Does The CI Financial IPO Make Sense?

Charles Paikert New York April 19, 2022

Does The CI Financial IPO Make Sense?

This news service casts an eye over the recent splurge of wealth management acquisitions by Canada's CI Financial, to ask about the strategy, the idea of holding an IPO of its US wealth arm, and the valuations of these businesses.

Can CI Financial disrupt the RIA M&A market again?

In just over two years the Canadian asset management giant has steamrolled its way to the top rung of the RIA business by buying nearly three dozen US advisory firms with over $130 billion in assets – often paying premium prices to outbid rivals.

Besides gaining a seat at the head of the M&A table, CI’s overly generous checkbook has contributed to a sharp rise in valuations for large RIAs, much to the consternation of competitors.

Now CI plans to file an initial public offering for 20 per cent of its confederation of wealth management firms in the hopes of “unlocking” the inherent value of the firms which CI believes hasn’t been reflected in the parent company’s floundering  stock price.

Will the strategy work?  And what impact will it have on the M&A market?

CI CEO Kurt MacAlpine argues that the company trades too much like an asset management business and not enough like a wealth management business. CI Financial’s price-to-earnings ratio is around 5.5x, while LPL Financial’s PE ratio is roughly three times as high, MacAlpine points out.

Valid comparison?
But that may be an apples-to-oranges comparison.

LPL is the country’s largest independent broker-dealer, with more than $1 trillion in AuM, $6 billion in revenues, 17,000 advisors and a three-decade long track record.

The advisory firm most like CI, of course, is Focus Financial, a holding company of advisory firms which went public in 2018, began trading at $35 a share and now trades at around $43 per share, but at multiples well below comparable firms in the private market.

Nor has Silvercrest, a higher-end wealth and asset management firm targeting UHNW clients, been a world-beater. In fact, since Silvercrest went public in 2013 at an offering price of $12, it is now considered by many to be a micro-cap stock, trading at around $21 per share.

Ready for prime time?
CI’s plunge into public markets may be hasty, according to some industry observers.

“It does feel a bit premature,” said Mark Tibergien, the former CEO of Pershing Advisor Services. “They obviously need equity to ensure their debt/equity ratio is in line. However, I think investors like to see material equity investments in a company as a means to fund growth not balance the financial statement.”
The minority status of the public stock also raises questions in the aftermarket, Tibergien said. “We know that public shares are valued as minority interests, not as control positions, so there already is a built-in discount based on that. They do get a liquidity premium but that may not offset the minority share status.”

“This industry is not ready for a public company,” said Rush Benton, senior director of strategic growth for Captrust, speaking at an M&A webinar sponsored by Advisor Growth Strategies. “Firms that have gone public don’t trade particularly well. It’s better to be private in this business.”

Companies such as Merrill Lynch, now owned by Bank of America, and Morgan Stanley come to mind when most people think of publicly traded wealth management firms, Benton said in a follow-up interview with Family Wealth Report. But those firms are “much more diversified than pure RIAs,” he pointed out.

“A holding company comprised of a collection of small independent RIAs, such as Focus Financial, just isn't widely understood yet,” Benton maintained. “The industry will get there eventually, but my view is that it will take large firms that are single operating companies, as opposed to holding companies, before the market fully values the RIA space.”

In addition, CI’s lack of full integration to date may prove unpalatable to the public markets. “We’ll see how the market values a firm that is unintegrated,” Benton said, who competes with CI for deals. “My guess is not particularly well.” 

Large debt, pressure to cross-sell?
CI is also counting on the approximately $300 million of free cash flow currently generated by its RIAs to help pay down the massive debt the Canadian company has accumulated in order to buy the US wealth managers in the first place.

But what if the gush of cash flow slows down – no longer such a remote possibility in an extremely volatile world?

“CI's sky-high multiples are predicated on the aggressive sales of CI's financial products into the acquired RIA's client base,” one veteran industry executive with an extensive M&A background said. “If the purchased RIA clients buy the CI products, then the cash flows may be there, if not, then it's dead on arrival. A market downturn would only increase the pressure to cross-sell.”

No more secrets
Going public also means becoming more transparent.

How much of a premium is CI paying? Now that the market gains are receding, how much organic growth do the firms generate? Interest rates are going up – what’s the debt load? Are the firms actually integrating? Is there synergy and scale?

“This IPO is fraught with risks, most notably publicly disclosing the math CI is using to justify the purchase price premiums they are paying,” said industry consultant Tim Welsh, CEO of Nexus Strategy. “Many on Wall St may see that leverage, over-confident assumptions and balk at a rich IPO price, leaving CI with a ‘ho-hum’ outcome. And because the premiums they are paying are ‘perfectly priced,’ with little room for error, any prolonged stumbles in the markets will expose their leverage and spell doom.”

Indeed, some industry competitors are already downplaying the significance of CI’s IPO.

“It will have zero impact on the market,” Marty Bicknell, CEO of Mariner Wealth Advisors said at the M&A webinar. “I haven’t spent a minute thinking about it. It’s not going to affect our flow of [deal] opportunities at all.”

Of course that may be wishful thinking coming from a rival buyer.

A successful IPO means that CI now has additional currency for continuing to pay up for acquisitions. “Not only can they offer cash, they can also offer stock as well to sweeten deals,” Welsh noted. “It could be a very powerful differentiator in the professional buyer marketplace.”

In an ideal world, a company such as CI would have begun to implement its plan to integrate the firms it acquired, detailed how synergy would be achieved, and created a public brand, Tibergien pointed out.

But he cautioned against underestimating any of the M&A consolidators, including CI. “The RIA business has a lot going for it: growth, significant margins, a service that is valued by clients and an offering that is much in demand,” he noted. “On the risk side, the talent shortage is acute, brand differentiation is harder to come by, and no firm has achieved true dominance or brand presence yet.”

Unquestionably, the CI Financial IPO is “another valuation marker for the RIA space,” as practice management consultant John Furey, founder of Advisor Growth Strategies put it.

But should it be happening at all?

Worth the hassle?
Noted M&A valuation expert Matt Crow, president of Memphis-based Mercer Capital, told RIABiz that the IPO “feels like financial engineering to me and the net present value of financial engineering is usually zero.”

Crow went on to question whether the “marginal valuation” and attention the public offering attracts justifies additional fees and higher compliance costs. And is all that hassle worth it, he asked, “just to restructure their balance sheet?”

Many privately held businesses are valued at a higher multiple than public companies, and avoid the administrative costs, management requirements and quarterly earnings reports that a public company requires, Benton noted.

“With the incredible amount of private equity capital seeking to invest in our industry, I have to wonder why a firm would choose an IPO in this environment to satisfy a capital need,” he said.

Indeed, large RIAs, including Mariner, Carson Wealth, and Savant Wealth Management have all been valued at multiples higher than 20 times EBITDA in the private market. 

“Publicly traded RIAs are going for less and they are beholden to the markets,” Furey observed. “If there is capital available in the private markets, it may make sense to stay private with capital markets as the final liquidity pool.”

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