Focus Financial Partners has its sights set on more mergers and acquisitions this year.
“We continue to believe that 2022 will be one of our best years for M&A,” Focus founder, chief executive officer and chairman Rudy Adolf said Thursday during a call with analysts to discuss the company’s second quarter earnings.
That implies that many more M&A deals are in the pipeline for the company since it has closed or announced only 14 deals so far this year, which includes 11 mergers from partner firms and three new partner firms, according to a regulatory filing on Thursday. That’s significantly lower than the 38 transactions it had in 2021 — a record year of M&A activity for the company.
“Our partner firms remain active in seeking mergers to strengthen their client service capabilities and enhance the growth of their business and we expect deal volume and momentum to only increase once current market volatility subsides,” Adolf said.
Focus has three different acquisition models: a partner firm model, a merger model and Connectus Wealth Advisers.
With the partner firm model, Focus acquires registered investment advisor and management firms. In this model, Focus owns 100% of the assets and acquires on average about 50% of the firm’s earnings while the firm owns the other half. Focus gives the firms it acquires access to growth capital and value-added services.
With the merger model, Focus facilitates its current partner firms to acquire wealth management practices and additional customer relationships. Connectus, itself a Focus partner firm, acquires wealth management practices whose founders are primarily interested in focusing on managing their client relationships.
Focus currently has 87 partner firms, which as of March were located in more than 250 offices in four countries, with more than 2,500 principals and employees.
The company aims to have 125 partner firms; around $4 billion in revenues; $1.1 billion in adjusted earnings before interest, taxes, depreciation and amortization; and a 28% ebitda margin by 2025, Adolf said during its Investor Day in December and then again during an earnings call with analysts in February.
Focus is “very selective and disciplined” when choosing partner firms, Adolf said, noting, “that’s how we built this business.”
“We are walking away from many opportunities where we don't like the pricing, or we don't think it is a good fit for our business objectives here,” he added.
Adolf said he sees “firms as platforms” and aspires to “help them grow” and eventually “acquire other firms.”
As a possible recession looms, Adolf said Focus remains “prudent” with capital deployment, noting that its “diversified revenue stream” will help “mitigate our market sensitivity.”
Adolf expects Focus to post a revenue growth of about 20% for the year, and estimates earnings before interest, taxes, depreciation and amortization growth at about 16% to 18%.
On Thursday, Focus reported total revenues of $539.2 million for the second quarter, up 26.8% year-over-year. Its ebitda for the quarter was $137 million, up 27.1% year-over-year.
Adolf also expects Focus’ partner firms to “adapt quickly” to a changing market environment. “Because our partners have autonomy, they are nimble in how they manage their businesses,” he said.
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