CI Financial’s IPO could make RIA’s M&A force nearly unstoppable if it “bursts,” but industry insiders see Focus Financial’s stalled share price as a “huge headwind.”

The Toronto firm is already outperforming the RIA M&A field in terms of deal flow and buzz, but an IPO is only worthwhile if investors cooperate by seeing a much higher value being separated from the old cash cow in Canada

Brooke’s note: Writing for RIABiz is never boring as long as there are doers like Kurt MacAlpine, CEO of CI Financial, and sensible people who cast doubt on his ability to pull off superhuman RIA feats. Roll-Ups have always been about moving fast and destroying things in the name of a larger vision. No serial acquirer of RIAs has moved anywhere near as fast, acquired more high-quality companies, or done so from such a truly endless pool of capital as MacAlpine. The general consensus in the industry is that he should consolidate his phenomenal earnings. He has surpassed Hightower’s AUM in two years; It took this Chicago firm 15 years to amass the same amount — $118 billion in AUM and $144 billion to AUA. MacAlpine’s takeaway from his success is that he has achieved this without the fruits of a US IPO with pure RIA assets as equity. He hasn’t signed up yet. but nothing he has heard of its dangers has convinced him to hedge an iota. It was fun interviewing someone with so much irrepressible enthusiasm.

Why go public when you can get an old cash cow to fund your growth for free?

The Toronto-based company announced plans on April 7 to sell up to 20% of its US wealth business and keep 80%.

Dan Seivert: ‘He did a great job acquiring companies.’

The move is being taken to unlock existing value by increasing the cash flow multiple of existing EBITDA from over $300 million to 20x, but also to provide an additional source of CI to pay for later companies .

CI Financial dominates the RIA M&A market in terms of post-AUM transaction rate, but not in terms of the scale of its own ambitions.

“We’re in the first inning of what we’re trying to achieve,” said CEO Kurt MacAlpine. “Now it’s even faster and easier.”

Eight more innings of this level of growth would take CI Financial well over $1 trillion in assets under management, but requires tremendous ongoing investment and every funding option and means to incentivize joining the company and sustaining its performance.

CI Financial yesterday took the unusual step of announcing its intention to file for an IPO before it even filed the S-1 document application with the Securities and Exchange Commission (SEC).

The good news is that the advance notice of the IPO allows MacAlpine to be candid about the plan — an SEC no-no after filing.

celebratory feeling

MacAlpine believes he’ll get plenty of pop by adding pure RIA business interests to his $1 billion-plus M&A currency arsenal, which includes $300 million in RIA cash flow.

“In January 2020 we had no companies and now we are announcing an IPO and it now stands on its own. We have hundreds of millions of free cash flow to fund debt.

He adds that employees, RIAs, and end investors have all shown enthusiasm — something he picked up from four separate town hall meetings he held yesterday to explain the move.

“We all wanted to do something different. There’s a celebratory feeling,” he told RIABiz.

CI has closed deals totaling $2.7 billion to date — with about 75% of that cash on close, according to research by ECHELON Partners, a boutique M&A-focused investment bank in Manhattan Beach, California .

“He has done an excellent job acquiring companies including 25% of the top 10% like Balasa Dinverno and McCutchen,” said Dan Seivert, CEO of ECHELON.

“Not only is he paid, but he’s an amazing salesman on the scale of Joe Duran and Elliot Weissbluth. He’s also a real visionary and a great analyst.”

However, many M&A experts in the industry say that the young CEO’s move to publicize the super-growth company with many multipliers is too bold for his own good.

Matt Crow: ‘[It] feels like financial engineering to me.’

In short, say doubters, life becomes infinitely more complicated when you run two public companies. The secret sauce in the deals is revealed.

Markets can hardly be trusted to allocate the multiples of profits or earnings that appear “fair” on paper in the trade pits.

“Kurt is very open about why they’re doing this,” said Matt Crow, president of Mercer Capital in Memphis, Tennessee. “That is commendable. But it still feels like financial engineering to me, and the NPV of financial engineering is usually zero.

“It’s going to create buzz, which might result in transaction volume. But I think CI has already caught everyone’s attention.

“Will the marginal rating earned and the marginal boom generated justify another offering’s IB fees, higher ongoing compliance costs, etc.? And is it all worth it just to restructure their balance sheet?”

headwind

According to Seivert, Crow expresses all legitimate concerns.

In addition, the publicly traded RIA Roll-up Focus Financial looks at face value what a post-IPO CI Financial would look like — it doesn’t currently have a major multiple.

“These Focus ratings are generating tremendous headwind for them,” says Sievert. Behold: Focus Financial shares fall after hours as secondary offer is filed that pays off most of KKR and Stone Point without raising M&A capital

Focus Financial is trading at $43, which is just a touch above its 2018 IPO price, though it has closed a steady stream of deals since then.

The Focus valuation is still 13 or 14 times cash flow, which is encouraging, MacAlpine says. CI Financial’s RIA unit is a financial unit that will outperform Focus’s loose confederation of autonomous private label companies.

“CI seeks to capitalize on the industry’s record high valuations in the hope that the investing public will pay a premium to private equity firms,” ​​said David DeVoe, founder and CEO of San Francisco-based DeVoe & Co. “Depending on the degree of separation for the CI parent, the IPO could be another ‘proof of concept’ for PE investors as well as a definitive valuation metric for private-to-public arbitrage calculations.”

Meanwhile, CI Financial is currently trading at 9.5 times earnings and MacAlpine is optimistic his company will do well with LPL Financial trading closer to 20 times earnings.

However, it’s not entirely clear that one company is an “init” and the other is technically not, says Seivert.

“I would say CI is actually worse than Focus when it comes to integration.”

Boost business

While Focus is more fragmented in many ways, it has also made efforts to create scaling capabilities internally, including a coordinated effort to use SmartAsset to generate and convert referrals to drive new business.

Companies at CI – like Focus – still use their own software stacks and have their own custody relationships.

Seivert says CI’s argument for boosting business is that it can refer its Canadian customers to an American RIA. “We ask, ‘How do you orchestrate the handover?’ It looks bulky.”

Seivert also questions what CI can do now for companies to hire enterprise-level talent.

Currently, he says, most of the work is outsourced to Heidrick & Struggles. That might be fine for $400,000 plus an annual salary, but ineffective for hiring lower-level employees.

Seivert also points to the tremendous strides companies like Mercer and Hightower Advisors are making in building internal capabilities such as trusts, banking and investment management. In contrast, he believes CI still has a long way to go with such centralized repositories.

Play for pop

Meanwhile, with interest rates headed in the wrong direction, it might not be a good time to go public — but betting on an even better window later in the year isn’t a sure thing, Crow says.

“If they wait until ‘later this year’ – I assume that means waiting for markets to settle down and be receptive to the IPO.

“If — for whatever reason — the IPO doesn’t happen, it all signals that CI is heavily indebted and has no good way to fix it other than use distributable cash flow to accelerate debt service.” That’s not going to make for a fun analyst call.”

In fact, it’s not clear that earlier is better, all the same, says Seivert.

“You can get that 25% pop, but why are you doing it now?” he asks. “Why not raise a private equity firm, wait, grow and make a bigger pop?”