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In wake of Goldman Sachs presentation, Focus Financial shares hit new lows, analyst compares RIA rollup to GM's ill-fated Hummer H-1

The roll-up's share price closed at $25.51, a steep drop from the $37 where it traded on day one -- and even below the targeted $33. But is it really the ungainly, inefficient, over-priced SUV or more the Ferrari CEO Rudy Adolf promised but thrashed by an unruly market?

Thursday, December 20, 2018 – 9:54 PM by Lisa Shidler
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Matthew Crow: If Focus had IPO’d at $18 and drifted up over the first few months to the mid-20s, it would be viewed today as a success.

Brooke's Note: It's a bad time to be in stocks. Ask Mark Zuckerberg, Jeff Bezos or Lawrence Culp. It happens to the best of'em. But Focus Financial's CEO Rudy Adolf may have made an unforced error in IPO pricing overreach that puts his firm in its first few months of trading into a position that is particularly concerning. That could end up  becoming a worry for the wider RIA business. Focus Financial is the comparable. Of course, Focus could help its own case by doing more deals. Mercer Advisors seems to be doing more with less. See:  Lisa's Bits: Commonwealth and Cambridge jump into RIA custody game bigger  But Focus did report three deals on Dec. 17th, though two were of the tuck-in variety.

Focus Financial’s high IPO may cause it problems for years, one analyst predicts, comparing the company to General Motors' ill-fated Hummer H-1, an oversized, inefficient vehicle, ultimately unloved by consumers. 

"Hummer executives must have been frustrated when the media lampooned their products for being ungainly and inefficient.  After all, Hummer never pretended to be anything else, Mercer analyst Matthew Crow writes.

Rudy Adolf
Rudy Adolf: Predicted 'annual growth in both revenues and adjusted net income per share of 20% on average and over time.'

I sensed a similar frustration in [CEO] Rudy Adolf’s voice as he pleaded (Dec. 5) Focus Financial’s case at the Goldman Sachs U.S. Financial Service Conference.  Ironically, Goldman Sachs was the key advisor to Focus Finacial in setting an IPO price back in July.

The article's title says it all: "Is Focus Financial an All-Terrain Investment Vehicle?" with the sub-head: "Management claims their model is recession proof; unfortunately, it isn't analyst proof." Here is a link to his full report. 

"The recent share price performance of Focus clearly suggests the market is losing interest in the issue, and it doesn’t seem to have anything to do with Brexit or yield curve inversions," he wrote in the opinion, posted Dec. 10.

"Instead, the analyst community seems to have soured on the Focus story, which is strange to us, because the story hasn’t really changed since the company filed the first version of its S-1 back in May."

The first week of December was turbulent for all equities, but Crow noted Focus was particularly hard hit.

Less than five months since the IPO, Focus closed Dec. 7 at $27.45, down 44% from its all-time, post-IPO high of $49.52.

The Hummer proved to be over-engineered, even for weekend warriors, is not a vehicle analysts use to as an optimistic metaphor.

In contrast, the Nasdaq, on which it trades, is down 13% from its high. Focus is "decidedly below where the offering priced at $33, and not much more than half the share price achieved less than three months ago," Crow notes.

The stock price for the New York-based roll-up closed at $25.51 today (Dec. 20), off 8.89% from its $27.88 open. A major part of Focus's problem was its high IPO price tag, Crow said.  See: Focus Financial shares soar after Rudy Adolf pumps the pipeline and stiff-arms analyst who presses him on a Focus sore point--organic growth, or lack thereof On Friday at noon (Dec. 21) the shares slipped an additional 3% to $24.75, or about 33% from day one trading of $37-plus.

History lesson

"Having gone public at $33 per share on heavily adjusted earnings, Focus doesn’t have a history of profitability to form a reliable foundation for value. If Focus had IPO’d at $18 and drifted up over the first few months to the mid-20s, it would be viewed today as a success," he writes.  See: Focus Financial IPO pays off for KKR and Stone Point, after all, by hitting price mark, plus an investor 'pop.' Now, on to the less glamorous task of paying down debt

"I’m not suggesting that $18 was a more appropriate valuation at IPO, but an excessive valuation at offering can be an albatross for a public company – and that may be how we eventually see this situation," he adds. See: 'Oversubscribed' Focus Financial lowers asking price as IPO-eve share demand wanes, raising prospect of a $100 million offering haircut

Focus's organic growth is a major problem, Crow says in his report. See: In another go-go sign, Focus Financial moves up IPO trade date to as early as Monday

Louis Diamond, principal of Diamond Consultants says Focus's problems are largely industry problems not unique to the firm itself.  

