Focus Financial earnings rise in Q2 on RIA M&A deals

Despite deal dropoff, Focus CEO sees 'no abatement' of M&A

August 4, 2022 5:30 PM

Despite falling well behind its pace last year, RIA aggregator Focus Financial Partners' CEO is predicting the firm will deliver "one of our best years for M&A" in 2022.

CEO Rudy Adolf made the prediction when the New York-based firm reported its earnings for the second quarter on Aug. 4. In 2021, the firm made 38 deals to acquire RIAs, including 14 that joined Focus as new partner firms that can deploy the firm's capital for their own future acquisitions. Focus hasn't gotten halfway to either of those figures in the first six months of 2022.

Wall Street has expressed some doubts about the firm because its definition of organic growth includes those acquisitions. That measurement traditionally doesn't extend to M&A deals or market appreciation. The firm is carrying billions of dollars in debt on its balance sheet as it racks up the deals. However, its revenue and earnings for the first half of 2022 each rose 30% above their levels from a year ago.

"Our partners are demonstrating their ability to handle difficult market conditions, and our business is weathering the challenging environment well," Adolf said in a statement. "We believe that the growth opportunities during and particularly after significant market volatility, combined with the operating leverage on our business, will lead to our sustained outperformance once conditions stabilize."

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For the key takeaways for financial advisors and other wealth management professionals from Focus' earnings report for the second quarter, scroll down the slideshow. To see analysis of the firm's results from the previous two quarters, click here and here.

M&A deals

The firm has closed or agreed to 14 transactions through the first half of the year, with three of the RIAs coming in as new partners and the others folding into existing Focus RIAs. After the Aug. 1 completion of its acquisition of Houston-based Icon Wealth Partners, the deals for it and Bloomfield Hills, Michigan-based Azimuth Capital Management and Geneva-based Octogone Holding have brought a combined $50 million in annual revenue and $9.5 billion in client assets.

Focus has 87 partner RIAs with 5,000 employees worldwide after completing more than 250 transactions since its launch in 2006.

Leverage

Since it takes a lot of capital to buy RIAs, the ratio of debt to earnings looms especially large as a metric for Focus. The firm's calculation of its net debt leverage ratio compared to earnings expanded by 36 basis points year over year to 3.9x in the second quarter. Focus expects that number to tick up further to 4.0x this quarter. It seeks to keep that number between 3.5x and 4.5x for the long term. At the end of the second quarter, Focus had $221 million in cash and equivalents and debt outstanding of $2.5 billion under its credit facilities.

Using a different estimate of debt-to-earnings before interest, taxes, depreciation and amortization, Moody's put the firm's leverage at 5.3x in its last ratings action last June. The agency affirmed its below investment-grade "Ba3" corporate family rating with a stable outlook. "If Focus fails to generate sufficient incremental earnings and leverage remains above 5 times debt-to-EBITDA, this would put downward pressure on its ratings," the agency said at the time.

Bottom line

Focus earned net income of $49.3 million, or adjusted EBITDA of $137 million, on revenue of $539.2 million. Profit soared by 10 times over the year-ago period, or by 27% in terms of the adjusted level, which the firm estimates outside of generally accepted accounting principles. Revenue surged 27% because of the growth of existing partner firms through their own mergers and new business bringing in more wealth management fees, according to the firm.

Remark

Despite inflation and worries that the country is entering a recession, there hasn't been "any kind of tangible slowdown" that would be apparent if it were similar to the financial crisis of 2008, Adolf said in response to a question from an analyst about whether sellers are getting jittery.

"Maybe some deals take a little bit longer, but I don't see any material difference," Adolf said, according to AdvisorHub. "We don't just believe that '22 is going to be a good year, but even what we see going into '23, there's no abatement of M&A opportunities whatsoever."

Despite deal dropoff, Focus CEO sees 'no abatement' of M&A

M&A deals

Leverage

Bottom line

Outlook

Remark