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Impact Investing Now Part Of The Wealth Management M&A Jigsaw

Tom Burroughes, Group Editor , November 15, 2017

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FWR talks to one of the top men at Tiedemann about its recent acquisition of Threshold, the Seattle-based firm, and why the latter's impact investment skill was a big part of the attraction. Some other recent M&A deals are driven by similar reasons.

Want to know how important impact investing is these days? It turns out that the trend of investing to change society, environment or other “non-financial” areas is seen as so important that wealth managers are willing to buy firms to get this expertise. 

Developing offerings around impact investing will rank high on the agenda for Tiedemann Wealth Management, the New York-based wealth advisor that bought Seattle-headquartered Threshold Group a month ago. Threshold Group traces its roots back to when George Russell sold Russell Investments to Northwestern Mutual and launched a single family office with the proceeds of the sale. It’s been a multi-family office since 1999.

Michael Tiedemann, chief executive, chief investment officer and chairman at the eponymous firm, told this news service about what the immediate future holds. And he made it plain that capturing Threshold’s impact investing skillsets was an important motivator to do the deal.

Threshold is a wealth advisory firm and family office with $3.4 billion in assets under management. On impact investing, for example, this is becoming an important issue for existing and new clients; having Threshold’s expertise is particularly important here, Tiedemann said. Not least, he said, is how Threshold has a rigorous approach to defining and measuring what impact is and can do for a client.

“They aren’t concessionary in [investment] returns and that was very important,” he said. "That team [at Threshold] has done a fabulous job,” Tiedemann said. Turning to the future, Tiedemann said many of his clients are interested in impact investing and he expects this will continue and increase. Some clients are even interested in having all of their portfolios expressed through an impact investing methodology, he said.

Threshold has been busy in the impact investing space. (See an example here.) Last April, as reported by this news service, Threshold Group and Forefront Analytics rolled out the Forefront Impact Resiliency Strategy, an investment strategy designed to provide investors concerned about ESG issues with a tool to help them navigate turbulent markets. (The Resiliency Strategy is a separately-managed account comprised of mutual funds and exchange-traded funds that meet ESG standards.) 

In August  2015 Threshold joined forces with Trucost to provide carbon audits of investment portfolios, particularly those of family foundations. The two firms have also been working together to develop a “decision making framework” to assess the carbon risk exposures of underlying assets in derivative investments. In the same year, Threshold brought in Stephanie Rupp as managing director of impact investing – a new role at the firm at that time.

Other firms are getting into the game. An example of how buying impact investing firms is seen as smart play arose in July 2015 when Goldman Sachs Asset Management acquired Imprint Capital, an institutional impact investing firm. This year, two impact investing houses combined to create a $13.9 billion investment management firm that will also have expanded research and client services capabilities, Pax World Management LLC announced. Pax is being renamed Pax Impax Investment Management (US) LLC (source: Financial Advisor, September 18, 2017).

Interest in the area is rising in North America (this publication recently held a conference on the subject in New York City). The Global Impact Investing Network, a pan-industry group gathering data on the sector and preaching the case for the method, has said investors intend to boost capital to this style of asset management by 17 per cent this year, reaching $25.9 billion this year, covering 9,557 deals. 

Among details of the GIIN report, it showed that there have been an "increasing number of large, well-known asset managers and other financial firms entering the impact investing space". In 2015, for example, the world's largest listed asset manager, BlackRock, said it was throwing its weight behind the impact investing space. Goldman Sachs and Bank of America are involved in areas such as social impact bonds; banks including UBS have created impact investing funds. The arrival of large firms will "help professionalize the market, bring in much-needed capital, and enhance the credibility of impact investing", the report continued, but there is the risk that arrival of prominent players will cause "mission drift" - in other words, that the original idealism of impact investing will be undermined in a chase for returns.

Outside the US, enthusiasm for impact investing is rising in regions such as Asia. A recent BNP Paribas Wealth Management study on entrepreneurs’ attitudes found that environmental protection is a big impact priority – perhaps unsurprisingly so, given issues such as atmospheric pollution in cities such as Beijing and Shanghai. And only this week, Geneva-headquartered Lombard Odier polled high net worth and ultra-high net worth individuals, finding that out of the next generation of such persons almost all (98 per cent) want to boost impact investing asset allocations.

According to a survey of US asset managers by Cerulli Associates, the analytics firm, a rising percentage of asset managers look at environmental, social and governance factors alongside more traditional financial tests to identify opportunities and risks. 

M&A
Tiedemann’s acquisition of Threshold is also part of a wider M&A trend going on in North American wealth management seen, for example, in the RIA space, among others. In late October, for example, private equity firm Thomas H Lee Partners bought a "significant stake" in US wealth management advisory house HighTower and pledged to commit $100 million in new equity capital once the acquisition is completed. 

Jamie McLaughlin, a wealth management and family office consultant (and regular commentator for this publication), said the Tiedemann/Threshold deal is a good one. “I’m usually wary of any transaction because I've learned integration is wickedly hard and can be a costly distraction.  Too often firm principals and their agents let the economics get in the way of clear-headedness and the simple principal that fit matters most. These are two truly fine cultures founded by great men (Carl Tiedemann, George Russell) and women (Jane Russell) that want to deliver solutions free of conflicts to families of great wealth and complexity. In a world where too many firms expropriate the term "multi-family office" as a marketing tagline and don't and can't deliver, they can deliver.”

Tiedemann told FWR that the consolidation trend in North America exists in several forms, such as that of aggregator firms, set up for the specific purpose of buying networks of small players. The Tiedemann/Threshold deal is not like that at all, he said.

In the case of the Threshold deal, the case for it had to begin by considering the caliber of the team involved, and the people at Threshold were of the highest quality, with a close fit in terms of their business approach and values, he said. 

Tiedemann said he admired and liked the close involvement of the founding Russell family in Threshold Group’s work; the acquirer was also attracted by how Threshold’s footprint in the northwest of the US would add important coverage to its operations.

“For the next 12 to 18 months we have enough existing capacity to grow at an organic pace without making any additional hires,” Tiedemann said. 

Asked about the impact of the Department of Labor Fiduciary Rule, which has had the effect of encouraging an industry move to fee-based advice, Tiedemann said the rule hasn’t greatly accelerated the case for his kind of business but did reinforce an overall trend towards more independence of advice and an appreciation of independent wealth management in general.

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