Focus Financial buys firm amid restructuring

Focus Financial Partners LLC, after a 19-month acquisition drought, has bought Joel Isaacson & Co., a financial planning and tax consulting firm, according to several people familiar with Focus.

The roll-up firm has also ex-tended its bank debt and arranged for new equity investments from current backer Summit Partners and a new backer, Polaris Venture Partners.

Specific terms of the transaction — which if it follows previous structures — will involve Focus' paying cash and equity units in exchange for a majority of Isaacson's cash flow, are not expected to be disclosed.

But in a sign of the deteriorating value of the franchise, Isaacson and Polaris are believed to be getting their stakes at about 50% below the valuation of Focus at the time of its last partnership deal. Polaris is also receiving a high interest rate on convertible debt it is lending, according to two people who said they were familiar with the transaction.

The managers of Focus Financial, led by chief executive Ruediger “Rudy” Adolf, also have negotiated sweetened equity packages for themselves, said sources familiar with an amended operating agreement that executives of Focus-controlled firms were asked to endorse in recent weeks.

The people declined to be identified, because they weren't authorized to speak for the firm or feared repercussions.

Focus, which this month held its semiannual partners meeting, instructed its 17 affiliates to avoid talking to the press.

Mr. Adolf and several other Focus executives did not return repeated calls for comment. A spokes-woman at the firm declined to comment.

But an announcement about the Isaacson purchase and the recapitalization is expected to be made Nov. 16.

Kevin Mohan, a managing director of Summit Partners, declined to comment but two weeks ago said he expected to be able to discuss new investments in Focus “soon.” David Barrett, general partner of Polaris, and other executives at the venture capital firm, didn't return calls seeking comment.

Joel Isaacson, a certified public accountant whose eponymous firm manages $1.35 billion for more than 700 clients, according to regulatory filings and the firm's website, de-clined to comment. People close to Focus two weeks ago said that Mr. Isaacson and his four partners were still in the process of informing their clients and employees — including 10 planners and 11 administrative staff members, according to a notice on the website — about the new ownership structure. Focus is expected to announce the Isaacson purchase and the recap today.

As of Friday, Isaacson wasn't listed on Focus's website as an affiliate.

Although Focus is likely to present the Isaacson purchase and the private-equity financing as votes of confidence in its business model, the deals are occurring under strain.

Focus has converted a payment due on a drawn bank line into a $35 million term loan being amortized over a number of years, according to the people familiar with the recapitalization.

The original bank line was led by Bank of America Corp., according to information on Focus' website.

Summit and Polaris are thought to be committing about $50 million of new equity to Focus. In the heady days of 2006, Summit poured in $35 million that Focus used to attract a flurry of initial deals from advisers looking to monetize their businesses.

The new extensions from Summit and Polaris help Summit avoid having to write down the value of its initial investment, according to a person who, along with other members of the private-equity community, was approached by Focus and Summit about various new investment structures.

Sources speculated that BoA agreed to the new loan structure in lieu of adding the Focus credit to its already pressing overload of non-performing loans. A BofA spokes-man didn't return a call seeking comment.

EQUITY STAKES

The equity stakes held by Focus investors, including the minority “units” held by its registered investment advisers, pension consultants and insurance firm affiliates, would translate into cash if the firm were able to arrange an initial public offering or a sale to a -private-equity firm.

The prospects of quick liquidation events, which Focus and other so-called roll-up firms dangle in front of prospective partner firms, dimmed over the past two years as market turmoil dampened revenue and profits at many of the affiliated firms.

People close to Focus said that its 17 firms, including Isaacson, are in relatively strong shape but that some are not current on their payments to Focus.

Focus's issues, they said, came from pressing debt service and an inability to complete new deals.

The great majority of Focus' firms have signed the amended operating agreements supporting the recapitalization, sources said, and former and current principals of several firms expressed satisfaction with the business model.

“I did fine,” said Anthony Carnevale, a founder of Sentinel Benefits & Financial Group, who affiliated his pension benefits administration firm with Focus in January 2007 as a way to finance his retirement, while allowing his sons John and Jim to continue in operating roles.

“We got a good deal, and things are more difficult now, but we're doing fine,” he said.

Calls to John Carnevale weren't returned.

E-mail Jed Horowitz at [email protected].

Related Topics: Mergers and Acquisitions