Focus Financial Partners founder and CEO Rudy Adolf and Chief Financial Officer Jim Shanahan spent much of the RIA aggregator's second fiscal quarter earnings call Thursday addressing questions about the company’s leverage ratio, which has risen to over 4.05x as of June 2019, largely due to the New York-based merger factory’s string of 27 deals since July 2018.
Alex Blostein, an analyst with Goldman Sachs, wrote in a research report Thursday that “we see this as a solid set of results – with market benefits and deal momentum building into 3Q” but noted that “questions around the firm’s leverage are likely to linger.”
Adolf commented that “we are above 4 and are comfortable above 4. We don’t have an absolute number that we are running the business against, we make these tradeoff decisions between growth and leverage on a transaction by transaction basis.”
Adolf said that he would plow the company’s fast-growing acquisition-based revenues, which rose more than 30% year over year to hit $301.5 million for the quarter, into more M&A, and if he did not find attractive targets, would delever. He added that while the company might issue more equity (it went public in 2018) to support mergers, this is not in its immediate plans. “We don’t have current imminent plans to issue equity.” Focus would do so only “in the context of a specific set of transactions where we have a clear understanding that they are accretive,” he said. After recently closing a successful term loan for $350 million, Adolf said the company had dry powder for more acquisitions of about $500 million.
Meanwhile, Adolf said he is confident that Focus is “the only game in town” for registered investment advisor (RIA) M&A.
“We believe if you are running a successful RIA business and want to continue to run as an RIA … there is nobody else who can offer this value proposition.”
An RIA could “get swallowed up” by a “monolithic” purchaser “or may get private equity involved, which means significant loss of control.” By definition, he said, private equity is temporary capital, while Focus provides permanent capital. “This thing will be on the block again, which is unattractive.”
Meanwhile, he added, Focus pays in the “mid to high single digits” in terms of M&A multiples “almost independent of size.”
Karl H. Heckenberg, president and CEO of New York-based Emigrant Partners, and a Focus competitor, scoffed at the notion that Focus was the only game in town. “They are unmistakenly the largest and the most active” RIA aggregator, he said, but “[Adolf] knows that’s not true.”
Emigrant has invested in 16 independent RIAs with $46 billion in assets, he said. Unlike Focus, which typically takes a 40% to 60% stake in other firms, Emigrant acquires only minority stakes in the businesses it invests in.