Target: Mutual Fund Store LLC
Sponsor: Warburg Pincus
Seller: Private owners, Summit Partners
The private equity giant last week agreed to buy a majority stake in Mutual Fund Store LLC, an investment adviser that has grown steadily by selling mutual fund portfolios to people with as little as $50,000 to invest.
Warburg says Mutual Fund Store—with $6.6 billion in assets and some 31,000 clients in 33 states—can attract legions of new investors by more than tripling its chain of branches, using the Internet to reach more potential customers, and tapping demand for independent financial advice.
“The middle class and the mass-affluent are underserved and under-penetrated in terms of financial products,” said Michael Martin, co-head of financial services investing at Warburg. Mass-affluent refers to people with $100,000 to $250,000 of assets to invest.
Big firms such as Morgan Stanley Smith Barney and Bank of America’s Merrill Lynch want brokers to spend time only with clients who have at least $250,000 to invest.
Clients who don’t make the cut are steered to Web sites, call centers or simply shown the door. Such investors represent a vast and untapped market, said Martin, who joined Warburg Pincus in 2009 after a 20-year career as a dealmaker for Credit Suisse First Boston and UBS.
He said investors want un-conflicted advisers who sell “worthwhile and transparent financial products.” Most brokerages receive fees or commissions for selling certain funds, which may not always be the best choice for a customer.
Kansas-based Mutual Fund Store does not charge commissions but collects a management fee of 1.25 percent of assets. It does not offer funds with front-end loads, and does not receive trailing fees from the fund companies.
In a similar vein, Warburg last year bought a 60 percent stake in Primerica Inc. from Citigroup for $230 million, gaining a business that sells funds and insurance to middle-class Americans through nearly 100,000 part-time agents.
Mutual Fund Store simplifies money management by offering customers only about a dozen collections of mutual funds. The strategy is akin to selling suits off the rack rather than custom-made.
Its branches are retail stores located in town squares and shopping centers, staffed by financial advisers. Company founder Adam Bold helps attract customers by hosting a weekly radio show about finance, heard in 55 markets.
“There is definitely a place in the world for this kind of approach,” said Aite Group senior analyst Sophie Schmitt. “A lot of the major firms are going up-market, and there’s less emphasis on selling to retail investors.”
Mutual Fund Store will deploy its investment from Warburg to expand from 60 metro areas into as many as 250 franchise and company-owned stores, Martin said. The firm plans to use social media and expand Bold’s radio show into higher-rated broadcast channels, he said. “It’s really a retailing story.”
Warburg may pursue more wealth management deals, Martin said, though about 25 percent of its $15 billion investment fund is already dedicated to 10 financial services companies. He declined to comment on the firm’s potential interest in several brokerages on the block, including Regions Financial’s Morgan Keegan and E*Trade Financial.
A recent series of investments in small banks—National Penn Bancshares, Webster Financial and Sterling Financial—took advantage of deep discounts in the wake of the 2008 financial crisis. Now Warburg must look elsewhere for robust returns, he said. “Opportunities for balance-sheet recapitalizations are more or less over,” Martin said. “Opportunities like Mutual Fund Store, a growth-oriented investment as opposed to a repair investment, are still around and we’re very interested in doing more.”
(Joseph Giannone is a correspondent for Reuters in New York.)