Experts, Rivals Zero in on Focus Financial Partners’ IPO Filing
In filing for a long-rumored initial public offering, wealth-firm aggregator Focus Financial Partners is getting set to validate the premise that independent approaches to goals-based investing can have meaningful appeal to the investing public as well as to the advisors and clients who have flocked to the channel in this decade.
“It’s one thing to get a valuation” from a private-equity company that’s set to make an investment, says dealmaker and investment banker David DeVoe, referring to the usual way the industry gets third-party pricing insight into retail-oriented RIAs. “It’s another to have the public market validate the valuation — and the firm itself.”
Focus is widely rumored to have “confidentially” filed for an IPO and then to have dropped it in 2016, a story not confirmed by SEC records.
With an offering cap of $100 million, the IPO of Focus — proposed ticker FOCS — as a Nasdaq stock looks like a mid-range play for that exchange. Of the 22 other Nasdaq IPOs priced in May, only nine planned smaller offerings in terms of offer amounts. And one of the above-$100-million offering was bigger than those nine together. But for the RIA rollup space, Focus’ IPO could be the start of a new era.
The offering limit is also well below the roughly $2 billion valuation given Focus last year when an investor group led by private equity firms Stone Point Capital and KKR acquired majority stake in the firm.
Besides burnishing the “halo of legitimacy” for firms looking to buy into a relatively opaque space, San Francisco-based DeVoe says a Focus IPO “will also change the complexion of future sellers” by “opening up a new segment of seller psychographics” for investors as well as firms mulling sales to Focus and other wealth-firm aggregators.
Shirl Penney, CEO of RIA-infrastructure provider Dynasty Financial Partners, says a Focus IPO “has potential to attract more capital to the space — and more attention, and more advisors who see the best way to monetize their advisory business someday is in an RIA.”
Meanwhile, as an investor play, Penney thinks a Focus IPO “could also create another way” to access "the independent wealth management movement.” To date such access has been limited to stock in custodians like Schwab, TD Ameritrade and Bank of New York Mellon and in Envestnet, one of the few publicly traded service providers to independent RIAs.
For Elliot Weissbluth, who runs Chicago-based Focus competitor HighTower, the proposed IPO bolsters the view that the “RIA business model is better than the integrated model” represented by bank-owned brokerages like Morgan Stanley and Merrill Lynch.
“Sandy Weill argued in the mid- and late 1990s that integration was good for the customer,” Weissbluth says, referring to the CEO who presided over Citigroup when, in 2000, Congress voided a Depression-era law prohibiting financial-business-line integration — a radical change marketed as a way to provide greater “consumer choice.” Twelve years later, Weill publicly rescinded his support for the move, which he’d lobbied aggressively to ensure.
And it seems many wealth management clients conform to his revised view. Between 2009 and 2017, retail-focused RIAs and hybrids saw money under management go from about $2.3 trillion to around $4.1 trillion, according to Cerulli Associates.
Meanwhile, Weissbluth doesn’t rule out taking HighTower, which manages than more $40 billion, to an IPO – but he says it isn’t something he has in view for the moment.
Joe Duran is in same boat. The CEO of United Capital in Newport Beach, Calif., says while an IPO isn’t utterly out of the question for his firm — a rollup RIA with $22 billion under management — it’s not a priority right now. “You never want to take cards off the table,” he says. “But I’m in no hurry.”
What interests Duran most about the Focus offering is its relative puniness. “It’s well below 5% of its market cap, so I suppose they want it oversubscribed,” he says of the $100 million offering. That’s notable, he adds, in view of the recent wealth firm moves in the other direction with industry names like Edelman Financial Services, a multi-office RIA, and robo-ish retirement firm Financial Engines going private under private equity owner Hellman & Friedman.
Against this backdrop, Duran says “it’s smart to create more demand than supply” — as Focus seems to be doing — “as a way to hold the price up.”
This view meshes with DeVoe’s assessment of Focus’ CEO Ruediger Adolf, as “a hyper-analytical and strategic thinker.” For this reason, Devoe says it’s no accident Focus’ S-1 — the SEC form used to apply for IPOs — “is being filed while financial services stocks are at trading at high levels.”
New York-based Focus, which was founded late in 2004, is in an SEC-imposed “quiet period” in the run-up to its IPO — a fact confirmed by its PR representatives.
But the firm’s S-1 provides some insight to the firm’s thinking.
Going public, Focus says, will reduce “RIA hesitation” around joining forces with a privately-held company and allow it to appeal to wirehouse advisors looking for support for their efforts as independent FAs.
In addition, says Focus, an IPO would pave the way to greater balance sheet flexibility, the ability to offer stock to acquirees as an alternative to purely private currency, and as a boost to marketing.
“No question, a successful initial public offering is a terrific credentializing event for Focus,” the firm says in its S-1. “As such, we expect that the initial public offering will be an important step towards building the Focus ‘brand’ in a way that supports our partner firms’ marketing without taking away their differentiated positioning.”