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Focus Financial's revenue gains keep spotlight on RIA proxy

Focus Financial Partners solidified its position as a closely watched surrogate for the RIA industry in the public markets after a quarter marked by notable acquisitions and impressive revenue growth.

Focus, which owns equity stakes in a collection of 58 advisory firms, went public in July. The company was involved in one of the biggest M&A deals of the summer — partner firm Buckingham Family of Financial Services diversified its portfolio by acquiring Loring Ward Holdings, a major turnkey asset manager provider, which has over $17 billion in assets under management.

Focus’ revenue grew 31% to $236 million for the third quarter ended Sept. 30, compared to the same period last year. The New York-based aggregator also reported a net loss of $39 million, but its adjusted net income was $34 million, which represents a 43% increase from the third quarter of 2017.

“Focus is driving attention to the market,” says industry analyst Chip Roame, managing partner, Tiburon Strategic Advisors. “It is helping analysts and buy-side investors understand organic and acquired growth, and will make it easier for other RIAs to go public.”

Focus Financial's Q3 revenues

Focus has added eight new partner firms since January, including three in the summer. But the Loring Ward deal bringing a major TAMP drew the most attention from industry executives and analysts.

“The Buckingham and Loring Ward transaction is the most interesting and exciting deal in a long time in this space,” says industry veteran Karl Heckenberg, a Fiduciary Network board member and special advisor at Emigrant Bank. “I think the industry will look back at this deal the way the asset management industry viewed BlackRock buying Barclays Global Investors and how transformative it was for BlackRock.”

In a conference call with analysts, Focus CEO Rudy Adolf said Focus expects Loring Ward’s TAMP assets to gradually migrate into Buckingham, resulting in “highly attractive economics.”

Adolph also expressed confidence in Focus’ ability to continue its strong M&A performance.

Focus expects Loring ward’s TAMP assets to gradually migrate into Buckingham.

Around 500 RIAs in the U.S. were “suitable targets” to be Focus partner firms, Adolf claimed, while another 5,000 smaller firms would be “a good fit” as sub-acquisitions for existing partners.

The aggregator’s $650 million credit line gives it “tremendous firepower” and “an attractive currency” to persuade more RIAs to join Focus, Adolph said.

But the earnings report and analyst’s call also highlighted a number of questions and concerns surrounding Focus.

Most notably, many industry executives and analysts remain skeptical of Focus including indirect acquisition activity undertaken by subsidiary level firms as organic growth.

Focus reported organic revenue growth of nearly 10% for the third quarter, compared to 14% growth for the same period last year. “We don’t have real numbers to show ‘same store sales,’” says Matt Crow, president of the research and consulting firm Mercer Capital.

While Focus reported more than 30% year-over-year quarterly revenue growth, Crow noted that the firm “bought two-thirds of that through direct acquisitions and some of the remaining third was growth from acquired subsidiary acquisitions conducted by existing partner firms.”

“Focus wants to be judged on adjusted earnings, not reported earnings,” says analyst Matt Crow.

Focus’ insistence on emphasizing adjusted EBITDA and net income, which are not compliant with generally accepted accounting principles [although allowed when explained], has also raised eyebrows.

“Focus wants to be judged on adjusted earnings, not reported earnings,” Crow says. “I think the market will eventually run out of patience with that. This report includes $92 million in adjustments for the third quarter to take a reported loss of nearly $39 million and turn it into adjusted EBITDA of $53 million. I don’t doubt the veracity of the numbers — it’s just whether or not one is willing to accept that some expenses, such as those associated with equity compensation or acquisitions, are really addbacks for a firm with their business plan.”

Focus' $39 million loss in the quarter, Crow added, "is both a function of ongoing operations as well as the cost of implementing their acquisition strategy."

Analysts were also concerned about the effects of market volatility and a possible market downturn on Focus’ business.

In response, Adolf said he “liked market volatility — it’s a good thing” because it shows the value of fiduciary advice as “[compared] to other sectors.”

And even though 75% of Focus’ revenues are correlated to the market, Adolf maintained that a market downturn would have “no major impact” on the company’s revenues.

Focus’ partner firms are more in the advice business than the asset management business, Adolf said. He also cited the high degree of client retention Focus experienced during the recession in 2008.

Is Focus really insulated from unfavorable markets?

“Time will tell,” Crow said. “But we wonder if the preferred claim on partner firm earnings will create a strain in bad markets which compromises Focus. And even balanced portfolios suffered in the 2008-09 downturn because of high levels of asset correlation.”

In any case, Focus’ M&A business would be in a position to benefit from a downturn, Adolf argued.

“Once the dust settles,” he explained, “there will be some very attractive major opportunities that we are uniquely positioned to take advantage of.”

The current market volatility, however, has taken its toll on Focus’ stock. On Nov. 13, the stock was trading at $33 a share, having lost one-third if its value from a 52-week high of over $49.

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