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Clayton, Dubilier & Rice's $7bn Acquisition of Focus Financial Partners

By Marvin Stenersen and Gabriela Lenerte (Stockholm School of Economics), Michele Silvestri, Kayla Ho and Jia-Jian Gan (LSE)

Photo: Timo Wielink (Unsplash)

 

Overview of the deal


Acquirer: Clayton, Dubilier & Rice

Target: Focus Financial Partners

Implied Equity Value: $5.5bn (without debt)

Transaction Size: $7bn

Expected Close Date: Q3 2023

Acquirer Advisors: Moelis & Company, RBC Capital Markets and BofA (Financial), Kirkland & Ellis, Debevoise & Plimpton and Simpson Thacher & Bartlett LLP (Legal)

Target Advisors: Goldman Sachs and Jefferies (Financial), Vinson & Elkins LLP (Legal)


Clayton, Dubilier & Rice (CD&R), a private equity firm, has agreed to acquire Focus Financial Partners, a leading independent wealth management firm, for a total of $7bn, including debt. The deal, which is expected to close in the third quarter of 2023, values Focus Financial at $53 per share in cash, representing a premium of about 30% over its closing price on February 24, 2023.


The acquisition of Focus Financial by CD&R is part of a broader trend in the financial services industry, as PE begins to see great upside in the independent wealth manager play. The deal is expected to help Focus Financial accelerate its growth strategy and expand its offerings to clients, while providing CD&R with a new platform for investment in the wealth management space.


In recent years, there has been consolidation within the industry as firms seek to expand their offerings and gain market share. This trend is expected to continue, with PE firms likely to continue further consolidation.


“This transaction represents an important evolution in the resources we will have to invest, enabling us to increase the value we deliver to our partners and their clients. We are uniquely positioned to capitalise on industry trends while offering the expertise and resources that help our partners provide differentiated service to their clients." - Rudy Adolf, Founder, CEO, and Chairman (Focus Financial)

Company Details (Acquirer - Clayton, Dubilier & Rice)


Clayton, Dubilier & Rice (CD&R) is a private equity firm founded in New York City in 1978. As one of the oldest private equity firms in the world, it has around $30bn in AUM, with holdings in various industries, including; consumer and retail, healthcare, industrials, and services. Its portfolio typically consists of middle-market companies, with the scope to create value through operational improvements, strategic planning, and financial restructuring.


CD&R credits its long-run successes due to reward-sharing, in which it emphasises incentives that support alignment, including substantial equity ownership for its portfolio company management teams.


Notable investments: Morrisons, Hertz, B&M European Value Retail, and BrandSafway


Company Details (Target - Focus Financial Partners)


Focus Financial Partners is a leading partnership of ~90 independent wealth management firms. They were founded in 2004 by Ruediger “Rudy” Adolf, Rajini Kodialam and Lenny Chang in New York. They provide access to best practices, resources and continuity planning for its partner firms that mostly serve high and ultra-high-net worth clients, and also institutions with comprehensive wealth management services. Their partners remain independent while they benefit from the synergies, scale, economics and best practices that Focus brings to help them achieve their business objectives.


Founded in 2006, headquartered in New York, New York

CEO: Ruediger Adolf

Number of employees: 5,000

Market Cap: $3.4bn (as of 08/03/2023)

EV: $6.3bn

LTM Revenue: $2.1bn

LTM EBITDA: $506.7mn

LTM EV/Revenue: 2.9x

LTM EV/EBITDA: 12.4x


Projections and Assumptions


Short-term consequences


The proposed transaction delivers substantial value to Focus' stockholders, who will receive $53 in cash per share, representing an approximately 36% premium to Focus' 60-day volume weighted average price as of the close on February 1, 2023 (the day prior to public announcement of the potential transaction), and an approximately 48% premium to the closing price of the Company's Class A common stock on December 28, 2022 (the day the Special Committee of the Board of Directors of Focus authorised its financial advisors to contact other specified potential bidders regarding interest in a potential transaction).


The transaction is expected to close in the third quarter of 2023. Focus will cease to be a publicly traded company upon consummation of the proposed transaction. CD&R and Stone Point intend to finance the transaction with fully committed equity financing that is not subject to any financing condition.


CD&R and Stone Point are making these investments because of their conviction in Focus' advantageous competitive positioning in a multi-trillion dollar, global industry.


Long-term Upsides


Focus Financial operates in the highest growth segment of the global wealth management industry. The Registered Investment Advisor (RIA) market is rapidly consolidating, while also being driven by strong, secular tailwinds due to the growing demand for fiduciary advice. In fact, after a decade-long bull market, RIAs outperformed, receiving a disproportionate share of net flows, seeing 22% of total net flows, above its 16% share of total client assets in 2021. The growth has been primarily driven by a sustained movement of advisors away from national full-service wealth managers.


More importantly, the consolidation wave across the wealth management industry is set to accelerate: especially for medium-sized and smaller owner-led independent wealth managers, strong cost and regulatory headwinds combined with the need for succession management are presenting an attractive opportunity for consolidation. As a pure play acquirer, backed by the expertise and capital of CD&R, Focus is ideally positioned to lead this wave of consolidation and further cement its strength in the US RIA market.


Additionally, Focus boasts a strong US-presence with ~90 Partners across 35 states, and fits well into the current trend of Private Equity businesses building wealth management platforms, with recent deals such as KKR’s stake in Söderberg & Partners, and Nordic Capital’s acquisition of Max Matthiessen.


Risks and Uncertainties


A key uncertainty surrounding this deal is related to Focus Financial’s potential

difficulties in continuing its growth through acquisitions. Registered Investment Advisor (RIA) roll-ups, such as Focus Financial, have seen increasing competition (e.g. from private equity firms) in recent times. This has drastically driven up acquisition multiples, from around ~6x to ~9x EBITDA, and historically to as much as 20x.


Additionally, Focus Financial’s acquisition strategy has relied heavily on debt financing, which has become ever more costly. As a result of expensive acquisitions, its net leverage ratio has increased from 3.5x in Q3 2021 to 4.2x as of Q4 2022 – close to the target ratio upper range of 4.5x. Thus, its current debt burden, as well as a toughening financial environment and elevated RIA valuation multiples, might potentially hinder the firm’s ability to pursue further acquisitions.


There also exists the risk of consolidation issues between the acquirer and the target.

At present, Focus Financial’s management team maintains a very low percentage of Voting Rights, (around 0.1%), in its ownership stake, yet is compensated rather generously. In 2021, for example, the CEO received a total compensation of $12 million. Tensions may arise if CD&R attempts to standardise compensation levels and therefore change this.


Another risk lies in the chance that existing customers of Focus Financial may have reservations about the acquisition and switch to alternatives in the interim. They may fear potential issues that are likely to arise during the transition period, such as technical problems and a change in the customer service that they are used to. If so, this could negatively impact the firm, with a primary motivation of acquisition being Focus Financial’s global reach amongst the UHNW (Ultra High Net Worth).


“Focus represents an outstanding collection of leading RIAs and business managers, and our investment is predicated on having greater financial and operating flexibility as a private company in order to support and drive collaboration amongst these entrepreneurial partners.” - David Winokur, Partner (CD&R)

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