Is PE Worth It? Don't Get Enamored By The Check

·48 min·4 clips

Frank LaRosa warns that a private equity check might just be paying you back with your own money for the first five years.

The episode opens with Frank LaRosa warning advisors not to get enamored by private equity checks, arguing they often just pay you with your own money. He and co-host Stacey Frank set the stage for a conversation about PE in the wealth management space, noting it's a hot topic with misconceptions. They clarify that private equity in this context includes traditional firms and family offices. LaRosa explains that family offices can be more nimble, with longer holding periods like 30 years, compared to larger PE firms demanding high returns in five years. He shares an example of a firm that lost equity because it didn't hit the growth rates its PE partner required, highlighting risks in deal structures. The discussion covers why private capital is attracted to wealth management for consistent returns. LaRosa advises being careful about whether a deal is based on EBITDA or top-line revenue, as EBITDA deals may involve more control. Stacey Frank asks about advisors taking minority stakes in RIAs instead of transition comp, leading to an analysis of trade-offs. LaRosa breaks down a hypothetical deal where a million-dollar producer sells 20% for a 5x multiple, emphasizing the need to assess what growth resources the PE firm provides. He contrasts growing alone versus with PE support to potentially triple revenue faster. The conversation turns to debt versus equity, with LaRosa recounting Kevin O'Leary's advice that debt is cheaper if a business can handle the service. Frank asks about the ideal PE candidate profile, and LaRosa suggests older advisors with limited time to scale. He then details a specific PE deal structure he favors, involving an initial sale at 4x with subsequent tranches at 20x, allowing advisors to retain equity and build legacy wealth. LaRosa expresses high confidence in this deal, noting he'd invest his own fees into it. The hosts warn about firms with vague plans versus legitimate players and stress the importance of due diligence. They conclude by encouraging advisors to work with experienced professionals to navigate these complex decisions.

As heard by us

Before admiring the private equity check, calculate how much may simply be the practice's money coming back.

Private equity can make an RIA deal look hard to refuse when the multiple is 15x or 18x, but Frank LaRosa keeps the focus on the math behind the check. His core warning is that a headline payout can hide a slower giveback.

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Why you'd press play

You are eyeing a 15x or 18x multiple and want the check interrogated before it charms you.

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