Private equity bought the New York-based roll-up a year ago and its revenues are growing about 20%

May 24, 2018 — 5:15 PM UTC by Brooke Southall

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Brooke's Note: If you are a company with a recent valuation of $2 billion and you file an IPO to raise $100 million, it's not a huge big deal -- unless it represents the first real RIA IPO in history. But, of course, Focus Financial is a very non-RIA RIA -- in fact, it's a holding company of them. Focus operates in the shadows with little use for the media or the rest of the industry. Not much buzz escapes the vacuum seal of its offices. But the tea leaves may not be so hard to read here. After the article was published I was able to get to two key sources -- Dan Seivert and Jamie McLaughlin -- who offered a plausible scenario for the rush to IPO and for what kind of valuation the IPO's investment bankers may seek.

Focus Financial Partners LLC filed the paperwork to complete an initial public offering to raise a $100 million to pay down debt.

The New York-based roll-up, which recorded revenues of $663 million in 2017, filed an S-1 form with the U.S. Securities and Exchange Commission. The Nasdaq symbol will be FOCS. No pricing information was given. The firm's adjusted EBITDA -- earnings before interest, taxes, depreciation and amortization -- was $145 million and adjusted income was $96.6 million.

It was only a year ago that Stone Point Capital LLC and Kohlberg Kravis Roberts & Co. LP acquired a majority stake in the firm in a deal that valued Focus at approximately $2 billion. See: Stone Point and KKR buy Focus Financial for $2 billion by employing massive leverage

The quick flip of Focus Financial may yield -- all being things equal -- a valuation in the neighborhood of $2.5 billion. considering that the liquidity premium of an IPO is typically in the 25% to 35% range, according to Dan Seivert, CEO of ECHELON Partners, a Manhattan Beach, Calif.-based investment bank largely for RIAs.

Louis Diamond: It’s interesting that they would IPO after they just recapitalized with KKR and Stone Point.

What may keep the valuation at $2.5 billion or less is the fact that previous owners of Focus may have known that Stone Point and KKR planned a roll-up flipping, hence the $2 billion price may been inflated to account for that. The premium of 25% -- known as "pop" -- therefore may be better applied to a lower valuation than $2 billion.

"Maybe they knew they'd take it public and they took some of the pop," Seivert says. The value of pop is that "owners can come and go with relative ease," he adds.

Stone Point is a Greenwich, Conn-based investor of $13 billion and KKR is the iconic New York private equity firm. Last year their cash last year quieted a drumbeat of reports of sellers desperate to cash out of Focus Financial including: Centerbridge Partners LP of New York; Summit Partners of Boston, Menlo Park, Calif. and London; Polaris Partners of Boston; and San Francisco and Dublin -- not to mention Focus advisors and employees.

Fast moves

"It’s interesting timing that they would IPO after they just recapitalized with KKR and Stone Point," says Louis Diamond, principal of Diamond Consultants in New York.

The move for a quick IPO makes sense given the fact that Focus was founded in 2006 and some of the key managers are not same young, energetic entrepreneurs that they were 12 years ago, says Jamie McLaughlin, principal of J. H. McLaughlin & Co. of Darien, Conn.

"I’d hasten to guess that [Focus founders] Rudy [Adolph] and Rajini [Kodialam]’s ages come into play and market multiples are at extended highs.  But it wasn’t entirely their choice – Stone Point and KKR are really driving the bus and they, too, see the bigger secular market trends and frothy multiples."

For the three months ended March 31, Focus's run rate continued to climb, generating total revenues of $196.2 million and adjusted EBITDA of $44.2 million. Much of its growth can be tracked to its biggest holding Buckingham -- an M&A machine. See: Buckingham becomes KKR-fueled, check-listed M&A 'machine' that now feeds on BAM TAMP clients

Two lifetimes in PE years

Focus, under the leadership of CEO Adolf, recently made a handful of acquisitions -- deals are done with little fanfare or disclosure. That's a practice certain to change somewhat post-IPO. See: Bypassing PR Newswire, Focus Financial reports purchase of $1.9B AUM RIA and it gets curiouser from there.

Dan Seivert imagines Focus owners seek a 25% 'pop' on the $2 billion paid a year ago. 

"As a public company some of their secret sauce and flexibility does get eroded," Diamond says.

But should Focus execute the IPO, it will garner broader benefits, according to Shirl Penney, CEO of Dynasty Financial Partners LLC.

"It has been a sellers market big time for awhile now in RIA segment with lots of capital from PE, sovereign funds, family offices and strategics coming into the space," he says. 

"This is potentially -- if successful -- another example of the demand to own RIAs. Investors have had to play the RIA growth story indirectly through purchasing custodian stocks, or service providers like Envestnet. Focus would be another, and perhaps more direct way, to get a piece of a number of RIAs for investors that are controlled by the holding company."

Founded in 2006, Focus's 11 years of existence is like two lifetimes in the private equity world. Focus had other liquidity events and has filed for IPOs in the past that never came to fruition. See: Why Focus Financial is risking it all -- including the advantages of privacy and private stock -- for a successful IPO.

RIA model validated

Off the record, M&A experts say that there were "rumblings" that Stone Point was anxious to get on with an IPO.

Big picture, RIA observers see the IPO as a "proxy" for the success of the emergence of the RIA business as a whole.

"It validates their story and the independent wealth management space as a whole," says a source. "[It] shows real investor interest in the RIA space as Focus can serve as the perfect proxy for the broader RIA segment."



Share your thoughts and opinions with the author or other readers.

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Jeff Spears said:

May 24, 2018 — 6:52 PM UTC

PE tenacity + RIA consistency = ?
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Jamie McLaughlin said:

May 24, 2018 — 9:27 PM UTC

Focus faces some tough choices - continue to rotate short-dated PE capital or become a small cap stock with all the hassle of being a public company. Who is the preferred master?

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