Independent broker dealer recruiter Jon Henschen Publishes “The Threat to LBO Private Equity-Backed IBD’s"

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Jon Henschen’s article, “The Threat to LBO Private Equity-Backed IBD’s" managers of debt-heavy IBDs backed by LBO private equity will need all the skills they can muster to thread the needle of falling revenues and desired growth.

In anticipation of difficult markets, we focused on lower debt-to-net capital ratios, while avoiding broker/dealers whose ratios started to push to four times or higher.

Featured in Wealth Management on December 13, 2022 independent broker dealer recruiter Jon Henschen’s “The Threat to LBO Private Equity-Backed IBD’s" shows how while readily working with standard private equity firms focused on growth capital the decision was made over a year ago to not work with those private investment firms that rely on high levels of debt on the part of portfolio companies to goose returns.

Henschen goes on to say, "in anticipation of difficult markets, we focused on lower debt-to-net capital ratios, while avoiding broker/dealers whose ratios started to push to four times or higher. Similar issues arise with leveraged buyout funds."

In the 2021 book, The Myth of Private Equity, author Jeffrey C. Hooke goes into detail on the history and inner workings of private equity. Hooke, a former private equity executive and investment banker, and currently a senior lecturer in finance at Johns Hopkins Carey Business School, says that, historically, private equity has avoided cyclical industries like financial services.

Henschen spoke with Hooke, specifically asking about the expansion into the broker/dealer space, Hooke said, “broker/dealers tend to be more cyclical than most industries, so it is not the optimal candidate for LBO PE. IBD representatives can walk out the door anytime. However, since the PE industry has bought most available firms that fit the low-tech, low-cyclical profitable categories, the PE funds are now branching out to less obvious candidates.” He concluded, “as long as the lenders play ball, what is to stop them?”

Henschen notes, "as we have seen in the IBD channel, LBO private equity has been aggressive, with cutting costs through consolidation, closing back offices and reducing staff, while at the same time spending above the industry average on acquisitions of broker/dealers, and issuing generous forgivable notes to entice advisors to join."

Spending less on those already with the firm but more to get new assets in the door works in the short term but can cause broker/dealers to struggle in the longer term and experience low retention of advisors, given a lack of costly technology improvements and lackluster service from marginal staffing levels—all exasperating factors to advisors.

Henschen concludes noting LBO private equity firms aspire to add assets and control costs as much as possible until they gain enough revenue growth to sell or take the company public. With the potential of a protracted recession on the horizon, will these LBO private equity managers hold on to their investments longer than they usually do? "An extended bear market could equally delay the intensions of larger LBO-backed firms’ timing or, depending on the skills of the managers, possibly derail those plans altogether."

Jon Henschen is founder of http://www.henschenassoc.com, an independent recruiting firm focused on independent broker dealers and RIAs based in Marine on St. Croix, MN. With more than 30 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both advisors, broker dealers and RIAs for his expertise and insight on industry topics. He is frequently published and quoted in a variety of industry sources, including Wealth Management, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.

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Cristi Barkley