Focus Financial Partners, a public company that has acquired more than 80 wealth management businesses, raised its long-term performance expectations on Thursday during its annual investor day. Among other new predictions, Focus said it plans to generate $4 billion in revenue in 2025, $500 million more than it forecasted two years ago.
“Today we did something very bold for a CEO and the CFO, to update strategic goals that we only presented two years ago and increase them dramatically,” Rudy Adolf, co-founder, CEO and chairman of Focus Financial Partners, told RIA Intel. “We are very optimistic about the future.”
To meet the new revenue target, Focus will need to achieve a 23 percent compound annual growth rate, or CAGR. The company said existing partner firms will contribute about $1 billion in revenue through organic growth and $500 million doing their own mergers and acquisitions. Management said deals with new partner firms will generate $700 million in new revenue.
Citing its current revenue growth, Focus said it is on track to meet the new expectations. It expects to have a total of roughly 125 partner firms in 2025, up from the 100 firms it previously predicted.
Focus also projected 2025 adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, will be $1.1 billion, up 31 percent from its previous $840 million projection. The company did not share its projected net income for 2025.
At Thursday’s investor day, Focus estimated that revenue for 2021 would be $1.8 billion, up 32.3 percent from $1.36 billion in 2020. In the third quarter this year, Focus recorded revenue of $454 million, 37.1 percent higher on a year-over-year basis. It recorded a GAAP net income of $1.8 million in the third quarter.
Unlike some past years, 2021 has been a profitable one for Focus and the prolific consolidator has made a compelling case to investors that its growth model is sustainable, Owen Lau, an executive director and analyst at Oppenheimer & Co who attended Focus Financial’s Investor Day, told RIA Intel. In a note published Friday, Lau said the organic revenue growth since inception was an “impressive” 15 percent.
Tax adjustments related to its deals are also helping Focus Financial’s balance sheet. In the third quarter, adjusted net income excluding tax adjustments was $68.5 million, or $0.84 per share, 33.3 percent higher year-over-year. Tax adjustments that totaled $11.8 million, or $0.14 per share, helped the bottom line.
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Normally, companies report their net income and earnings per share. But because Focus Financial’s business model and growth is so reliant on mergers and acquisitions, the company also reports adjusted net income excluding tax adjustments. Lau said non-GAAP performance is what he and other analysts currently pay the most attention to when evaluating and rating the company, as well as its total deal volume.
“One good thing about the acquisition model is they got a tax benefit,” said Lau. “This is an actual cash benefit for the company. So, this is not just an accounting thing, this is a tax shield for Focus, and it adds about 12 to 15 cents per quarter [to] the bottom line to the company. So, it adds up.”
The $2 billion tax shield will have an estimated economic benefit of $543 million ($350 million on a net present value basis), or $4.28 per share, Focus said.
Since it was founded in 2004, Focus has acquired 82 firms and tucked-in more than 150 other wealth managers. Most are private wealth managers and vary in size, from some managing about $1 billion dollars to Buckingham Wealth Partners, which manages $62 billion. In aggregate, Focus firms manage more than $350 billion. The group has 4800 employees in more than 200 offices across four countries.
Last year, Focus created its own RIA called Connectus Wealth Advisers, “for founders and teams who want to continue managing their client relationships and maintaining their boutique cultures while gaining the operational efficiencies of shared services.” Wealth managers who join Connectus get centralized technology, investment support, marketing and lead generation services, and more. In September, 10 RIAs had already joined Connectus and proved its early success, executives said at the time.
After Thursday’s investor conference, shares of Focus ended the trading session down 2.37 percent at $65.09 a share. Lau attributed the price fall on the investor day to macro factors impacting the broader equities market. The S&P 500 fell 0.72 percent and the Nasdaq fell 1.71 percent on Thursday. The stock is up about 44 percent from this time last year.
Most of Focus Financial’s revenue comes from the fees its wealth management firms charge clients. Those fees are based on a percentage of the assets under management, so when the market goes down, Lau said, so will Focus Financial’s revenue and investors take notice. “It's not unreasonable for for us to see Focus down by 2 percent when the market is down like 1 percent,” Lau said.
Lau is not worried a potential market downturn derailing the growth company. About 20 percent of the company’s revenue is based on non-market correlated factors, he noted. The company has also invested in consulting companies and tax planning businesses that generate revenue.
Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.
Clarification: This story was updated to include the total benefit of Focus Financial's $2 billion tax shield. It previously stated only the annual benefit.