off the assets and keep the indexes.”

Some of Russell's institutional clients did not express much concern over any impending change.

“We've had a great working relationship with Russell for over 20 years. Throughout the sale process we will continue to maintain our confidence in Russell and relationship with them. They have a great culture and talented people,” said Osey “Skip” McGee Jr., executive director of Baton Rouge-based Louisiana Sheriffs' Pension & Relief Fund.

The $2.7 billion pension fund has hired Russell for investment consulting, money management and transition management services.

Scott Simon, chief investment officer of the $4.1 billion Colorado Fire & Police Pension Association, Greenwood Village, said staff members aren't terribly concerned. “We use them for a specific mandate (cash overlay), and we don't see this transaction affecting their services for that group,” Mr. Simon said. “We see no cause for concern.”

Charles Wollmann, spokesman for the $19 billion New Mexico State Investment Council, Santa Fe, said in an e-mail that the council “will monitor this transaction and evaluate it for potential impact on the services” that Russell provides.

Russell is one of five transition managers New Mexico has on its bench.

Opportunity for competitors

In terms of what a possible sale of Russell's divisions could mean to a competitor like Wurts, Mr. MacLean said: “There are a lot of talented people at Russell, and we've been fortunate to have hired some of them. Our close proximity to Russell in Seattle is a potential opportunity for us.”

Upon completion of the deal, Russell Investments President and CEO Len Brennan will join the exchange's executive committee. It remains to be seen, however, what Mr. Brennan will do if and when the investment division is sold.

“The Russell brand has a good reputation in the industry,” noted Mr. Schoppig.

“The really interesting question is how and when and by what process do they spin off this business,” said Grail's Mr. Putnam.

Mr. Lenardos noted that following the review, the next step for LSEG to take, should it choose to sell the business, “would be to test the market price for this asset. The only way to do that is to engage potential buyers.”

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RIA Aggregator Targets Aggressive Growth, Adds $4B

Article published on May 29, 2014

By Danielle Verbrigghe

Source: FundFire

The largest of the so called ‘RIA aggregator’ shops, Focus Financial Partners, has set an aggressive acquisition pace so far this year, driven in part by a ramp-up in resources within its wirehouse lift-out program.

In fact, the fast-growing firm appears to be on track to outpace last year’s acquisition growth. So far this year, the RIA aggregator has completed 13 transactions, adding more than $4 billion in client assets. That compares with 10 such deals in 2013, which collectively added more than $5 billion in client assets.

The firm has benefited from an increase in resources behind its Focus Connections program, which targets wirehouse teams looking to transition to independence, says Rudy Adolf, Focus Financial Partners’ founder and CEO.

“We have invested more in this area because we think it is very, very attractive,” says Adolf. “It’s a terrific channel, first and foremost, because it is such a compelling value proposition. There’s such a big benefit for a client to move with an advisor towards independence.”

Over the past year and a half, Focus, which represents about $75 billion in overall client assets across about 30 partner firms, has ramped up resources behind the Connections program, including adding personnel and raising capital to fund transactions. This year, six of its 13 deals have gone through the program.

But wirehouse lift-outs are only one piece of the transaction mix. The firm also invests in large RIA firms, targeting those with at least $400 to $500 million in client assets. Those shops usually join as stand-alone partner firms. Through its merger program, Focus provides capital and transition support to help existing partner firms acquire advisors, targeting shops with between $100 million and $400 million in client assets. Additionally, Focus offers a succession program targeting smaller deals.

While Adolf expects to see growth coming from all of these channels, he expects to see particularly strong growth from the Connections program, as more wirehouse teams break away.

“We’re on a very good trajectory,” Adolf says. “Focus has a very large war chest in terms of capital we can deploy.”

An example of one such recent deal came earlier this month, when Focus announced that a team of former Merrill Lynch advisors with more than $750 million in client assets, had launched a new RIA, Quadrant Private Wealth. Working with the Focus Connections program, Herman Rij, Jason Cort, Kori Lannon and Brian Cort left Merrill to form the new Bethlehem, Penn.-based firm.

And earlier this week Focus announced that former Wells Fargo advisors Joseph Zappia and Ted Garofola had joined one of Focus’s existing RIA partner firms, LVW Advisors. Zappia, who will lead a new family office unit at LVW, had previously been a managing director and senior portfolio manager with the Zappia Investment Group at Wells Fargo Advisors, where he managed about $400 million in private client assets.

Lori Van Dusen, CEO of LVW Advisors, originally established the firm by linking with Focus in 2011. Before that, she had been with with Convergent Wealth Advisors, after earlier departing Smith Barney. Her choice to ultimately pick Focus was driven by her desire not only to grow organically, but to also make acquisitions.

“I decided it would be the most powerful combination to have an independent business backed by the resources of Focus and a lot of cheap capital,” Van Dusen says.

Now, her firm represents about $5 billion in overall client assets, including about $2.5 billion in assets under management.

When acquiring an advisor shop, Focus typically takes between a 40% and 60% stake. While the firm provides transitional and operational support, the RIAs continue to function as independent shops. While Focus doesn’t create its own portfolios or recommend investments, it does offer partner firms access to third-party research from providers including Mercer, CAIS, Fund Evaluation Group, Goldman Sachs, eVestment and Zephyr. Each partner firm ultimately makes its own investment selections.

“The core of our formula is you never turn a successful entrepreneur into an employee,” Adolf says. “We have a very decentralized business model.”

Breakaway advisors are often drawn toward linking up with firms that represent a mix of independence and assistance, says Dan Inveen, principal and director of research of FA Insight.

“There are a lot of different flavors that a transitioning breakaway can choose for their affiliation model,” Inveen says. Though the business models vary, firms like United Capital and HighTower also target such advisors. Firms that can build adequate scale and resources specifically supporting breakaway advisors may stand to benefit over those that are just dabblers, Inveen says.

“If you specialize in understanding the needs and challenges of these folks you can become very good at it and prosper as a result,” Inveen says.

Focus has set the pace for other firms trying to build mega-RIA networks, says S. Craig Cognetti, a partner with Grail Partners.

“Their success has actually attracted a lot of people to try to do this,” Cognetti says. “While it seems simple, it’s actually a lot harder to do what they’re doing.”

Focus has an advantage in being well financed, and having a track record of growth through acquisitions, says FA Insight’s Inveen.

“Focus is one of few firms that has demonstrated some staying power,” Inveen says. “The fact that there’s not a lot of other Focus Financials out there indicates that this is not an easy business model to succeed at.” 

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