Focus profits fall more than 40% on rising expenses

In what was almost certainly Focus Financial Partners' last quarter as a publicly traded firm, the company's expenses pushed down its profit by more than 40%.

The New York-based registered investment advisory firm consolidator reported its second-quarter earnings on Aug. 3 ahead of the completion of a deal for private equity investor Clayton, Dubilier & Rice to remove Focus' stock from public listing at a valuation of more than $7 billion. Focus didn't hold an earnings call but still reported its results prior to folding into its new parent officially sometime this quarter. 

Costs related to the steep cost of borrowing capital compared to last year and the pending merger deal put a dent in the firm's earnings.

At a special meeting held last month, the company's shareholders adopted and approved its merger agreement with Clayton, Dubilier & Rice and another private equity firm keeping an undisclosed percentage of equity in Focus, Stone Point Capital, according to Focus. 

"Completion of the merger is subject to other customary closing conditions," Focus said in a statement included in the press release of its earnings. "The merger is expected to close in the third quarter of 2023. However, the company cannot assure completion of the merger by any particular date, if at all or that, if completed, it will be completed on the terms set forth in the merger agreement."

To see the key takeaways for financial advisors from Focus' second-quarter earnings, scroll down the page. For a look at the firm's first-quarter earnings statement, click here. To view coverage of the firm's fourth-quarter results, follow this link.

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M&A deals
After the first quarter, Focus had completed 16 deals. As part of its earnings statement for the second three months of the year, the company didn't break out the number of M&A transactions.

The number of partner RIAs increased by a net five, or 6% year over year, to 90 in the second quarter. Acquired base earnings for the period slipped 3% to $11.07 million. 

Available cash flow
Net cash from operations over the past 12 months dropped 9% year over year to $266.13 million in the second quarter, while cash flow available for capital allocation fell 16% to $271.20 million.  

Leverage
The firm's net leverage ratio, which is a measure of debt liabilities minus cash flow and divided by earnings, expanded by 46 basis points from the year-ago period to 4.36x in the second quarter. The respective parent companies of private equity-backed wealth management firms Kestra Holdings, Cetera Financial Group and Osaic (formerly Advisor Group) each have higher leverage ratios, according to Moody's Investors Service.

Expenses
Rising operating and interest costs tore a hole in Focus' earnings for the second quarter. Operating expenses jumped 26% from the year-ago period to $547.31 million due to higher charges for selling, general and administrative costs and more than $30 million in extra compensation for a larger group of RIAs benefiting from greater stock values than 2022.

Continued rate hikes from the Fed also tacked on more costs for Focus in the last three months related to its borrowing for business capital. Interest expenses soared by 143% to $48.34 million.

Bottom line
The company generated net income of $29.08 million on revenue of $583.81 million, or 49 cents per share. Profit tumbled by 41% from the year-ago period, while revenue rose 8% and earnings per share ticked down 4%.