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Rudy Adolf, CEO of Focus Financial Partners.
Focus Financial CEO Rudy Adolf

Focus Financial Reports Growth, Strong M&A Pipeline in First Earnings Call

Leadership said that they expected a successful IPO would spur interest from would-be sellers of advisory firms, though they declined to offer specifics.

Focus Financial Partners, an acquirer of registered investment advisory firms, reported very strong growth during its first-ever earnings call on Wednesday and a strong pipeline of mergers and acquisitions—what Founder and CEO Rudy Adolf called the company’s “bread and butter.”

While the company reported a net loss of $7.7 million in the second quarter, total revenue in the quarter increased $74.2 million, or 47.2 percent year-over-year, to $231.4 million. The spike in revenue, the vast majority of which comes from fees paid by Focus Financial’s subsidiary wealth managers, helped grow non-GAAP adjusted net income by 37.6 percent to $29 million, or 40 cents per share.

In the hours following the earnings call, Focus Financial was trading above $42, a new high.

During Wednesday’s earnings call, Adolf said a combination of organic and inorganic growth lead to the second quarter results. Focus Financial added three subsidiary advisory firms last quarter that contributed a combined $28.3 million in base earnings. Meanwhile, the subsidiary firms it has partnered with have also been active dealmakers, acquiring or merging with other firms in what Focus Financial defines as organic growth.

Most recently, the Focus Financial-affiliated Kovitz Investment Group in Chicago, an RIA that manages more than $3.3 billion, announced a merger on Tuesday with AFAM Capital, a decades-old firm that started with The Prudent Speculator newsletter and grew into an asset management business that now has more than $950 million in AUM. Adolf called the deal “a perfect microcosm” of the company’s business model during Wednesday’s call.

Focus Financial now has 58 partner firms that account for approximately $653 million of recurring annual revenue, Adolf said. The company expected that the successful initial public offering last month would spur interest in the firm and that expectation became a reality, he added.

Focus Financial’s IPO raised more than $564 million after associated expenses. It ended its first day of trading up 13.8 percent or $37 per share on Wednesday, squarely in the middle of the price range it estimated in its filing for the IPO.

Sell-side analysts asked about the projected number of M&As to occur this year, but Adolf and Focus Financial CFO James Shanahan declined to share any details.

However, Adolf said that the pipeline for subsidiary firm deals is “at least as strong as the holding company transactions” and that while the company helps partner firms execute about 15 to 20 acquisitions per year, Focus Financial expects that number to increase in lockstep with the number of subsidiaries. About two-thirds of wealth managers partnered with Focus Financial have engaged in an acquisition, he said.

Focus Financial used proceeds from its IPO to pay off a $207 million second lien term loan and pay down approximately $185.5 million of its first lien term loan, reducing it to $803 million. Amendments on the company’s debt tied to the IPO reduced interest on the first lien term loan to 4.75 percent and increased the borrowing capacity of its revolver facility from $250 million to $650 million.

The remaining proceeds will be used to buy back stock and for general corporate purposes, including potential acquisitions.

Mike Carrier, an analyst at Bank of America’s Merrill Lynch, said during the call “it does seem that operationally [Focus Financial] can provide certain incentives to the partner firms” and asked if those benefits would be passed to the holding company.

“Absolutely,” Adolf said. “Our model simply wouldn’t work if it was purely a financial model … what we are also bringing is, of course, tremendous purchasing power.”

In response to a question about the company’s investment in SmartAsset, Adolf said it was a small investment and made Focus Financial one of the technology company’s largest shareholders. He said the investment was less about a monetary return and more about the expertise the companies can share with one another for the benefit of its advisors.

“Quite frankly we are very impressed with the initial results,” Adolf said, referring to Focus’s use of SmartAsset’s latest client-lead generation tool.

In June, the company led a $28 million fundraising round for SmartAsset, which plans to use the investment to further develop its fast-growing, client-lead generation tool for financial advisors. Javelin Venture Partners, TTV Capital, IA Capital, Contour Venture Partners, Citi Ventures were those who took part in the round of funding.

Focus Financial is the only firm of its kind that is publicly traded, although there are aggregators of wealth management firms relatively similar in size in the market. HighTower Advisors, a Chicago-based firm with more than $42 billion in AUMs, began as a company that recruited wirehouse brokers but changed its focus to acquire existing RIAs. It was rumored that HighTower might eventually seek an IPO before private equity firm Thomas H. Lee Partners agreed to buy a significant stake in the company. It’s not clear how much revenue HighTower generates, but United Capital, another private, large RIA with more than $20 billion in AUM, expected to pass $200 million in revenue before the end of 2017—less than what Focus Financial reported in just the second quarter.


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