Focus Financial Partners' announcement Monday that it plans on raising six times as much money — $600 million instead of its original $100 million — in an initial public stock offering is another endorsement of the registered investment advisory model, and a sign that RIA valuations could be rising.
The New York-based RIA rollup business said that it wants to sell 16.2 million shares in its IPO at a range of $35 to $39 a share, a price that values the company at $2.5 billion. The latest announcement updates a May 24 filing that sought to raise $100 million.
"The real interesting number is the aggregate value of the business," said Charles "Chip" Roame, managing partner at Tiburon Strategic Advisors.
As a public company, or a public company in waiting, Focus is required to share the kind of balance sheet details that rarely find the light of day in the RIA space. According the Securities and Exchange Commission filing, Focus had 2017 revenue of $662.8 million, with a net loss of $48.3 million. Focus' earnings before interest, tax, depreciation and amortization (EBITDA), which measures operating performance, was $145 million last year.
As Mr. Roame points out, both the valuation based on revenue of 3.8 times and the valuation based on EBITDA of 17.2 times "are rich."
While it is not uncommon for initial stock filings to bookmark an offering amount, Mr. Roame said "the substantially upsized" offering to $600 million from $100 million "suggests they believe there is substantial demand in the market."
"Much like the PE activity to date in the RIA industry, this reinforces that investors highly value the recurring nature of RIA fees, and there is substantial demand to invest in this industry," he said.
"What I think is surfacing in this price is the underlying massive secular shift that's happening in our industry, which is the growth of the independent advice channel," said Elliot Weissbluth, founder and chief executive of HighTower Advisors.
Citing data from Cerulli Associates showing $85 billion moving out of the wirehouse channel last year, $70 billion in 2016, and $59 billion in 2015, Mr. Weissbluth said, "this is a secular trend that is once in a lifetime and it is not going to reverse."
A spokesman for Focus Financial declined to comment for this story, citing a regulatory quiet period leading up to the stock sale.
Focus Financial, which has acquired all or portions of 55 RIAs since launching in 2006, filed to go public just 13 months after its most recent partnership with private equity investors.
Carolyn Armitage, managing director at the investment bank Echelon Partners, said the pre-IPO price range is typically set at a level that is high enough to "create buzz" but not set so high that it would dampen investor appetite.
"They do a great deal of research to make sure the price is fair and competitive," she said. "Very few wealth managers have gone the public route, given the heavy cost of compliance and reporting and the sharing of financials. But, as investment bankers, we would love to see this be successful, because it could pave the way for additional offerings."
According to Echelon Partners' data, there are less than 160 publicly-traded companies in the financial services industry, and only one pure-play in the RIA space, Silvercrest Asset Management Group (SAMG).
Edelman Financial Group went public in 2010, but was taken private two years later.
Stephen Winks, managing director at Overlay Views and founder of The Society of Senior Consultants, said beyond giving RIAs a valuation benchmark, the Focus IPO could drive more brokers toward the independent advice channel.
"The price says there will be a gold rush for highly productive people in the advisory business, as opposed to product salesman," he said.