Lou Diamond
Louis Diamond: 'Most of the industry is having trouble with organic growth. I think it’s a sellers’ market for RIAs.'

“Most of the industry is having trouble with organic growth. I think it’s a sellers’ market for RIAs, and many are ripe for acquisitions. I don’t think Focus will run out of folks to acquire and I think they can keep their growth engine up,” he says. 

Indeed, on Dec. 17, Focus announced its purchase of Altman, Greenfield & Selvaggi LLP, a family office and business management firm headquartered in New York City that has no ADV.

It also announced that Buckingham Strategic Wealth, which it owns, tucked in Alpern Wealth Management, which manages $192 million and Griffon Financial Planning, Inc., which manages $86 million. Buckingham becomes KKR-fueled, check-listed M&A 'machine' that now feeds on BAM TAMP clients

One double-edged sword for Focus is the number of firms under its umbrella. A handful could be slowing down the firm’s overall growth. “If there are some firms that aren’t performing as well, they’ll probably drag down the numbers,” Diamond says.

During its 3rd quarter financial report, Focus CEO Adolf said the company's objective was to produce "annual growth in both revenues and adjusted net income per share of 20% on average and over time.”

Crow notes that the problem is the word, "adjusted."

Distressed industry

"Adjusted means they can grow by acquisition, but they’ll be expending cash and equity to fund that growth. Organic growth is estimated at 10%, but it includes acquisitions by partner firms. Management justifies this because broker-dealers include advisor recruiting in their organic growth rates,” he writes.

Crow adds: “That’s a risky justification, because the economics of broker-dealers has been eroding for decades, and many see the practice of paying to poach advisors as a sign of an industry in distress."

Diamond agrees that the IPO was likely overpriced in part because Focus got a huge bump for being the first IPO in the pure RIA space.

“They were able to get shareholders, founders and private equity partners maximum value and now it’s time to execute on it and keep a growing and stable company," he explains. 

But Diamond, who is not an equity analyst, but is part of a recruiting firm that participates in M&A transactions, maintains the industry is not in trouble. Rather, the high IPO price was a reward for Focus's partners, he says.

But Crow disagrees saying Focus is now in a challenging, up-hill battle because of the $33 IPO price. But Analysts Buzz website wrote a column last Tuesday that the firm is likely to hit $40.33 in the 52-week period.

Another analyst Jake Williams posted a report, also Tuesday, on Reagents Global Market that Focus’s stock might be a good time to purchase it in terms of historical performance.

“Right now, FOCS stock is trading… above its 200-day moving average and may be a good opportunity to buy,” he wrote.

Liquidity

But Williams also noted that the firm's liquidity is poor. The company has a market cap of $1.9 billion with $69.1 million shares outstanding. Trading volume was 202,533 shares with an average volume of 281,686.

“Our calculation, using the current average volume and close price, leads me to believe that the liquidity is bad, highly speculative and an investor may want to avoid this stock,” he wrote.

Today's drop happened on better than average volume, 365,543 shares.

Of the seven analysts covering the stock, three have issued a "buy" rating and four have the stock on "hold." No one is pushing a sell rating. The average price target is $39.33.

"Nine months ago, the investment banking community wanted to see Focus as the ultimate RIA – but it was never that.  Focus is a complex feat of financial engineering which demonstrates, above all, how difficult it is to build a consolidation model in the investment management community," Crow concludes.  


Related Moves

Looking past Covid-19 pandemic, Louisiana RIA buys $1-million building after hitting $1 billion in AUM and hiring the town's mayor

Summit Financial Wealth Advisors was sold to Focus Financial in 2014, growing its assets by $400 million since then but keeping staffing about the same

December 17, 2020 – 3:02 AM


Mentioned in this article:

Focus Financial Partners, LLC
Consolidator/Roll-up Firm
Top Executive: Rudy Adolf




Peter Giza

Peter Giza

December 21, 2018 — 8:12 PM
(heavy elderly Saxon peasant accent) "I'm not dead yet" - sorry, couldn't resist Jeff. Would you have expected less Brooke :) The H-1 in its U.S. Army dress is a pretty cool vehicle. It's when GM thought stuffing a GMC pickup truck dashboard and seats into it where things went very wrong. When I saw the first one my immediate reaction was - WHY? And now I ask myself the same question wrt externally funded and IPO targeted rollups.
Peter Giza

