Venture funders see opportunities in high-net-worth advisory practices. Big asset-management deals like Bank of America's purchase of U.S. Trust from Schwab may grab all the headlines, but the real heat is in a plethora of more modest transactions that have rumbled through the wealth-management world so far this year, indicating unprecedented interest from venture capitalists in the high-net-worth advisory space.

In the first nine months of 2006 the wealth-management industry raised $300 billion from private-equity firms, according to New York based investment bank Berkshire Capital, which sees the total hitting $400 billion before the year is out. That's up from the $283 billion in venture funding that went to wealth managers in 2005.

Piles on the sidelines

"I've never seen a market with this much liquidity and capital available," says buyout firm Kohlberg Kravis Roberts co-founder Henry Kravis, quoted by Berkshire Capital in the most recent edition of its quarterly newsletter.

Just last week WealthTrust, an advisory-firm holding company based in Nashville, Tenn., got an undisclosed infusion from private-equity firm Circle Peak that coincided with WealthTrust's management-led buyout from Morgan Keegan. At the start of 2006 Focus Financial Partners, another wealth-firm collective with a holding-company strategy, got a $35-million commitment from venture firm Summit Partners.

Berkshire Capital chalks such deals up to the attractive returns to be had from the private-wealth firms, especially compared to those offered by publicly traded stocks -- the same dichotomy driving private-equity's more established interest in hedge-fund investments.

But as we reported last week with reference to the WealthTrust transaction, Ben Phillips, a managing director of New York-based investment bank Putnam Lovell NBF, echoes Kravis and suggests that private equity's newfound interest in wealth management may owe something to the fact that venture funds are glutted with uninvested money.

Whatever the reasons for it, private equity's role in wealth management is a departure. Venture capitalists used to view wealth managers as risky propositions.

"The fact that many such companies are dependent on a handful of employees with strong client relationships creates an area of potential risk for investors," Berkshire Capital says it in third-quarter review. "In addition, the small size of many of the firms makes it difficult for private equity firms to employ one of their favorite tactics for revving up investments" -- that is, hiving off staffers.

Hey big spender

Now, though, private-equity players are looking past these drawbacks and seeing seductive profit margins and a fast-growing high-net-worth population.

Worldwide there were about 8.7 million U.S.-dollar millionaires with total financial assets $33.3 trillion last year, according to the World Wealth Report, an annual survey by the consulting firm Capgemini. That's up from 4.5 million U.S.-dollar millionaires with total financial assets of about $16.6 trillion in 1996.

Meanwhile the number of private-wealth advisories showing their legs is on the rise as well. That's because they need capital to expand or to combine with other firms around compliance, technology, and other areas of practice management or because their owners are looking for attractive exit strategies.

As it happens, Berkshire Capital views the marriage of private equity and boutique-based wealth management as a bountiful match. "Private equity firms tend to leave varying degrees of ownership in the hands of existing management as a performance incentive, along with operational control (provided financial targets are met, of course)," the investment bank says it its newsletter. "At the same time, they can lend assistance with succession issues by providing the capital required for younger managers to acquire equity from the original owners."

In other words -- and unlike a lot of banks and asset managers -- private-equity firms are likely to let successful boutiques keep doing what they did to become successful instead of simply chucking them into the corporate-identity blender.

But then Berkshire Capital also warns boutique advisories that bringing venture capitalists into the mix can add an element of uncertainty. These investors tend to be more interested in exit strategies than in long hauls. In short, a wealth manager could end up partnered with God-knows-whom once the private-equity players cash out. -FWR

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