Focus Financial Partners Touts Billion-Dollar War Chest for RIA Acquisitions

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February 18, 2021

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Focus Financial Partners’ expectations for a pandemic-related slowdown in its business of buying majority stakes in registered investment advisors were belied in 2020 by rising markets and a continuing appetite for its service and capital sector from independent firms, the company said on Thursday.

Focus, which posted a 14.5% fourth-quarter revenue gain and a 20.7% jump in adjusted profit, has a $1 billion war chest to continue doing deals following 12 months that CEO Rudy Adolf characterized on an earnings call as “The Year of the Drunken Sailor.”

“We see many attractive opportunities to deploy capital,” he said assuring analysts that Focus will maintain price discipline despite stiff competition from other RIA acquirers.

After forecasting in the early days of the Covid-19 pandemic that expected deal completions would be delayed, Adolf trumpeted Focus’s 25 M&A transactions in 2020, including seven partner firm acquisitions and 18 “tuck-in” mergers of smaller firms into existing partner firms. 

Focus completed 15 transactions in the fourth quarter, including five partner deals. It ended 2020 with 71 partner firms, and stood by its forecast of 100 partner firms by 2025.

Adolf and Chief Financial Officer Jim Shanahan said Focus will “soon” be adding another partner firm with about $5 billion in client assets. They did not identify the firm.

Focus, which went public in 2018 but is controlled by private equity firms KKR and Stone Point, stood on the sidelines as competitors paid double or triple the multiples of what they were worth, Adolf said, repeating his cost-focus mantra from previous calls. 

“These are obviously shareholder value-destroying transactions,” he said. 

Focus’ 2020 acquisitions were made at prices “basically constant” with what it paid in 2019 and 2018, or slightly lower, he said, and its average return on new partner deals remains around 25%.

The company’s billion-dollar reserve for acquisitions includes cash-flow generation and an unfunded $650 million revolving credit facility, and Shanahan said Focus expects to honor its commitment of moderating its net leverage ratio.

Focus ended 2020 with about $1.5 billion of debt, including bank lines, and $65.9 million of  cash and cash equivalents. Some analysts have warned that its stock is overvalued relative to its high financial leverage, but Adolf shrugged off the criticism.

“We’re in a rock-solid position and I’m very confident that [20]21 is going to be a very good year again,” he said. “It’s not like we’ve got this $1 billion sitting in our checking account and it’s burning a hole into our pocket….This is capital we can draw on if and when we need it.”

Focus ended 2020 with $250 billion in assets under management at its partner firms, up from about $200 billion when it last disclosed AUM in November 2019.

Focus booked $379.7 million in revenue in the fourth quarter of 2020, up from $331.5 million in last year’s third quarter and from $340 million reported in the year-earlier fourth quarter. Its net income, excluding tax adjustments, rose 20.7% from the year-earlier period to $57 million. On a per share basis, adjusted net income rose 14.3% over the same period.

The company’s existing partner firms contributed 63%, or $24.6 million, of its year-over-year quarterly revenue growth, reflecting higher fees on rising markets and the addition of new advisors to their teams. The remaining $14.8 million of revenue gain came from Focus’s 2020 partner acquisitions.

While favorable market conditions helped wealth management firms industrywide, Focus said it also booked “better-than-expected” revenue from its family office/entertainment industry clients, many of whom are beginning to rebound from last year’s pandemic-influenced shutdown.

Shares of Focus were changing hands at $54.99, up 3.74%, in afternoon trading on Nasdaq.