What drives the evaluation of RPA companies considering selling?

Pension consulting firm valuations are at an all-time high and the number of transactions is skyrocketing, leading many RPPs to ask, “What are the drivers of value?” “

As of September 9 RPA Assessment Workshop, led by Dick Darian, CEO and Founder of the Wise Rhino Group, two esteemed panels of DC aggregators and vendors addressed this issue, as well as how RPAs can create the services they want.

Although multiples have increased for RPA companies, ranging from eight to more than 10 times profits and even more with an additional price Darian thinks we may have peaked. Demand and supply have reached equilibrium, and many of the major aggregators have reached scale, he said.

On the other hand, the number of deals will increase, with a maximum of 67 expected in 2021, down from just 32 in 2020 and just eight deals in 2017, Darian said. The dramatic increases have been in part due to new buyers like Edelman Financial Engines, PNC, Morgan Stanley and private equity firms, as RPAs seek to mitigate risk and collaborate in a post-Covid world.

The main drivers of the valuation start with a healthy growth trend in recurring income and earnings before interest, taxes, depreciation and amortization, not focused on a few clients. The range of services, including types of plans and member services, is essential. But a company’s next-generation leadership, team and staff are essential for buyers, said Darian, who has closed nearly 50 deals in the past three years.

The first panel aggregators consisted of the largest and most active companies, including Hub International, MMA Retirement, NFP Retirement and SageView. Echoing many of the themes raised by Darian, the panel focused more on people and relationships.

Nick Della Vedova, president of NFP, said the company is looking for companies where it can accelerate its growth, as well as those in places where NFP has a strong benefits or damages practice. Thought leadership and the fit with Hub are key for Joe DeNoyior, president of retirement and private wealth, while Jeremy Holly, director of development at SageView, said the company has been taking a close look at the talents of the staff. Craig Reid, National Practice Manager at MMA Retirement, said culture, partnership and integration with the business are the keys to success.

Conducting a SWOT analysis – strengths, weaknesses, opportunities and threats – to understand the weaknesses and strengths of the business was essential for Joe as he moved his business from a firm to a firm. The days of not interacting with the participant are over, said Della Vedova. Indeed, more and more plan sponsors are asking plan members for help, Holly noted. With plan fees coming down, Darian said the key to sustainable growth will be serving plan members.

As a result, RPAs with strong wealth management business and leadership will be charged a higher price.

RPAs who are considering partnering with a larger company should speak to other companies that have sold to that organization, Reid said, noting that RPAs also need to spend time with the people they will be working with.

The second panel, which focused on how RPAs can partner with vendors to create value, included executives from Gallagher, John Hancock Retirement, Principal Financial and Transamerica Retirement. The providers were selected based on their history of solid partnerships with RPAs.

Bill Thompson, division vice president at John Hancock Retirement, cautioned RPAs to assess which record keepers are true partners, especially when it comes to participant services, and said this could be determined by part by their willingness to share data. Principal Financial sales manager Scott Boyd noted that most RPAs work with many vendors, which can lead to inefficiencies, especially if they are not true partners and have competing interests. He also warned that RPAs should not lose the efficiencies created by the pandemic, such as virtual and one-on-one group meetings.

Establishing rules of engagement with vendors is critical, although there are many instances where they are not followed, said John Jurik, national practice manager at Gallagher, who seeks to help his advisers pull based on their enormous capacity for well-being.

Brian Walker, National Sales Director at Transamerica Retirement, noted that there are many cases of RPA leveraging Transamerica’s resources, such as identifying reasons why participants take out hardship loans and withdrawals, to design a potential solution.

Della Vedova said RPAs need to invest in their businesses, especially marketing, while Holly noted that RPAs should develop talent. Being a business student, creating a business plan, and thinking like a buyer are essential, Darian said.

Whether RPAs are looking to sell or not, they should always be prepared, as an uncontrollable event could accelerate the timeline, he said. And understanding the main drivers of assessment will provide a solid roadmap.

Fred Barstein is founder and CEO of The University of Retirement Counselors and the university of the plan sponsor. He is also editor-in-chief of InvestmentNews’ RPA Convergence Bulletin.

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