Focus Financial, the New York-based advisory firm amalgamator and one of the few publicly traded RIAs, reported $337.1 million in revenues for the first quarter this year, an increase of 29.7% over the same period last year, beating analysts’ consensus expectations of 67 cents per share by seven cents.
The stock jumped on the news, but it came with a warning: Executives said going forward, the coronavirus epidemic would hurt the firm’s growth strategy in the short term, making Focus one of the earliest indicators that the coronavirus pandemic is taking the wind out of the bull market for independent advisory firms.
Focus Financial’s growth strategy is acquiring RIAs, many of which acquire their own RIAs, making Focus a proxy for the overall state of mergers and acquisitions.
Before the coronavirus shut down many businesses, the firm completed four deals, and added one new partner firm—Nexis Investment Management—on February 1, according to the firm.
But Adolf said the pipeline for new acquisitions was likely to slow, if not stop, over the next several months, depending on how the pandemic plays out.
“Given the market volatility, industry deal activity has standardly slowed,” said CEO Rudy Adolf. “we currently anticipate that M&A activity will be muted in Q2 and most likely in Q3 as well.”
Revenue is also anticipated to be impacted: Over 70 percent of Focus Financial’s revenue is correlated to the market, Adolf said, and billed in advance—so the true impact of the first quarter volatility won’t be felt until the second quarter results.
Adolf said revenue would likely fall to between $290 million and $300 million in the current quarter, adding that the company likely wouldn’t be able to reach its 20% growth target in the near future: the company expects organic revenue growth to be between -5% and -7%.
Since the pandemic axe dropped in late February, companies have largely been guarded about the effect on the M&A market. Some, like Minneapolis’ SkyView Capital, which connects RIAs with capital to grow, noticed an uptick in interest for M&A capital.
But increasingly, there are signals deal activity among RIAs is hitting the brakes.
In an interview Friday, Dave DeVoe, founder and managing partner of DeVoe & Company, the San Francisco-based consulting firm and investment bank, confirmed that in light of data which first became available last week, “Q2 (M&A) is starting with a whimper. April was a very light month, with only 7 transactions announced. This is an extension of the weak March that ended Q1. Q1 steadily declined each month from 18 deals in January to 6 in March.”
Adolf said he expected deal activity to pick up again in the fourth quarter, depending on how deep and long the pandemic persists. “We believe that a large percentage of these transactions in our pipeline will ultimately sign and close as the rationale for the transaction has not changed. The most important takeaway is not a couple of quarters of slower activity, but rather the size of the opportunity in the 12 to 36 months following this crisis.”
Adolf also pointed out that there are 10 times as many acquisition opportunities as existed more than a decade ago, so the outlook should continue to be bright once M&A gets off life support: “Keep in mind after 2008-2009, your focus today is 10 times. You're 10 times the size of what we were in 2008-2009. It can be another 10 times but clearly there is a tremendous opportunity.”
When and if it does recover, Adolf said that that Focus will be ready and waiting, with “almost $500 million in firepower, $233 million in cash, and $250 million in the revolver” to deploy on more takeovers.
Adolf said that “many of our partner firms are viewing it as a larger and more compelling opportunity post-2008 and 2009” and chose to emphasize that new referrals to his firm’s advisors have been going up since the pandemic debuted a few months ago, although he and Shanahan declined to attach a certain number to it.