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M&A gains drive Focus’ 33% revenue growth

A high volume of M&A activity is paying off for Focus Financial Partners.

The aggregator’s revenue grew 32.5% year over year to $260 million in the first-quarter, according to Focus’s first-quarter earnings report. The primary driver of the gain came from new partner firms acquired over the past year, the company said.

Focus has acquired 21 firms year-to-date, with 12 of them taking place in the period ending March 31, contributing approximately $48.4 million in revenue. There are four deals currently pending.

“Management is clearly executing the business model they presented last year in the lead up to their IPO, so no one should be surprised about their performance,” says Matt Crow, president of Mercer Capital, the Memphis, Tennessee-based valuation firm.

M&A at Focus Financial May 9,2019

Higher wealth management fees also helped boost the firm’s first-quarter revenue, which rose to $243 million from $58.8 million, year over year. However, Focus’ organic growth rate slipped to 7.7%, compared with 17.6% a year ago. Growth from existing Focus RIAs lagged due to the fourth-quarter market decline, primarily in equities and fixed income, the firm said.

On an earnings call with analysts, Focus CFO Jim Shanahan said the firm anticipates that market growth and recent merger activity should help organic revenue growth rebound to around 10% in the second-quarter.

“Even though they expect it to recover in this quarter to 10% or better, it’s worth remembering that Focus includes sub-acquisition activity in their organic revenue growth metric,” Crow said. “This seems to frustrate the analyst community, and it probably will continue to do so.”

What’s more, less than one-fourth of Focus’s increased revenue came from existing firms, which includes tuck-ins. Chip Roame, managing partner of Tiburon Strategic Advisors, says it would be better to see the firm earning higher revenue and net profits from existing firms — not just acquisitions.

Focus is also expanding internationally with the acquisition of Prime Quadrant in Toronto, Canada, in the first-quarter and Escala Partners in Melbourne, Australia, last month.

“On one hand, I like the expansion,” Roame says. “On the other hand, the U.S. RIA business is so ripe. Why the distraction?” He also wonders if the international deals suggest Focus does not believes there is enough opportunity in the U.S.

Focus also released a new offering for its RIAs this quarter, Focus Client Solutions. With banking partnerships, RIAs can now offer cash and credit solutions, which will give clients higher yields on cash, as well as refinancing and commercial lending opportunities, according to the firm.

“Cash is a very hotly debated area in the industry,” Adolf said. “Quite frankly, there are not enough competitive solutions out there in the traditional public providers.” Focus has partnered with about 15 banks, and expects more, he said.

This offering “makes clients stickier” for RIAs and will add high margin business to the mix, according to Roame. “[It] might not drive huge revenue, but will be highly profitable,” he said.

Mercer Capital’s Crow sees it as a natural extension of Focus’ business model.

“It makes sense to me that Focus would develop investment products to distribute through their partner firms, so long as doing so remains true to the fiduciary standard,” Crow says.

Focus did not respond to a request for comment on pricing for the new offering or why the firm decided to expand internationally.

The aggregator will also concentrate on succession planning as a growth strategy, Adolf said.

“We’re looking for RIAs facing a succession event,” Adolf said. The average advisor is 52 years old, according to the most recent Cerulli data. For RIAs that don’t have that next generation of leadership in-house, Focus will help identify like-minded partners.

Focus’ adjusted net income for the first-quarter was $35.7 million, an increase of 40.3%, or $10.3 million over the same period last year. Adjusted net income per share for the first-quarter was $0.47 per share, an increase of 34.3% over the previous year.

But revenue and earnings per share, among other indicators, fell short of anaylst expectations. Focus’s stock was trading at $34.08, down 8.97% from yesterday’s close “The Street did not like these earnings,” Roame said.

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