Focus Financial earnings fall in Q1 due to market losses

Focus earnings muted by market ahead of $7B deal

May 4, 2023 11:28 AM

With Focus Financial Partners going private in a deal valuing the company at more than $7 billion that's expected to close next quarter, the firm scaled down its first-quarter earnings.

Rudy Adolf, CEO of the New York-based acquirer of registered investment advisory firms, and Chief Financial Officer Jim Shanahan spoke in prepared remarks for less than 10 minutes on an earnings call with analysts after Focus disclosed its first-quarter results on May 4. Just as in the company's fourth-quarter earnings call, neither took any questions after their comments.

The company isn't releasing forecasts for the second half of the year, and Focus won't disclose its earnings for the next quarter if buyer Clayton, Dubilier & Rice has already closed the acquisition.

Slumping stock and bond values tamped down earnings for Focus, which classifies 75% of its revenues as correlated to markets and gets 96% of its business from wealth management fees. After making more than 290 deals since the firm's launch in 2006, it has 5,900 financial advisors and other employees and 90 partner RIAs. Earlier private equity investors took the firm public in 2018. At the end of the call, Adolf took time to praise the firm's partners.

"It is in environments like we experienced last year when our firm's industry leadership and the value of what they do really shows, positioning them for solid growth and performance as financial markets recover," he said. "[Co-founders] Rajini [Sundar Kodialam], Lenny [Chang] and I could not be prouder of our incredible partnership and the quality of the business the Focus team, together with our partners, has built over the last 18 years. We look forward to continuing to grow and evolve the company and to capitalizing on the substantial growth opportunities that lie ahead of us."

Industry News

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To see the key takeaways for financial advisors and other wealth management professionals from the firm's first-quarter earnings, scroll down the slideshow. For a look at the firm's fourth-quarter earnings statement, click here. To view coverage of the firm's third-quarter results, follow this link.

M&A Deals

So far in 2023, Focus has completed 16 M&A deals, with two of them bringing new RIA partners and the rest of the transactions as "tuck-ins" of teams into the firm's existing advisory practices. The addition of Toronto-based Westcourt Capital Corporation on May 1 is expected to tack on $11.1 million in acquired annual base earnings, Shanahan noted. Another new partner firm that Focus closed on Jan. 1 brought $1.2 million in new annual revenue, he said.

Last year, the firm completed two dozen transactions, which was a 37% dropoff from its volume in 2021. At the end of the first quarter, Focus had 89 partner RIAs, compared to 84 at the same time in 2022.

Cash on hand

Net cash provided by operating activities climbed 5% year over year to $290 million in the first quarter, while cash flow available for capital allocation ticked up 1% to $303.9 million. The firm's loan agreements and accompanying undrawn revolving capital amounts to more than $850 million in "available firepower as we anticipate another strong year of M&A activity," Shanahan said.

Leverage

At the end of the first quarter, Focus had debt outstanding under those credit facilities of $2.7 billion with a net leverage ratio (obligations minus cash divided by earnings) of 4.41. The company seeks to restrict that ratio to between 3.5 and 4.5 as "the appropriate range for our business given our highly acquisitive nature," according to its earnings statement.

Expenses

The firm's costs in the first quarter included $26.1 million in "earnout" payments to Focus partners and another $12.5 million in deferred acquisition outlays, Shanahan noted. As a whole, operating expenses tumbled by 14% year over year to $463.2 in the period, due to lower costs in five of the six areas broken out by the company's earnings statement. Compensation, the largest type of expense, dropped by 12% to $181.8 million due to lower stock and bond values that are tied to the advisory fees collected by partner RIAs through Focus.

Remark

Focus is growing through the reach of "the largest M&A team in the independent wealth management space," Adolf said.

"Our differentiated ability to source structure and execute these transactions remains a core element of our value proposition to growth-oriented firms," he said. "We believe that the flight to comprehensive, unconflicted advice will continue to accelerate due to last year's market correction, leading to substantial growth in client assets managed by the RIA industry as experienced in prior cycles."