Focus Financial Partners' earnings rose in 2022 due to M&A

Focus mum on go-private talks as its profits soar

February 16, 2023 1:20 PM

Focus Financial Partners isn't spilling details of its exclusive talks to go private in a $4.1 billion deal, but it is disclosing that its profits are soaring.

The New York-based registered investment advisory firm boosted its net income five-fold in 2022, as the underlying earnings of the more than 85 RIAs under the aggregator's umbrella easily offset the impact of slumping stocks and bonds last year, according to its Feb. 16 quarterly earnings statement.

In a major milestone for the RIA industry, Focus went public in July 2018 roughly a dozen years after its launch.

During a brief call with Wall Street analysts, CEO Rudy Adolf said the company "will not be opening up the lines for Q&A as we normally do," in keeping with its pledge not to discuss a potential deal for private equity firm Clayton, Dubilier & Rice to acquire Focus for $53 per share in cash, or $4.1 billion, until a transaction is approved by its board.

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To see the key takeaways for financial advisors and other wealth management professionals from the firm's third-quarter earnings, scroll down the slideshow. For analysis of the firm's last three quarters, click here, here and here.

M&A deals

Focus ended the year with 88 partner firms, an increase of four from 2021. Market volatility made a dent in the firm's M&A deals, but it's getting back up to speed in the new year.

Transaction volume fell by 37% year over year to 24 in 2022, with five acquisitions bringing new partner RIAs on board and the rest as "tuck-in deals" made by existing partners. Acquired base earnings, the annual profits of the companies joining Focus, plummeted 63% to $26.6 million.

So far in 2023, the company has made 11 deals, one of them a new partner acquisition of Indianapolis-based Spectrum Wealth Management, an RIA with $1 billion in assets under management. Earlier this week, Focus made a minority investment in trust and estate planning technology firm Luminary Platforms.

Leverage

With cash and equivalents on hand of $140 million and debt outstanding of $2.6 billion under its credit facilities, Focus ended 2022 with a net leverage ratio — debt minus cash divided by earnings — of 4.19. The ratio came in 34 basis points above the same time a year ago. The firm has set a ratio target between 3.5x and 4.5x as an "appropriate range for our business given our highly acquisitive nature," according to the earnings statement.

In his remarks, Adolf noted that the firm has roughly $1 billion in capital to deploy through its cash and equivalents and revolving facilities under a loan, along with nearly $318 million in capital available for allocation from its cash flow in the last 12 months.

"Our M&A pipeline is strong, with a good mix of opportunities in the U.S. and internationally," he said. "And our partners remain active in pursuing mergers to expand their businesses and recruit high-quality talent."

Bottom line

A larger base of partner firms that are growing through their own deals generated enough revenue to offset the impact of lower asset values last year. For the year, Focus earned net income of $125.3 million on revenue of $2.14 billion. Revenue jumped 19% from 2021, while profits soared by more than five times their level from the prior year. More than 95% of the firm's revenue came from advisory fees and other recurring revenue.

Outlook

In the first quarter, Focus anticipates it will generate $560 million to $570 million in revenue and acquire firms with estimated combined annual base earnings of $1.7 million. An estimated adjusted EBITDA (earnings before interest, tax, depreciation and amortization, a common measure of profitability) margin of 24% would represent a decline of 120 basis points from the first quarter of 2022. The company expects its net leverage ratio to rise by 11 basis points from the end of 2022 to 4.30x.

Analyst ratings

Two analysts who had contrasting price targets respectively above and below Clayton, Dubilier's offer of $53 per share have taken divergent actions in their ratings of the firm's stock after the announcement of the exclusive talks with the private equity firm. Morgan Stanley analyst Ryan Kenny and BMO Harris analyst James Fotheringham each wrote that they expect the negotiations to reach an agreement to take the firm private, though.

Fotheringham had been using a target of $55, and he downgraded Focus to "market-perform" from "outperform" due to the expectation that there won't be "a competing bid," he wrote. Kenny's target was well below the offer at $35 per share, and he upgraded Focus to "equal-weight" from "underweight" in terms of the firm's earnings compared to its benchmark. Since there "do not appear to be material contingencies against the deal," Kenny's "conversations with investors suggest general support" for it, he wrote.

Overall, four analysts rated Focus as a "hold" this month and three called it a "buy."

Remark

The team of more than 5,800 advisors and employees led by Adolf believes that "the flight to comprehensive, unconflicted advice will continue to accelerate as a result of last year's market correction, he said.

"2022 was another year in which the value of prudent fiduciary advice was evident, particularly in the unique challenges presented by markets and economies last year," Adolf said. "Our partners are trusted advisors in every aspect of their client's financial lives beyond investments. These deep multifaceted relationships result in continued high client retention, which drives our recurring revenues and the stability of our financial model."