Despite the record-breaking volume and size of M&A deals in 2021, one of wealth management’s most active consolidators aims to stay in “our sweet spot range,” its CEO said.
Having completed or announced more than 30 transactions through Nov. 1, Focus Financial Partners is driving that massive consolidation. Its revenue and adjusted EBITDA have each surged by more than a third with the influx of new RIAs folding into New York-based Focus or its existing partner firms,
Instead, Focus sees opportunities among RIAs with between roughly $1 billion and $5 billion in client assets, while “first and foremost we look for firms that simply are aligned with our vision,” Adolf said,
M&A flow: In the third quarter, the firm closed the acquisitions of two partner firms and seven mergers into existing Focus RIAs in transactions often referred to as “tuck-ins.” At 16 deals closed and at least 15 other pending acquisition agreements for a total of 31, the firm has outpaced the 25 it completed during the entire year in 2020. A Focus RIA called Connectus is responsible for eight transactions this year. As of Nov. 1, the number of partner RIAs had reached 79. In three recent deals alone, Focus added RIAs with $11 billion in combined client assets, roughly $60 million in annual revenue and $22.5 million in yearly base earnings, according to Adolf. The largest of the acquisitions was Ancora Holdings, a Cleveland-based asset and wealth manager with more than $9 billion in client assets.
Leverage ratio: Adolf spent a large portion of the call discussing the debt-to-EBITDA ratio of Focus, which isn’t surprising given the capital required for acquisitions. Focus earned GAAP net income of only $1.8 million in the quarter, down from $3.9 million in the same period a year ago. While Focus is publicly traded with large institutional holders of its stock that include as BlackRock, J.P. Morgan Chase and Vanguard, private equity firm Stone Point Capital holds a minority interest in the firm through its shares. The firm’s net leverage ratio of 3.54x is only a little more than half of the ratio cited by ratings agencies examining the debt issued by large privately held wealth managers. Focus has “always committed” to a range of between 3.5% and 4.5%, Adolf told analysts. “That is what we believe is the right range for us operating as a public company,” he said, noting the firm has no shortage of capital and equity to deploy. The firm’s net cash from operating activities soared by 54% year-over-year to $299.7 million in the third quarter.
Bottom line: In addition, its adjusted EBITDA surged 45% from the year-ago period to $113.5 million. Revenue rose by 37% to $454.5 million. More advisory and other fees from RIA partners compared to the same time in 2020 and the extra business from incoming practices drove the higher topline figure, along with rising equity values, according to the firm. The firm derived about $100 million of the quarterly revenue from what it describes as “family office-type services” such as tax and investment advice for high net worth and ultrahigh net worth clients. A strong pipeline reflects “the aging of the founders and the founding generation” of RIAs more so than tax uncertainty which “may or may not have some implication here in the U.S.,” Adolf told analysts. “You have heard the statistic before: 50,000 advisors just in the U.S., 65 years and older, managing $3 trillion in client assets,” he said. “These forces are so much stronger than just taxes here or there, so we have no question that our momentum in next year and in the years after is going to continue to be very, very strong.”
