Strategy

Does The CI Financial IPO Make Sense?

Charles Paikert, New York, April 19, 2022

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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.” 

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