Centerbridge was able to gain a major share of equity in Focus and dilute earlier investors such as Summit after Focus ran into financial problems following the financial crisis, when many RIA firms saw their profits dry up as revenues dropped 30 percent or more in 2009. Focus executives said they had always planned additional rounds of capital raising, but it’s doubtful they anticipated and budgeted for the Great Recession.
Before Centerbridge made its investment in 2013, Summit, facing serious dilution, reportedly retained Goldman Sachs to find a buyer or explore the possibility of an IPO. But then both the debt and IPO markets were not nearly as receptive as they are today—and Focus was still a younger, less financially secure company than it is now.
According to sources and public statements by Focus executives, the firm is believed to have about $500 million in debt and another $220 million or so in preferred stock outstanding. In the last month, Focus has doubled its credit facility to about $1 billion. Earlier this year, the firm reportedly also borrowed about $75 million, giving investors a chance to sell back stock on a pro rata basis.
In 2013, Focus reportedly generated about $270 million in revenue and about $56 million in EBITDA (earnings before interest, taxes, depreciation and amortization). At present, its annual revenues are believed to be about $325 million.
Sources familiar with the way Focus structures its deals with advisors say it owns 100% of the assets of firms it acquires. However, the transactions typically leave the RIA operators with 40% to 49% of cash flow, plus varying combinations of Focus stock and cash. This means that Focus, combined with its network of firms, might generate as much as $120 million in EBITDA before paying management at headquarters as well as minority interests to various principals at its constituent RIA firms.
One source estimates that the actual amount of cash flow Focus retains is closer to the $70 million to $75 million area. That would exceed the $50 million minimum in EBITDA that most investment bankers consider necessary to do an IPO.
What kind of price-earnings multiple would the equity market assign to Focus shares? Given that most of its revenues come from asset-based management fees, it undoubtedly has a more predictable revenue stream than NFP, whose network comprised many transaction-oriented insurance and estate planning firms. Yet Focus also owns some hybrid RIAs that earn commissions as well as fees, so its revenue stream is not purely fees.
Comparisons to other micro-cap and small-cap firms in the advisory space are inexact and problematic because the few publicly held firms in this business all have somewhat disparate business models.
Boston Private Financial Holdings, another firm with an RIA network, sports a market capitalization of $1.1 billion ($1.2 billion including debt) and has pretax income of about $100 million. However, Boston Private owns a private bank and an investment management unit, so its revenue mix differs significantly from that of Focus.
Silvercrest Asset Management serves ultra-high-net-worth clients with average portfolios of $30 million, which is typically less profitable than an RIA serving middle-class millionaires because rick folks in that bracket don’t let their advisors charge 70 to 100 basis points in annual AUM fees. However, it also runs a proprietary asset management business, where margins can be substantially higher.