Focus go-private deal praised amid industry's M&A slowdown

With the dust settling after the news that a private equity investor will acquire Focus Financial Partners, dealmakers are high on the move.

Clayton, Dubilier & Rice set an enterprise valuation for Focus — a New York-based acquirer that is parent to 88 registered investment advisory firms — at more than $7 billion as part of an agreement to purchase a controlling interest in the publicly traded firm for $53 per share, or a reported $4.1 billion. The parties announced on Feb. 27 that a special committee of the Focus board had approved the proposed merger with an expected close in the third quarter, pending a 40-day "go shop" period enabling the sellers "to actively initiate, solicit and consider alternative acquisition proposals."

Two other RIA acquirers and a pair of investment bankers and consultants said going private could help Focus take a longer-term view and become more valuable. As a private firm, Focus can take on more debt that will give it capital to deploy for future acquisitions of RIAs and tuck-in deals among existing partners, according to David DeVoe, the founder of DeVoe & Company, a consulting firm and investment bank.

"It's just another indicator of the independent wealth management space and how attractive it is to smart investors," he said in an interview, adding that the Focus deal represents "another vote with the checkbook that this is the optimal model."

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While most observers expect the deal to be completed on its existing terms, what's not immediately clear is how the firm's 5,800 financial advisors and other employees spread across 300 offices in five countries view the agreement. Of four Focus partner RIAs contacted by Financial Planning, one said they couldn't comment on the deal, and another said they were refraining from discussing it with the press on the advice of counsel. The two others didn't respond to emails. Neither Focus nor Clayton, Dubilier responded to inquiries, either.

Focus CEO Rudy Adolf and other company executives haven't spoken publicly about the deal beyond prepared statements from Adolf calling the transaction "an important evolution in the resources we will have to invest" and from George LeMieux, the chairman of the board's special committee, describing it as offering "the best path forward for Focus and all its stockholders."

"Partner firms and their clients rely on Focus to meet their core objectives, and Focus will remain well-positioned to serve these constituents," LeMieux said.

DeVoe reported earlier this week that RIA M&A volume has dropped by 22% year over year to 38 transactions so far in 2023. That dropoff is "not something to be ignored," but it's also a product of "a number of ancillary pressure points" in the economy that don't change the dynamics behind 10-straight years of record volumes, DeVoe said. Those factors include the industry's succession challenge and the need for greater scale.

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Focus completed the acquisition of five new partner RIAs in 2022, plus 19 other tuck-in deals its existing advisory firms closed last year. Its total volume of 24 tumbled by 37%, while the firm's acquired base earnings, which are the annual profits of advisory teams joining the firm, dropped by 63% to $26.6 million. 

Despite the smaller figures, the existing partners' growth pushed up the firm's earnings fivefold to $125.3 million and its revenue by 19% to $2.14 billion. At the end of 2022, Focus had cash and equivalents on hand of $140 million and debt outstanding of $2.6 billion.

The amount of debt, as well as a competitive bidding process revolving around "what is in the 'eyes of the beholder,'" explains the difference of nearly $3 billion between the reported enterprise value of the firm and the equity value reflected in the purchase price, according to Daniel Seivert, CEO of investment bank and consulting firm Echelon Partners.

In his firm's annual M&A report, Focus failed to make the top 10 dealmaking firms in 2022. Echelon doesn't count the tuck-in deals, also known as sub-acquisitions, in its listing of deals, which left Focus well below Mercer Advisors and its 20 deals, along with Wealth Enhancement Group (14), Creative Planning (13), Mariner Wealth Advisors (12) and Merit Financial Advisors (11). 

Regardless of whether Focus is public or private, its volume is falling because its "valuations and deal structures are less competitive with other buyers," Seivert said in an email. Adolf's prepared remarks on the last earnings call held by Focus in February touched on those themes. The company has made 10 sub-acquisitions and one new partner RIA deal in 2023.

"While we will continue to grow our partnership and add additional scale, we remain highly selective in our M&A process and disciplined in our capital allocation to ensure we execute transactions that generate incremental value for our shareholders," Adolf said. "2022 was another year in which the value of prudent fiduciary advice was evident, particularly in the unique challenges presented by markets and economies last year." 

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Asked his thoughts on the key takeaways for RIAs about Focus being set to go private less than five years after its initial public offering, Echelon's Seivert said he thought the IPO had been "a milestone for the RIA business model, but not necessarily RIAs."

"Being public is difficult as the priority is growth and quarterly earnings," he added. "Those don't necessarily line up with what is good for employees or customers."

As a publicly traded firm, Focus is trading at a multiple of about 12 times its earnings, according to Beacon Pointe Advisors President Matt Cooper. As a private firm, it could garner as much as 20x simply because of the "breakup value" of the RIAs in its network, Cooper said in an interview. Focus has "a lot of options to create value in the private space," he said.

His Newport Beach, California-based firm purchased five RIAs in the last three months with a combined $1.5 billion in acquired assets under management. That puts Beacon Pointe at $25 billion in total AUM two years after it received its second private equity infusion of capital from KKR in 2021. 

"We're early in our evolution, and we've got a long way to go in the private markets before we have to consider any other type of situation," Cooper said.

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Torrance, California-based EP Wealth Advisors completed its 27th deal last week since receiving a minority investment from financial services holding company Wealth Partners Capital Group in 2017. The expansion of the industry in the past couple of decades from investment management to areas such as tax and estate planning makes it important for firms like Focus and EP Wealth to adapt to that demand for greater scale, co-founder Brian Parker said.

"The positive of the private markets is taking that long-term approach," he said. "Clients are asking for more and more from their advisory teams, and so you're seeing a lot more firms doing more."