Focus Financial's latest private equity partnership puts IPO on back burner

KKR, Stone Point investment puts value of RIA roll-up at $2B, but doesn't answer the question of whether an IPO would be successful

Apr 19, 2017 @ 2:23 pm

By Jeff Benjamin

Rudy Adolf
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Rudy Adolf

Focus Financial Partners is extending its 11-year relationship with private equity investors, raising new questions about the likelihood of the RIA-roll-up going public anytime soon.

An announced 70% ownership stake by PE firms Stone Point Capital and KKR values Focus Financial at approximately $2 billion, which founder Rudy Adolf described as "fair market value."

But rolling Focus' majority ownership to the third round of private equity firms since the firm's 2006 launch has some industry watchers wondering if Focus is getting closer to or further from a long-anticipated public stock offering.

"Whether they're getting closer to an IPO is something we could debate for a while, but they have had trouble soliciting interest in the public markets," said Brian Hamburger, president of MarketCounsel, a compliance consulting firm.

The new investor group provides liquidity to private equity firms Summit Partners, Centerbridge Partners and Polaris Partners, as well as employees and some RIAs that use Focus Financial's platform.

"It's a strong theory that this transaction is in lieu of a public offering," Mr. Hamburger said. "They have attracted some next-generation private equity investors, and this may be something they settle into."

David DeVoe, managing partner at consulting firm DeVoe & Co., agreed that as long as private equity firms are stepping up to take ownership, Focus Financial might not need the public markets to finance future growth.

"In terms of what is best for the firm, going public is not always the holy grail," he said. "Rudy Adolf has really taken a text book approach to capitalizing on private equity and the different strata of private equity by working with blue chip firms."

Mr. Adolf acknowledged that a fresh private equity relationship takes a public offering off the table in the near term, but said, "We'd like to think that medium- and long-term the public market will be the right owner for Focus."

"We believe the flexibility we have with private capital is very powerful at this stage of our evolution," he added. "Running a business that can go public is the highest standard of management, and so it's good to keep it as an option. But at this point it's not imminent."

Focus has 45 partner firms and affiliates across the United States, Australia, Canada and the United Kingdom, with a joint venture in China.

Mr. Adolf said about 25% of the partner firms are breakaway reps from the brokerage industry, an area where he plans to maintain a deliberate focus.

"We believe the wirehouse models are struggling because they are inferior," he said. "We are very selective in the lift out space, because we only team up with the top tiers."

From a private-equity firm's perspective, the growth mode, along with the strong income yields of the underlying RIAs, are a golden goose, according to Elizabeth Nesvold, managing partner at the investment bank Silver Lane Advisors.

"For a private equity owner, the cash-flow play is amazing; it's a high-yielding private security that will likely appreciate," she said. "They essentially have a share of the revenues, and they have limited costs at the holding company level."

In terms of what this latest PE deal means to the larger wealth management industry, Ms. Nesvold said, "Everyone in wealth management should be rooting for this deal and for Focus Financial to become a public company" because it will provide some clarity on public market valuations for the category.

"Currently, the closest public comps are asset management firms, many of which have been hit by multiple years of net outflows and depressed multiples," she added. "Wealth management is a vastly different business model, though public investors will struggle to see the distinction until one of the independent wealth management platforms proves it out."

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