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Focus Financial struggles to move 'needle' but reframes opportunity from 500 $1-billion RIAs to 1,000 practices

The RIA rollup's decelerating growth rate and limited acquisition capital are among an analyst's concerns

Friday, May 7, 2021 – 1:54 AM by Brooke Southall
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Rudy Adolf: Reality is – actually the number is about 1,000 firms in the industry based on several research groups are over $1 billion.

Focus Financial Partners Inc. exceeded its own expectations for its first quarter, ended March 31, with total revenues of $394.2 million, but shares (FOCS) slid nearly 2% on a day when the Nasdaq edged higher. (Shares reboinded Friday morning.)

"The company performed in a way that shows acceleration of momentum," Rudy Adolf, Founder, CEO and chairman said in a release.

Yet technically growth decelerated in the three-month period, says Matt Crow, president of Mercer Capital in Memphis, Tenn. See: Focus Financial IPO marks an RIA milestone one year on, but year two hinges on how Rudy Adolf handles the millstone around his neck--mounting debt

"Growth is decelerating," he says by email. "Total revenue growth dropped to less than 20% and organic revenue growth (which you’ll recall includes tuck-in acquisitions by partner firms) is down to about 12%.

"Beating adjusted EPS estimates by a nickel doesn’t overcome that," he said. 

But the good news for Focus Financial was delivered by its CEO, Rudy Adolf after Kyle Voigt, a  Keefe, Bruyette & Woods analyst asked about the size of the pool of M&A opportunity.

"If we go back to your IPO, which is almost 3 years ago now, I think you mentioned at that time, there were about 500 RIA firms with over $1 billion in AUM that could potentially be viewed as acquisition targets or potential for them to join the Focus partnership as partner firms," the New York-based analyst said.

Adolf explained that the pool doubled in depth.

"This is an ever increasing pool of opportunity. Reality is – actually the number is about 1,000 firms in the industry based on several research groups are over $1 billion."

Translating that deepening pool to cash flow that can be deemed as pure GAAP earnings remains a work in process.

The New York City roll-up continued its practice of putting asterisk-style notes on key growth metrics including its organic revenue growth rate of 12.2% year- over-year and record adjusted EBITDA. 

"We delivered strong results in the 2021 first quarter, above the upper end of our guidance on all measures, and we are very pleased with the overall performance and growth of our business," said Jim Shanahan, chief financial officer.

"We also reported our first quarter of adjusted EBITDA in excess of $100 million, which is a substantial milestone and reinforces the operating leverage that results from our scale."

Unsettled macro backdrop

The press release headline boasted that Focus "exceeded expectations."

Jim Shanahan, Focus Financial
Jim Shanahan: 'We are very pleased with the overall performance and growth of our business.'

First Quarter 2021 Highlights

  • Total revenues of $394.2 million, 16.9% growth year over year
  • GAAP net income of $2.5 million
  • GAAP basic and diluted net income per share attributable to common shareholders of $0.00 on a rounded basis
  • Adjusted Net Income Excluding Tax Adjustments of $63.4 million and Tax Adjustments of $10.5 million
  • Adjusted Net Income Excluding Tax Adjustments Per Share of $0.80 and Tax Adjustments Per Share of $0.13
  • Net Leverage Ratio of 3.79x
  • Net cash provided by operating activities for the trailing 4-quarters ended March 31, 2021 of $242.1 million, 32.8% higher than the prior year period
  • LTM Cash Flow Available for Capital Allocation for the trailing 4-quarters ended March 31, 2021 of $219.9 million, 51.8% higher than the prior year period
  • Raised $500 million under First Lien Term Loan at LIBOR + 200 and repaid borrowings under First Lien Revolver
  • Formed a joint venture with Orion Advisor Solutions that will add cash and credit solutions and related services developed by Focus Client Solutions to Orion's WealthTech platform.

But shares fell about 2% to $46.64 today, below the secondary offering price of $48 in February. The Nasdaq, on which it trades, was up 0.37%. See: Focus Financial shares drop after hours as secondary offering gets filed that mostly pays off KKR and Stone Point without generating M&A capital

Focus reports GAAP net income of $2.5 million compared to $34.0 million in the prior year quarter, but its GAAP basic and diluted net income per share attributable to common shareholders is zero on a rounded basis down from $0.43 for the same period in 2020, it adds. 

The good news is that the RIAs owned by Focus lived up to their end of the bargain, Adolf says in the release.

"Our partner firms generated outstanding results, delivering exceptional service to their clients and growing their businesses despite the unsettled macro backdrop."

Focus will need to rely on partners because its cash makes M&A growth more difficult, Crow adds.

"It’s also fully encumbered: Net leverage is about 4-times.  Cash on hand to do acquisitions is 3% of their total market cap – not enough to move the needle," he says. 

Committed

That net leverage will not budge much, but partner firms will produce more growth in the future, adds Shanahan in the release.

"Our net leverage ratio was 3.79-times as of March 31, and we remain committed to our net leverage ratio range of 3.5-times to 4.5-times," he said.

"The excellent performance of our partner firms, together with our sustained M&A momentum and further build-out our value-added offerings all create levers of future growth for our partnership."

It may be enough to keep the stock buoyed in its current range, Crow says.

"It's fully priced," he says. 

"Total market cap (equity plus debt) is about $4.8 billion, including equity of $3.3 billion and debt of over $1.5 billion (net of cash).  See: Focus Financial CFO admits firm needs to 'de-lever' and assures analyst $14-million splurge for posh new offices won't soon repeat

"Run-rate annual revenue is $1.6 billion and Focus’s highly-adjusted run-rate annualized EBITDA is $400 million.  So it’s priced at 3[times revenue and 12-times adjusted EBITDA.  And let’s not forget that the per share price is nearly three times what it was a year ago."

 


Related Moves

With RIA valuations ticking down and successions ticking up, Focus Financial deep sixes 'drunken sailor' pause, forgoes buyback plan and adds a CEO

CEO Rudy Adolf sees a 'softening' in multiples after a couple of frothy years when CI Financial dominated headlines and big RIA deals

August 13, 2022 – 12:39 AM

New-look Hightower hires Abby Salameh and takes a 'Hurley-style' stake in a $4.8 billion DFA RIA

The Chicago roll-up gets a chief marketing officer who gets RIAs as it becomes part-Dynasty, part- Fiduciary Network in adopting a very 2019 deal structure for LourdMurray

May 3, 2019 – 7:11 PM


Mentioned in this article:

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




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