This news service explores the reasons for Focus Financial de-listing from the stock market and the implications of its strategy.

Now that Focus Financial is going private, what will CI Financial do?

Serial acquirer Focus, led by financial engineer Rudy Adolph, has entered into a “definitive agreement” to be acquired by private equity firm Clayton, Dubilier & Rice in an all-cash transaction valued at an enterprise value of over $7 billion, or $53 a share.

Focus went public less than five years ago as the epitome of a rare “pure play” registered investment advisor public offering. The dramatic U-turn following the failure of the stock price to gain traction is bound to raise questions about the viability of the public markets as the optimal situation for advisory firms.

The most closely watched IPO entrant is the collection of RIAs owned by Canadian asset manager CI Financial. Despite industry skepticism about the move – and acknowledging Focus’ intent to go private – CEO Kurt MacAlpine last week reiterated the company’s intent to spin out its RIA business into the public markets.

Higher valuation?
Based on Focus’ valuation of approximately 12x enterprise value/EBITDA, CI may command a higher targeted valuation multiple, according to Scott Chan, analyst for Canaccord Genuity.

CI’s RIA offering won’t have Focus’ high debt level, Chan noted. He also cited the “above-average growth characteristics” of the advisory firms, as well as a stronger EBITDA margin profile, despite “limited cost and revenue synergies” from the disparate RIAs, which have not yet fully consolidated. 

CI also appears to be trimming the fat from its RIA operations, following the departures of two high profile (and highly paid) CEOs from advisory firms in Chicago and New Jersey.

Meanwhile, the industry continues to grapple with the implications of Focus’s big move.

The deal centers on private equity unlocking value in RIAs, said investment banker Steve Levitt, managing director of Park Sutton Advisors. 

Changes coming
“Much as the sale of United Capital to Goldman marked a clear inflection point in the wealth management industry, this deal represents another one,” Levitt said. “As the 800-pound gorilla and an early mover in the industry, Focus has largely been about fostering succession planning in the wealth management industry but [it has] not been around synergies and integration. We may see this changing.”

Clayton Dubilier or another private equity buyer is likely to consolidate Focus affiliates to achieve synergy and/or scale, Levitt said. “I can also see value unlocked through the exit of certain pieces over time,” he added.

This latest private equity investment – from a firm making its initial foray into the business – “is further validation of the aggregation of RIAs, which is fundamentally a good business,” said Mark Tibergien, the former CEO of Pershing Advisor Services.

Value questioned
Others industry executives thought Focus fell short, however.

“How did Focus’ strategy add value?” asked one executive who asked not to be identified. “It turned out to be an abject failure. The second generation at those firms will have no equity upside after the sale.”

A number of shareholders felt the price of $53 per share was too low, and “given the low probability of a higher competing offer,” William Blair equity research downgraded its rating of Focus to “Market Perform from Outperform.”

Focus maintained that the price was a “substantial value” for investors, representing an approximately 36 per cent premium for the company’s 60-day average weighted price as one day before the agreement to negotiate was announced earlier this month.

Stone Point Capital will retain a portion of its investment in Focus and provide new equity financing as part of the deal.