A global wealth management firm's special purpose acquisition company will give financial advisors and the public a new foothold in an emerging area.
Kingswood Acquisition filed documents on Dec. 23 about its planned initial public offering, roughly five months after reaching an agreement to acquire U.S. wealth management holding company Wentworth Management Services and take it public.
The new disclosures, which include an investor presentation , offer the first look into Wentworth's earnings for 2022. The firm owns Purshe Kaplan Sterling Investments and is valued at $213.6 million. The documents also highlight the use of a SPAC as a means of raising capital and Kingswood's bet on "hybrid" registered investment advisors.
SPACs, also known as "blank check companies," take firms public as part of an acquisition financed by the underlying investors. In this case, the investors are the major shareholders of London-based wealth and asset management firm Kingswood Group, and the publicly traded firm whose stock is expected to be listed in the second quarter will be called Binah Capital Group. Wentworth derives the majority of its business from PKS Investments, which is a brokerage known in the industry for being "friendly" to third-party registered investment advisors that use its services. Those RIAs are called "hybrid" advisors because they use an outside brokerage like PKS or LPL Financial , and offer both fiduciary and brokerage services.
Roughly 1,900 advisors managing about $25 billion in client assets with PKS and two other small brokerages owned by Wentworth will keep the same basic setup under a new publicly traded parent firm and benefit from the capital influx, according to Binah Executive Chairman Larry Roth. The former CEO of independent wealth managers Cetera Financial Group and Advisor Group views hybrid RIAs as "the jet stream in wealth management" because of the enduring need for brokerage services among advisory firms, Roth said in an interview.
"From an advisor's perspective, nothing changes," he said. "We're bringing more capital into the business so we can help them grow their practices and build out the technology."
The use of SPACs has declined rapidly over the past year amid slumping stock values and a plunge in initial public offerings. Dynasty Financial Partners dropped its plans for an IPO last month. The number of IPOs through SPACs tumbled by 82% year over year to 78 in the first three quarters of 2022, according to S&P Global Market Intelligence.
The close of the merger creating publicly traded Binah has moved back from its initial expected date in the fourth quarter of 2022, but it's going forward. A handful of other wealth management-related SPACs are rolling out amid a depressed Wall Street and heightened regulatory scrutiny from the SEC.
As of August, 15 SPACs unveiled anticipated mergers totaling a collective $6 billion in value, according to a report last year by law firm Skadden. "While this deal volume is considerably lower than the peak of the SPAC market 12-18 months ago, it demonstrates that, despite significant headwinds, market participants will continue to explore creative strategies to pursue transactions," the firm concluded.
A merger through a SPAC "doesn't go through the same due diligence process" with all of the "checks and balances" of a conventional IPO, said Brian Lauzon, the managing director of M&A advisory firm InCap Group. But the financing method provides sellers in the underlying deal with more visibility into the price of the asset than a standard IPO, he said.
"You can get to market quicker by merging into SPAC versus doing the full IPO process," Lauzon said.
He noted that "the need is clearly there" in the industry for hybrid-friendly brokerages like PKS and a handful of others servicing the small sliver of commissionable transactions and legacy products managed by the fast-growing ranks of RIAs .
Wentworth and Kingswood plan to raise $30 million in convertible preferred equity capital and $24.2 million more in debt notes with the deal, according to the investor presentation. On a trailing 12-month basis, Wentworth generated $12.2 million in earnings before interest, taxes, depreciation and amortization in 2022 on $183.7 million in revenue. More than three quarters of the business came from sales-based or trailing commissions. The number of registered representatives with PKS and the other brokerages jumped 47% over the prior three years to 1,931, which helped to boost the firm's annual revenue 46% in that span.
"The U.S. wealth management landscape is highly fragmented and is among the few remaining sectors in the financial services industry to continue to experience significant consolidation," the presentation said. "Wentworth believes it is well-positioned to capitalize on the market fragmentation by offering independent managers a platform they can leverage to access asset gathering opportunities that would not otherwise exist on a standalone basis."
The presentation cites a pipeline of four incoming firms with a total of roughly 460 reps and $53 million in annual revenue that are poised to use PKS or another brokerage under Wentworth's umbrella. Well-known RIAs and networks that use PKS include Focus Financial Partners, Mercer Advisors, Dynasty, Beacon Pointe Advisors and Journey Strategic Wealth.
"They provide a ton of great services for advisors, but they're not in the brokerage business," Roth said. "So they send their advisors to PKS."
As executive chairman of Binah, Roth is keeping his other role as an industry consultant through his firm RLR Strategic Partners . Wentworth President Craig Gould will manage the day-to-day operations of the firm as Binah's CEO, and former Sanctuary Wealth Chief Financial Officer David Shane will be Binah's CFO. Michael Nessim, the current CEO of Kingswood Acquisition and the CEO of the London-based wealth management firm's other American investment, Kingswood US, will leave the SPAC to remain with its sister company. Kingswood created Kingswood US in 2020 by acquiring the majority of a New York-based investment firm that, in turn, purchased the parent company of midsize wealth management firm Chalice Financial Network for $4 million. The firm now has 200 advisors with $3 billion in client assets.