Registered Investment Advisor (RIA) owners who are pursuing an injection of capital from an outside source are most likely weighing two options—a minority equity investment and a debt investment. Each of these growth strategies entails very different considerations and potential consequences, so it is important to understand their benefits and risks. Ultimately, the choice will depend on the goals, strategy, and vision of the firm.
Weighing minority equity investments against debt capital A minority equity investment requires the sale of non-controlling equity interest in exchange for growth capital, liquidity, and potential strategic expertise. Because minority equity investment involves an external investor acquiring less than a 50% stake in the company, this approach allows owners to maintain economic control while still gaining access to the financial resources, operational support, and technology that can accelerate growth.
Debt financing, on the other hand, allows RIA firms to raise capital without giving up equity ownership (or corporate governance control—except in situations of default). This typically involves borrowing funds from a lender, such as a bank, private credit provider, or specialized financial institution, with an obligation to repay the principal plus interest over time. Unlike equity investments, debt does not dilute ownership or introduce external influence over business decisions. However, it does require firms to manage cash flow carefully to meet repayment obligations and debt covenants.
When weighing these two options against each other, the first consideration is availability. Minority equity investments are less readily available and usually reserved for firms with higher annual revenue (likely in the range of $10 million). On the other hand, debt financing is more broadly accessible from a wider variety of sources and in a broad array of structures.
The second consideration is the amount of capital needed. While debt capital can be a good option, it typically reaches capacity at 3-5x leverage, meaning the total debt is 3-5x its free cash flow (FCF). And a firm needs to be able to support that leverage from a cash flow perspective. Thus, the amount of funding the firm can acquire may be more limited under a debt financing scenario than under a minority equity investment.
The third consideration is consequences. Because debt financing doesn’t require any ownership stake in the firm, there’s less third-party influence over the business and there’s also no dilution. However, with a minority equity investment, the minority shareholders tend to acquire between 20% and 49% of a firm’s shares, which gives them influence and creates dilution but does not cede complete control.
Considerations for Minority Equity Investments
Before firm owners take on any new investments, it’s critical that they first determine whether the opportunity is a good fit for the business’ goals. These key questions may help identify next steps:
What’s the level of financial or strategic support offered by the investor? In addition to financial support, some investors can offer additional non-capital resources, including industry expertise, operational and strategic support, and a network of contacts. Access to this support will depend on the firm’s needs.
What’s the size of your firm? Minority equity investors tend to focus on firms with roughly $10 million or more in revenue as they view scale as the foundation upon which they can accelerate growth, acting as the foundation that allows supplemental capital to be leveraged for enhanced performance and growth.
How much control are you willing to cede? The flipside of this question is: How much outside involvement do you prefer? While minority equity investors are generally less disruptive and allow the firm to continue along established lines, it is fair to acknowledge that their involvement will inevitably introduce certain changes to the business.
Will the investment offer the necessary liquidity? Minority equity investments can provide a source of growth capital for acquisitions and/or infrastructure or subsequently can be used towards liquidity that allows a senior or founding advisor to attain liquidity in a way that debt financing may not.
Across a landscape of increasing competition and rapid macroeconomic shifts, RIAs are facing key decisions around financing growth, both organic and inorganic. Debt investments and minority equity investments are each potential ways for firms to source capital (and sometimes strategic support) without ceding control.
Founded in 1981, MarshBerry is a global leader in financial advisory and consulting services serving the insurance brokerage and wealth management industries to help clients grow and advance their business strategies. With locations across North America and Europe, MarshBerry market sector expertise includes property and casualty agents & brokers, employee benefit firms and specialty distributors, partners in insurtech, capital markets, and insurance carriers, as well as registered investment advisors, retirement planning and life insurance firms. Clients choose MarshBerry as their trusted advisor for every stage of ownership to help them build, enhance and sustain value through Financial Advisory solutions (Investment Banking; Merger & Acquisition Advisory, Debt & Capital Raising, Business Consulting), Growth Advisory solutions (Organic Growth, Aggregation, Leadership, Sales & Talent Solutions) and Market Intelligence and Performance Benchmarking.
