On a quarterly earnings call Thursday morning, Focus Financial Partners CEO Rudy Adolf and CFO Jim Shanahan shared lower-than-anticipated results for the first quarter, as the firm plans to go private via a sale to private equity firm Clayton, Dubilier & Rice. They declined to take questions or offer expectations for the second quarter, citing the anticipated deal with CD&R, expected to close in the third quarter.
The firm posted first quarter revenue of $557.5 million, up 3.9% year over year, but about $10 million lower than analyst expectations, according to SeekingAlpha.com. Focus had a GAAP net loss of $7 million in the quarter, compared with a $39 million gain in the year-ago quarter. GAAP basic and diluted income per share was -$0.01 and -$0.22, respectively, down from $0.45 and $0.44 a year earlier.
Non-GAAP earnings per share was $0.69, down nearly 30% from the prior-year period, missing analyst expectations by $0.07.
Focus attributed the increase in revenue to $19.2 million of revenue from new partner firms acquired over the last year. Organic revenue grew by 0.3% over the same time last year, slightly lower than expected and considerably lower than the industry average. Focus said an unexpected dip in non-market-correlated revenue was responsible for the underperformance.
Approximately three-quarters of revenue was correlated to financial markets, while the remaining quarter comprised revenues from family office services, tax advice and fixed fees.
Despite the lower results, executives touted the ongoing deal-making as a sign of financial health. Focus Financial Partners completed 12 deals in the first quarter of 2023, adding one new partner firm and facilitating tuck-ins for 11 existing partners. That compares with one new partner firm and four tuck-ins in the first quarter of 2022.
The company’s debt stood at about $2.7 billion at the end of the quarter, a net leverage ratio of 4.41 times, marginally higher than the expected ratio of 4.3 times.
According to Shanahan, this is due primarily “to the modest shortfall in our adjusted EBITDA versus our expectations.” The firm has indicated that a leverage ratio between 3.5 and 4.5 times is appropriate, given the acquisitive nature of its business model.
Adjusted EBITDA was $132.5 million, excluding expenses associated with the sale to CD&R—1.9% lower than expected and down from $135.1 million in the first quarter of 2022.
Shanahan said an undrawn term loan and revolver, along with cash, gives Focus more than $850 million available to continue making acquisitions.
Focus comprised 89 partner firms at the end of March. Another RIA has been added in the second quarter, in addition to three more subacquisitions.
“Year to date, our M&A activity has been strong,” said Adolf. “Our differentiated ability to source, structure and execute these transactions remains a core element of our value proposition to growth-oriented firms.”
The sale to CD&R is expected to close in the third quarter of this year, pending a vote underway by all noninterested stakeholders. Some investors who are being forced out of the company at a share price of $53 have expressed doubts they’re getting the best deal possible, but most expect the deal will be approved.
During a discussion on RIA M&A hosted by Advisor Growth Strategies, Managing Partner John Furey asked participants to weigh in on what the sale means for the industry.
“It says to me that public markets don’t understand the wealth management business,” said Marty Bicknell, CEO of Mariner Wealth Advisors. “Focus [is being] taken private at a significant multiple discount to the last dozen or so deals of similar firms. And that says to me that the market is not valuing the business.”
“I frankly think this experience will keep others from going public for quite some time,” he said.
“The market really views them as an M&A machine,” said Savant Wealth CEO Brent Brodeski, describing the firm’s acquisition model as financial engineering and saying it “was ahead of its time” a decade ago when there were fewer buyers on the scene.
“I think it’s really struggling right now,” he said, citing the growing number of sophisticated acquirers, high multiples and rising cost of capital.
“It’ll be interesting to see,” he added. “With private equity coming in, I suspect it’s going to end up being a very different story than what Rudy and his team have told their portfolio companies for years.”