Peter Giza

December 24, 2018 — 3:00 PM
I agree with Brian's assessment of rollups being the wrong model longterm. But I think that thr statement that advisors will quickly become an extinct species is disproved by the bank teller. The ATM and every other digital product was going to replace the tellet and most banking employees for that matter. But here we are entering 2019 and I don't see any banks sans tellers. Personal preference, trust or mistrust of "the machine", life events, etc., throw a monkey into the wrench-works. For example, before having a family you may have no issues managing your assets. Then children come along, higher paying job with travel and greater responsibility. All of that puts big pressure on time and requires greater understanding of what it takes to build on your assets and a protest retirement. Plus humans are the only ones that can keep the system quasi-honest.
Peter Giza

Peter Giza

December 21, 2018 — 5:59 PM
As a platform the HMMWV, which is what the H-1 was based, wasn't a bad one. Now the implementation of the H-1 is another story. Perhaps there is a parallel here.
Brooke Southall

Brooke Southall

December 21, 2018 — 6:02 PM
I knew somebody would introduce some Hummer nuance to the metaphor. :)
Brian Murphy

Brian Murphy

December 21, 2018 — 6:18 PM
The market is discounting anything "built on leverage" and that's all that Focus (and all rollups) really are. 20%+ growth only comes along based on acquiring additional assets using debt. It's a poor business model - no real innovation to speak of, just buying assets. Emphasis should be on expanding the market to those who don't get traditional advice, not competing to buy other stodgy, old businesses. Look no further than GE for how that turns out. Anyways, in the short term, the return on Focus will be highly correlated to high-yield spreads. In the longer-term they're on the wrong end of a industry that will see dramatic change over the next 5 years.
Jeff Spears

Jeff Spears

December 21, 2018 — 6:21 PM
Focus needs to Pivot and start emphasizing organic growth. The market will reward this pivot and current and potential advisors will benefit as well. Founders and Private Equity investors have reaped a short term reward. This pivot will allow all equity holders to benefit. As your article mentions I would drop the adjusted earnings term too. FOCS is not dead yet...
Socrates

Socrates

December 21, 2018 — 10:25 PM
@Brian Murphy Could you elaborate on your insight, how does a national RIA expand market to those who don't get traditional advice? And why is an umbrella of rolled up fee based RIAs on the wrong side of the industry winds over next 5 yrs?
Brian Murphy

Brian Murphy

December 21, 2018 — 11:50 PM
@Socrates - At present the ENTIRE RIA industry (excluding digital advisors) is focused on the 20% of the population that has $100k or more in investment assets. They all use an "AUM-based" pricing model and lock users up via custodial platform relationships. Hence competition boils down to asset gathering and the game becomes gaining market share by purchasing those assets at another's expense - whether it be by purchasing other RIAs in a roll-up (as is the case here), purchasing directly through advertisement/marketing, etc. Of the remaining 80% of the population - 40% have nothing; nada, zilch. They're currently targeted by savings apps like digit, acorns, etc. 40% of the population has assets, but not enough to garner interest from advisors...hence they get no coverage. Nothing. Much of these assets are tricky - they're in 401(k) plans, perhaps annuities, savings accounts, etc. so things like Wealthfront/Betterment aren't holistic solutions. The answer to addressing the broader market opportunity is through technology and new business models. Reconsider AUM based fees, reconsider the "bundle" of products/services offered, reconsider what advisory is. i'll leave it there for now. Roll-ups are on the wrong side of the industry going forward as they are about integrating legacy service offerings and swapping assets amongst industry players - they bring nothing new to the table. They will be cast aside quickly (by clients) when next generation advisors figure out a compelling combination of the above; product, business model, distribution. Today's advisors are wedded to the notion that clients need human advisors - I suspect they don't and are just looking for the right holistic product that relieves them of that relationship effectively. I'm spending my time on that.
Brooke Southall

Brooke Southall

December 24, 2018 — 9:44 PM
I love when the techie talks as the pragmatist, Peter. And finishing with the quasi-honest thought is a quasi-poetic!
Randy Bullard

Randy Bullard

December 26, 2018 — 4:54 PM
Because Focus is hands-off regarding technology and service delivery with the firms the purchase, organic growth is purely in the hands of the underlying RIAs which are apples and oranges as far as their desire, means and acumen at acquiring new clients. Focus as a financial asset holding company is simply in no real position to affect organic growth.

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