This morning on November 14 following a contentious earnings call with investors, shares of Focus Financial Partners have fallen 6 percent to about $30 a share. Over the last five days, shares of the nation’s largest RIA aggregator, which completed an IPO on July 26, have declined 25 percent.
The performance of Focus stock calls into question the ability of other aggregators to go public. Back in July when Focus went public at $38 a share and the stock held up for a few weeks, many observers thought it might pave the way for some other RIA consolidators like HighTower and United Capital to follow in its footsteps.
On September 9, when Focus shares were trading 60 percent higher at their $49.50 peak, many aggregators and consolidators were upbeat as they envisisioned receiving similar valuations for their firms. In only two months, the picture has changed dramatically.
The downdraft in Focus shares also creates problems for many of its affiliated advisors who own shares in the aggregator. Focus holds investments which it purchased for cash and stock in some of the profession's leading RIA firms, including Bartlett Wealth Management, The Colony Group, Buckingham Strategic Wealth, Coastal Bridge Advisors, GW Wade & Co. and Douglas C. Lane & Associates, to name a few. But executives at these partner firms are only permitted to sell the shares they received over a three-year period at a rate of one-twelfth of their position every three months.
Today, investors appear to be questioning their unique method of calculating cash flow via what appears to be a newly created cash flow metric, "adjusted EBITDA." Questions about the metric were first raised by Financial Advisor shortly before the IPO.
One analyst who examined the Focus S-1 IPO filing estimated that the aggregator's cash was between $85 million and $95 million when traditional accounting techniques were applied. However, when the intriguing adjusted EBITDA metric was used, Focus's cash flow swelled to the $145 million area.
In that filing prior to the IPO, Focus plainly acknowledged that its adjusted EBITDA concept, which adds back certain non-cash charges into cash flow, was not recognized under generally accepted accounting principles (GAAP).
After the $38 a share IPO was successful, it initially seemed that the market had bought into the concept. Now, however, it appears analysts and investors are having second thoughts.
For years, many have questioned how much of Focus's growth is organic and how much based on acquisitions. In the filing, it said that organic revenue growth in 2017 was 13.4 percent, but added that this figure includes growth related to acquisitions of other firms and customer relationships by partner firms and mergers among Focus firms.
Total revenues at its existing firms, not those acquired, is closer to 8.3 percent in 2017 from about $485 million in 2016, according to one expert who tried to strip some of the above-mentioned factors.