The Canada-headquartered financial group went on a big US wealth management buying spree three years ago. It is selling a stake in its US wealth group to a variety of investors. We delve into the strategy details.

Buying RIAs may have been expensive for CI Financial, but it appears that despite paying premium prices for more than two dozen high quality wealth management firms, the Canadian asset management giant has scored a sweet multiple arbitrage pay off.

After a massive buying spree of US firms that began in 2020 and resulted in more than $130 billion in AuM, CI is selling off a 20 per cent minority investment in its US wealth management business to a group of institutional investors, including the Abu Dhabi Investment Authority, Bain Capital, Ares Management funds, and the State of Wisconsin.

The deal represents an eye-popping multiple of 25.6 times EBITDA generated by CI in the first quarter, the Canadian firm said in a statement late last week.

The reported multiple is “very strong,” said John Langston, managing director for the investment banking firm Republic Capital Group. “It doesn’t answer the question of what they paid but it’s reasonable to believe CI did well here.”

While “the implied EBITDA multiple is not realistic in a public market forum,” CG Capital Markets analyst Scott Chan said in a note to investors, “we believe a double-digit EBITDA multiple is reasonable” in the private market.

The investing group paid CI approximately $1 billion, the company said in a statement, at a $6.7 billion enterprise value for the wealth management firm, known as CI US. The deal enterprise value exceeds all of CI’s total enterprise value, according to the company.

More selling ahead?
The deal appears to leave the door open for more selling to come.

CI shares on the Toronto stock exchange rose sharply on news of the deal and ended the day with a 20 per cent gain. And last month the company agreed to sell a minority stake in Boston-based Congress Wealth Management, a firm it bought in 2020, to Audax Private Equity. 

Noting that the parent company holds 80 per cent of the wealth management firm, CI “still has quite a bit of runway to sell incremental amounts,” said David DeVoe, principal of San Francisco-based RIA consultancy DeVoe & Co. CI was able to “attract strong investors,” Langston pointed out, and “certainly may” continue to sell off stakes.  

Industry observers noted that CI has been preoccupied for three years with buying and, more recently with selling, not integrating its newly-acquired firms operationally. “For the most part,” said Dan Seivert, CEO of RIA M&A specialists ECHELON Partners, “they are leaving their partner firms alone.”

What’s more, CI CEO Kurt MacAlpine is known for playing his cards close to his chest. Less than three months before selling off 20 per cent of CI US, MacAlpine denied that the company was considering a sale, telling analysts that “the path we’re pursuing is getting ourselves ready for our IPO.”

And in his investor’s note, Chan said CI’s majority stake allows the company to “wait for an exit strategy when the market presents itself to capitalize on a value that suits [CI and the new investment group].”
 

IPO no go
The deal further postpones – if not derails – the IPO, which has been viewed with skepticism since it was first floated last year. 

“We capitalized on an opportunity to accomplish in the private markets the objectives we sought in the IPO,” MacAlpine said in a statement. Those objectives, he added, included value creation for shareholders and an infusion of capital to “materially deleverage.”

The deal is structured as a convertible preferred equity transaction, according to the case study prepared by CI’s investment bank, RBC, reviewed and first reported by CityWire RIA, and does not require CI to have a liquidity event until 2030. 

“In the event that we’re not public in 2030, they do have a liquidation preference to ensure that they have an ability to get their capital back and return to their shareholders at terms that are fair and reflective of the value of the business,” MacAlpine said in a conference call with analysts and investors.

Given the uncertain IPO market, Chan told investors: “This transaction represents a very attractive alternative.” The deal supports CI’s US registered investment advisor business value proposition, he said, gives CI a higher valuation than comparable wealth management public companies and larger net proceeds to reduce debt as well as guaranteed capital.

Deal seen as boosting industry
Industry observers saw the deal as a boost for the entire RIA business.

“I think it’s a win for CI and for our space," Langston said. “It shows the appetite some of the largest groups have for our industry.” 

The reported valuation of CI’s wealth management business, according to DeVoe, “will help buttress the high multiples being paid for RIAs.” 

And getting access to more capital “to do more deals in these higher cost of debt markets is a great move,” added Seivert. “Reducing debt in the process also opens the door for better financial ratios and health and provides more flexibility in deal making.”