M&A Watchers See Risks in CI’s Wealth Spillover in the U.S.
CI Financial, the Canada-based asset management firm that has aggressively purchased U.S.-registered investment advisers, said on Thursday it sell up to 20% of its US wealth management business via an initial public offering, using the proceeds to pay down debt that helped fuel the spending spree.
But observers close to the RIA M&A space say the spin-off of the US wealth management business is a bold move that will speak volumes about the health of the market and test the strategy. rapid growth of CI Financial. Going forward, CI Financial will need to be more transparent about its acquisitions and, given the performance of the shares of other publicly traded wealth management companies in the United States, may not achieve the valuation that executives expect. , which could have implications for the entire industry.
“CI believes that the growth and success of its U.S. wealth management business is not accurately reflected in CI Financial’s current share price,” said CI Financial CEO Kurt MacAlpine. in an email interview with WealthManagement.com. “As America’s fastest-growing wealth management platform, having started with no assets in early 2020, to become a leading national RIA network with $133 billion in assets in two years, CI thinks its US wealth management business will be an attractive stand-only public company.
A source close to the RIA M&A space, who declined to be named, said the move made sense given that CI Financial shares, which trade on both Canadian and U.S. stock exchanges, have been under pressure. pressure over the past few years, with analysts pointing to the company’s growing levels of debt.
The company’s US-listed share price is down 27% year-to-date. And while the company doesn’t take on debt specifically for the wealth management industry, its gross debt has more than doubled since 2019, from $1.6 billion (Canadian dollars) to nearly $3.8 billion. dollars (Canadian dollars) in 2021.
“I think what might really bite them is…much more pressure to disclose…organic growth numbers, which they don’t have to do now,” the source said. “There’s going to be a lot more pressure to release the details of the trades they’re making, the multiples they’re paying, the debt that’s accumulating specifically related to US trades.” Currently, CI does not have to disclose details of its RIA transactions in the United States because they are not “material” transactions.
But the strategy only works if they can get that higher multiple in the US wealth market, the executive said.
In private markets, where companies like Mercer or Wealth Enhancement Group are active buyers, RIAs are valued at around 30 times earnings, the executive said. This is the space where CI Financial has aggressively made deals, buying more than 30 companies since entering the US market in January 2020.
Yet publicly traded Focus Financial, also an aggressive buyer, trades at 9.5 times EBITDA, according to a March report from Deutsche Bank. SilverCrest trades at around 13 times earnings, the executive said.
“They’re going to have to start convincing the market that there’s a plan to integrate all of these very radically independent businesses into one … CI Private Wealth,” he said. Many of the companies acquired by CI are not required to take the CI Financial name.
Matthew Crow, president of Mercer Capital, a business valuation and financial advisory services firm, said CI’s decision puzzled him because it already had access to public markets.
“They already have what they’re looking for,” said Crow, who recently wrote an article on LinkedIn about how the performance of publicly traded consolidators, such as Focus Financial, Silvercrest and CI Financial, has been “lackluster” despite rising stock markets.
“(CI Financial) is publicly traded on a stock exchange very close to the United States. It is well known that about half of their business is in wealth management in the United States. They have already attracted a lot of attention and notoriety and their shares are reasonably liquid,” he said, adding that it is not clear why the US market would then be trading at a different valuation. “I think you’re adding something of an expense layer to the corporate entity that may not accomplish anything.”
Using equity to pay down debt in times of rising interest rates could also have unintended consequences, Crow said.
“Debt capital is generally considered to be cheaper than equity capital, net-to-net, so the only reason you would issue equity to replace debt is usually if you think you can’t repay the debt. or if you’re worried that the costs of debt will rise significantly,” as they can with rising interest rates, he said.
“Unfortunately, the same interest rate sensitivity that would make you do that is probably not good for the wealth management industry in general, because it’s not going to do good things for the financial markets, and therefore the AUM, and therefore revenue and therefore profitability at these wealth management companies.
If consolidators feel their balance sheets are overstretched, they could pull out of the M&A market, which could depress valuations across the board, Crow said.
“High prices in the private market are being created by people like CI Financial who are currently chasing liquidity. It’s a bit of a closed system, and that probably tells us a lot about where the industry is going.
Another source close to the mergers and acquisitions space, who also declined to be named, agreed that the falling valuation of wealth management companies in the public markets raises more questions about CI Financial’s strategy.
“(An IPO) doesn’t make sense to me because if you’re going to go public now, why do you think you’re going to be valued more than what Focus is valued at,” he said. “I can’t imagine what they think given that Focus is trading below the prices CI has paid in the market.”
He says CI’s strategy has always been a bit confusing because MacAlpine was quick to say that CI Financial isn’t building an “aggregator” model; the company does not require these RIAs to change immediately.
“There are a lot of people in the industry watching this whole situation and saying, ‘What’s the end game here? ‘” the executive said. “Are they really adding value if all they’re doing is buying at the best price and the talk is just ‘We’ll leave you alone’? How to create synergy? How do you get scale if you buy companies and leave them alone? »
The source said there is this notion that public companies benefit from “permanent capital”, while private equity-backed companies are at the whim of fund managers with their own investors and monetization timelines. to consider.
But in truth, public companies that stumble are also vulnerable, he said. Manning & Napier, a publicly traded investment management firm, was recently private with the support of billionaire Terry Pegula.
“If CI’s actions don’t work, they’re now vulnerable to someone coming in from the outside and saying, ‘We’re going to pay for this, and there’s a new sheriff in town and we’re going to take him on. a different direction.
Jim Dickson, CEO and founder of Sanctuary Wealth, said the move will create uncomfortable times for CI Financial executives as they have to answer to stock analysts, and there will be a lot of scrutiny over the deals they have. do and will do. go forward.
Nonetheless, he thinks the positives outweigh the negatives.
This is proof that the RIA business has multiple exits for previous investors and corporate directors, he said. Public markets, he added, are a great way to get cash for some of the RIA companies the company has purchased.
“I think the one thing a lot of people say privately is, ‘What’s the number a national RIA can make public? Is it $100 billion in assets and $100 million in revenue? »
Many industry players are trying to figure this out, he said. When does an RIA really evolve to become a sustainable business in light of public procurement?
“I think there are a lot of eyes on this craft and a lot of eyes on this opportunity because it’s going to be eye-opening,” he said.