Focus Financial's home run: Aggregator PE deal worth $2B

It looks like RIA aggregator Focus Financial Partners has hit a home run.

Two top tier private equity firms, Stone Point Capital and KKR, are set to acquire a majority stake in the 11-year old New York-based company, one of the industry's leading consolidators, valuing Focus at approximately $2 billion.

"This is a real coup for [Focus founder and CEO] Rudy Adolf and his team," says Corey Kupfer, managing principal of Kupfer & Associates, a New York-based law firm with a specialty in RIA transactions. "Stone Point and KKR are major players, and would not be making this investment unless they expect significant growth by Focus over the next three to five years."

Focus' valuation has increased about 30% annually since its last major stock sale four years ago, when private equity firm Centerbridge Partners valued Focus at $750 million, notes M&A consultant and investment banker David DeVoe.

'SMARTEST OF THE SMART MONEY'
"The deal is the smartest of the smart money voting for the independent advisory space and the aggregation business model," DeVoe says. "Focus began with venture capital, moved up to mid-sized private equity and is now at the blue chip level."

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Selling shareholders include Centerbridge and Focus’ other private equity investors, Summit Partners and Polaris Partners, as well as "certain wealth management affiliates and employees," according to a Focus press release. Those sellers stand to profit significantly from Focus' increased valuation. KKR and Stone Point are set to acquire a 70% ownership stake in Focus.

Focus’ senior management team "will continue to lead the business and each will remain a significant shareholder," the statement continued.

INSIDERS GIVE THUMBS UP
Top executives at two major Focus firms applauded the move.

The deep pockets and resources of Stone Point and KKR, should be a "catalyst for growth," for Focus, says Colony Group president and CEO Michael Nathanson. What's more, shareholders appreciate "the opportunity for liquidity" that comes with the recapitalization, Nathanson says.

The Boston-based Colony CEO says he hasn't decided how much of his equity stake, if any, he would sell. "The question," Nathanson says, "is: Do I take money off the table for an investment that has done extremely well for me?"

Adam Birenbaum, CEO of St. Louis-based Buckingham Strategic Wealth, also expressed satisfaction as a shareholder.

Focus shareholders appreciate "the opportunity for liquidity, " says Colony Group CEO Michael Nathanson.

"This is the third time Focus has provided a liquidity option, each time at a significantly higher price," Birenbaum says. "Rudy has delivered on his commitment to his investors time and time again."

PRESSURE ON COMPETITORS?
Focus' track record for attracting ever larger capital investments and allowing shareholders to monetize their stock is expected to put pressure on its M&A competitors.
"It will be interesting to see what Focus’ competitors do in light of this move," Kupfer says. "Will they feel the need to raise additional capital or look to partner with similarly statured investors to be able to continue to complete with Focus?"

One of those competitors, Brent Brodeski, chief executive officer of Rockford, Ill.-based Savant Capital Management, believes the Focus deal is "good news" for the RIA industry.

"It proves that sophisticated investors see the upside that is ahead of us," Brodeski says. "It also shows that there is potential liquidity to the handful of super RIAs that are emerging."

Focus did not go public, as the firm had indicated it would do last year.

But Brodeski says the aggregator model is not for everyone.

A number of potential sellers were "uncomfortable about taking illiquid, non-dividend paying Focus stock in exchange for their private dividend paying businesses," he maintains. "I don't know if this deal solves for that."

IPO DILEMMA
Indeed, Focus did not go public, as the firm had indicated it would do last year.

Not issuing public stock and instead choosing to remain private was "maybe the most interesting thing about the Focus transaction," according to Brodeski.

He suspects that Focus concluded that going public might have impeded its growth prospects.

"If the market liked what they saw and rallied behind Focus' story, they could have benefited from going public and been able to use their stock to fund more acquisitions," Brodeski explains.

"But if the market decided it was not excited about Focus, or RIAs in general, their stock price could suffer. If that was the case it would have been expensive, and likely imprudent, to issue new stock at depressed prices to fund new acquisitions. "

Another possible exit strategy is a sale to a large financial service firm, possibly based overseas.

Because there are so few publicly-traded wealth-oriented firms, any company working with independent advisers wanting to go public "are going to be folded into the broader asset management industry, " says investment banker Liz Nesvold, managing partner of New York-based Silver Lane Advisors.

"But wealth management is an entirely different animal," Nesvold notes. "Until somebody proves that wealth management is different than asset management, it makes a pure play wealth management platform difficult to stand out in a public arena."

WHAT'S NEXT?
Nonetheless, private equity firms have an investment timeline, and a future Focus IPO remains a possibility, industry observers say.

Other possible scenarios for an exit strategy and monetization include a sale to other private equity firms or to a large financial service firm, possibly based overseas.

"Going forward, it will be very interesting to see who is really calling the shots" says attorney Corey Kupfer.

In addition to its U.S. 45 U.S. partner firms, Focus has pushed to expand internationally, making deals with advisory firms in Australia, Canada and the United Kingdom and has a joint venture in China.

The private equity transaction is expected to close this summer.

UNANSWERED QUESTIONS
In the meantime, the industry will be watching to see how certain details of the pending deal will be worked out, says Kupfer.

The deal allows Focus’ current investors and what the company would only characterize as "certain" wealth management affiliates and employees to monetize their investment.

But, Kupfer points out, "it is unclear right now at what level —for example, are the existing investors cashing out in whole or in part?"

Noting that Stone Point and KKR bought a majority stake but say current management is staying in place, "it will be very interesting going forward to see who is really calling the shots," Kupfer says.

"What contractual decision-making rights and ongoing employment protections will management have now that they are minority owners?"

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