Focus earnings rise in Q3 due to RIA M&A deals

Focus earnings soar on impact of 24 RIA deals this year

November 4, 2022 2:40 PM

Falling stock values hurt the growth of Focus Financial Partners in the third quarter, but its substantial ranks of new and existing registered investment advisors buoyed the firm's results.

Growth at the 87 partner RIAs owned by the New York-based firm, a serial acquirer of advisory practices, slowed to 3.4% in the period, according to the firm's Nov. 3 earnings statement. That's a huge dropoff from 28.8% growth in the third quarter of 2021 in "revenue related to partner firms." That latter metric is different from the topline across all of Focus, because it covers only the quarter-over-quarter rise in revenue attributable to its RIAs operating under their own management teams. Focus refers to the rate as "quarterly organic revenue growth" but doesn't use that term in its traditional sense.

The number has reached an average of 15.7% over the past four years. After tumbling in the third quarter, the firm predicts growth will be negative in the fourth.

At least two dozen deals struck by Focus so far this year are helping to cancel out the negative impact to the firm's bottom line, though. A year ago, the firm had 11 fewer partners. In the third quarter, earnings shot up because of "our decentralized approach to partnering with entrepreneurs" ensuring that the company is nimble "during an exceptionally volatile period in the capital markets," CEO Rudy Adolf said in a statement.

"We are very pleased with these results as they reinforce our continued disciplined execution and that of our partner firms, which has contributed to stability in our fundamental results despite the market backdrop," Adolf said. "This year will be one of our strongest for M&A activity overall, as well as one of our most active years for mergers on behalf of our partner firms."

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To see the key takeaways for advisors and other wealth management professionals from the firm's third-quarter earnings, scroll down the slideshow. For analysis of the firm's last three quarters, click here, here and here.

M&A deals

The company has completed or agreed to 24 deals, with five of them ushering in new partners and the rest tuck-in deals that fold advisors' practices into existing Focus firms. In 2021, Focus bought 38 advisory practices.

The company tacked on $21 million in annual revenue and $7.3 million in base yearly earnings through two recent transactions, one that closed on Nov. 1 and a second that will be completed next year. Venice, Florida-based FourThought Private Wealth manages $1.1 billion in client assets. The other incoming firm, Needham, Massachusetts-based Beaumont Financial Partners, has $2.7 billion.

Leverage

The ratio of debt to earnings before interest, taxes, depreciation and amortization, a key measure of profitability, remains a core metric for the firm as it seeks to stay between a target of 3.5x to 4.5x. If that ratio increases, interest and principal payments on the debt could slash Focus' earnings and cash flow over time. The ratio climbed 44 basis points year over year to 3.98x in the third quarter. Over the next three months, the company predicts the measure to rise to 4.25x.

Bottom line

In a display of the impact of more than 250 acquisitions by Focus since 2006, earnings soared in the third quarter despite the continued slump in stock values. Focus earned net income of $38.3 million on revenue of $519.9 million for the period. Revenue surged by 14% year over year thanks to the new partner firms that Focus has acquired in the past 12 months and growth in wealth management fees from its existing base. Net income jumped all the way up from $1.8 million in the year-ago period.

Outlook

With a forecast of negative 10% in growth for the partner firms for the fourth quarter based on slumping stocks, Focus expects its overall revenue to slip to between $505 million and $515 million before performance fees. The firm's adjusted EBITDA margin will tick down to roughly 23% from 24.8% in the third quarter, according to Focus.

Remark

"We expect that the resiliency and stability of our results will continue to be evident as we navigate the current market turbulence," Chief Financial Officer Jim Shanahan said in a statement. "We are executing well against our M&A pipeline, and we remain confident that we will weather the current challenges and emerge well-positioned to capitalize on the forward growth opportunity within our industry."