Focus Financial evolves beyond PE ownership

Four years after partnering with private equity investors, Focus Financial Partners is going through the next phase of working with outside owners.

Focus, which went public in 2018, announced Monday that one of its two private equity partners, Kohlberg Kravis Roberts & Co., had sold its 6% ownership stake in Focus in a secondary stock offering, effectively ending its relationship with the $250 billion RIA aggregator.

The stock sale follows a secondary offering in March in which KKR and the firm's other private equity owner, Stone Point Capital, combined to sell a similar-sized ownership stake in Focus.

Stone Point still owns about 14% of Focus’ free-floating shares, but it's clear that the trend is the private equity owners are cashing out of this particular wealth management position.

“It is natural for PE investors to maximize the internal rate of return on their investment,” said Daniel Seivert, chief executive of Echelon Partners.

“If a portfolio company continues to grow faster and add value faster than in prior years, the investor will hold,” he said. “If another year reduces IRR, then the investor will likely look to sell and return the capital to investors.”

Seivert said there are more than 200 private equity firms invested in the wealth management and wealth technology spaces, and that they are always looking for greener pastures.

Private equity investors, drawn to the industry's sticky and predictable advisory fees, have helped drive consolidation in the wealth management space, where economies of scale drive profits.

But as companies like Focus Financial can attest, the PE relationship typically lasts between three and seven years before the investors start searching for a liquidity event.

In the case of Focus, the company went public a year after selling a minority stake to PE owners, offering some liquidity to its PE investors. But the string of secondary stock offerings is apparently leading to the final exit.

From the July 2018 initial public offering through Tuesday, Focus’ stock price gained 65%, which compares to a 50% gain by the S&P 500 Index over the same period. Over the four-year period through the end of 2020, Focus made 78 acquisitions and added 31 new partner firms.

The exit by KKR comes a week after Focus announced an $800 million debt capital raise to support its acquisition pipeline.

“Our business performance remains excellent,” said Focus senior vice president Tina Madon.

Over the past few years, private equity investors have been pouring money into the wealth management space at an increasing pace, tempting firms with the lure of fresh capital and business savvy.

“The private equity firms are seeing that they can add value and get behind these firms,” said Kay Lynn Mayhue, president of Merit Financial Advisors, a $5 billion firm that sold a minority stake to private investor Wealth Partners Capital Group and private equity firm HGGC last year.

Mayhue said that when her firm compared the access to capital through a public stock offering or PE partners, the decision was easy.

“On the PE side, we were looking for a shareholder partner that would bring tools and expertise to the table,” she said. “With a public entity you lose that, and the shareholders just have their hands out and are asking what have you done for me lately, and they’re not rowing with you.”

Mayhue acknowledges that the concept of a long-term investment is a “relative term when it comes to private equity,” but she also appreciates that in a few years her firm might need a different kind of PE partner.

“In the private equity world, you kind of graduate to different types of firms as the company evolves,” she said. “Three, five or 10 years from now, we’re going to be a different company and will be looking for someone to partner with us from a very high level.”