Focus Financial conscripts Fidelity to bombard RIA principal/prospective clients with IPO solicitations while one research shop waves a yellow flag
RIAs can buy Focus shares at 'first-tick' price from the Boston-based giant through tomorrow as part of a 'directed' program that may also encourage RIAs to sell to Focus down the road
Brooke's Note: How do you market a roll-up of advisors who offer an alternative to transactional stock brokers? Heavy selling of transaction opportunities. Making an IPO succeed is all about pumping up share demand so that it exceeds supply of shares. But that demand doesn't get there on its own or by soft-pedaling. Fidelity is in on the game and its participation is telling because it can earn some revenue (paid by the issuer of shares) on the deal but also get RIAs a first bite at a pure-play RIA IPO. If it works, a virtuous circle of selling could ensue. Success may beget success in a buoyant IPO with Focus paying down a mound of debt so that it can turn around and borrow more to fuel deals and more deals, which remain the company's principal source of growth. But the perils, too, are everywhere you look when it comes to getting RIA principals hooked on Focus shares with sales restrictions -- especially with creative determinations of cash flow underpinning the valuation.
Fidelity Investments is helping get the Focus Financial Partners initial public offering (IPO) aloft with an intense last-minute email campaign targeting, among others, the owners of RIAs with billions of dollars in AUM. But at least one new report is raising some cautionary flags about the deal.
Autonomous Research, which bills itself as a "leading independent research provider on financial companies globally.," takes Focus CEO Rudy Adolf to task for the paucity of financial detail in his roadshow. See: Why Focus Financial is risking it all -- including the advantages of privacy and private stock -- for a successful IPO
"The roadshow was quite limited on financial detail, with management focusing on selling the story rather than the numbers," reads the report, titled, somewhat derisively, "Hocus Focus IPO-Primer."
"We worry that the considerable amount of adjustments to get to Focus’s ‘true’ earnings and EBITDA numbers may temper investor excitement a bit, as this is the case for comps such as AMG," says the analysis forwarded to RIABiz by an anonymous source.
It adds more optimistically: "Most of the adjustments are quite logical and commonplace in our view, as Focus is attempting to provide investors with a clear depiction of its cash generation capabilities.
"However, we question why the company adjusts out equity-based compensation, as we view this as a real expense which dilutes earnings attributable to equity holders," says the research company.
Endorsing the deal
Those points, however, might not occur to potential investors solely from a reading of the Boston-based investments giant's email.
Fidelity sent RIA principals emails on July 3, July 9 and July 23 soliciting them to purchase shares. The email is headlined "Fidelity Directed Offerings Alert" with a green stripe and its brand emblazoned across the top.
In an email Fidelity says 33% of all IPOs have a directed share program and that Fidelity has managed DSPs since 1999, including two of the largest in the history (AT&T Wireless and Kraft Foods).
"This is the typical process for Fidelity as well as all firms that manage DSPs," the firm says.
In any event, the email directs recipients to a video link with a 30-minute presentation by Adolf wearing a blue fleece vest. Focus CFO Jim Shanahan and others also chime in to endorse the deal, including advisors whose firms were acquired by Focus. [To make the link work, click "public site for retail investors" then "View all deals" then the Focus Financial link.]
"We have two stories to tell," says Adolf in the video. "I will share with you the business model and financial performance that makes Focus attractive to investors. And, we will also let our own partners share with you what makes Focus attractive to them."
Fidelity explains in its email that recipients of its solicitation were specially chosen -- as was Fidelity. See: Focus Financial IPO is on at $39 per share as KKR pushes giant share premium, with an eye on raking off an extra $532 million
"Focus is setting aside a percentage of shares in the IPO for a Directed Share Program," it reads. "The Directed Share Program allows Focus to invite prospective partners, employees, directors, friends and family to submit an indication of interest and potentially buy shares in the offering. Fidelity Investments is pleased to have been selected by Focus to administer the sales under the Directed Share Program in the United States."
The advantage of buying through the Fidelity program is that the investor is assured of getting the IPO price "on the first tick" explained a person familiar with directed share purchases. IPOs notoriously soar once out of the gate, leaving regular investor chasing a rising price.
That said, both Focus and Fidelity are taking a risk by including RIA prospective partners in an offering that carries with it downside risk -- as any offer does. Even Facebook slid to $18 after it went public in 2012 at $38 per share. Of course, Facebook, today, is trading at around $210 a share.
"If they sell to prospective RIAs and the price turns down, it'll leave a sour taste in their mouths," the source said.
Or not, says Matt Crow, president of Mercer Capital in Memphis, Tenn.
"This may simply be a distribution channel to open the [Focus] offering up to a broader base," he says. "I don’t necessarily agree that the success or lack thereof of Focus reflects on Fidelity one way or other."
The RIA who forwarded the email solicitation to RIABiz said it seemed ham-handed to send such a solicitation to RIAs, especially those who stopped taking Focus calls for an M&A deal long ago.
The "first tick" investors shouldn't expect to make a quick buck. The Fidelity program includes a lock-up period of at least 180 days before the shares can be sold.
Still, those conditions are less onerous than the ones placed on some of the Focus advisors who own shares. In at least one case, an advisor says he can only sell one-twelfth of his shares per quarter after the six-month period expires..
But there is a gooed news too, the Autonomous report says. "According to the presentation, the key members of the management team, as well as the private equity owners (Stone Point and KKR) will not be selling in the IPO."
It may be a case of hurry up and wait.
The Fidelity email instructs would-be investors to open a Fidelity brokerage account no later than July 24th to participate, and gives no assurance that shares will be available under the Fidelity program terms. See: Focus Financial VC backer says IPO still on the table after private auction yields no sale
At last report, the IPO was locked, loaded and ready to take bids ahead of schedule.See: In another go-go sign, Focus Financial moves up IPO trade date to as early as Monday
The New York-based RIA roll-up's IPO is now set for as early as Monday, July 23, according to a published Marketwatch IPO schedule. Sources familiar with the IPO say it is likely Tuesday or Wednesday at the latest barring mishaps. "They have partners in city getting ready," said one New York-based source. A Nasdaq IPO listing has it set for July 26.
The whisper date to begin trading on Nasdaq was originally July 30 or 31.
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Focus Financial Partners, LLC
Top Executive: Rudy Adolf