Focus Financial Partners Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2021

There are 9 speakers on the call.

Operator

Good morning. I would like to welcome everyone to the Focus Financial Partners 2021 Third Quarter Earnings Call. Joining today's call are Rudy Adolf, Founder and CEO Jim Shanahan, Chief Financial Officer Rusty McGranahan, General Counsel and Tina Madden, Head of Investor Relations and Corporate Communications. Mr. McCrenahan, please go ahead.

Speaker 1

Good morning, everyone. Before we begin, let me remind you that during the course of this call, we may make a number of forward looking statements. We call your attention to the fact that Focus' results may, of course, differ from these statements. These statements are based on assumptions made by and the information currently available to Focus Financial Partners and involve risks and uncertainties that could cause the results of Focus to materially differ from these statements. Focus has made filings with the SEC, which lists some of the factors that may cause its results to differ materially from these statements, including without limitation, uncertainties surrounding the COVID-nineteen pandemic.

Speaker 1

And finally, Focus assumes no duty and does not undertake to update any such forward looking statements. With that, I will turn it over to our Founder and CEO,

Speaker 2

Rudy Adolf.

Speaker 3

Rudy? Thanks, Rusty, and good morning, everyone. We appreciate you joining our call today. We delivered another strong quarter in Q3, and we are having an exceptional year across every dimension of our business. Our financial performance exceeded our expectations on all measures, positioning us for another record year.

Speaker 3

We generated 3rd quarter revenues of $454,500,000 adjusted net income Our last 12 months cash flow available for capital allocation grew 54.4 percent year over year to 299 point $7,000,000 reinforcing not only our strong performance, but also the economic value of our TechShield. Our high growth business is complemented by a resilient, tax efficient financial model that has consistently delivered Strong results across market cycles. We are also proud that 10 of our U. S. RIA partner firms were recently included in the Barron's 2021 list of America's Our M and A momentum continued to accelerate in the Q3 as we closed 2 new partner firms and 7 mergers on behalf of our partners, including a merger for connectors in Australia.

Speaker 3

The Q1 to date, we have closed another 12 transactions and announced 3 that are pending closing. This brings our year to date total to 31 transactions, which included 9 new partner firms, 22 mergers for our partners, including 8 mergers for connectors across 4 countries. Our expanding international footprint is an important source of revenue diversification. Our value proposition continues to resonate strongly And we are seeing an extraordinary level of potential transactions, both in terms of new partner firms and mergers on behalf of our partners. Connexus also continues to experience significant interest in the U.

Speaker 3

S. And internationally. We have a good mix of transactions in our pipeline And thus seeing new opportunities to expand our business, our partnership stood at 79 firms as of November 1. I've never been more excited about the caliber of firms we are attracting. Not only are the industry leaders in their own right, but they further complement and diversify our partnership through their track records of growth as well as their deep expertise in wealth structuring Ankora, Cardinal Point and Almond, 3 recent partner firms we have closed or announced, are great examples of this.

Speaker 3

Combined these, they oversee approximately $11,000,000,000 inclined assets, and we anticipate Today, we will add approximately $60,000,000 in annual revenues and approximately $22,500,000 in annual acquired base earnings. A little context on each. Ankora, which closed October 1, is a premier wealth advisory and investment management I'm in Cleveland, Ohio, with over $9,000,000,000 in client assets. The firm is a scaled wealth manager that has differentiated itself through its diversified service model, which is complemented by an impressive investment team and performance track record spanning more than 15 years. Amcor is particularly well known for its deep investment management expertise, offering its clients an array of proprietary solutions in equity, fixed income, mutual funds and alternative investments.

Speaker 3

Cardinal Point, which closed November 1, is a Toronto based wealth manager with approximately $1,100,000,000 in client assets. Over more than a decade, Cardinal Point has built a reputation as a leader in cross border wealth management. The firm addresses the complex needs of clients who are domiciled in both Canada and the U. S. Through the highly integrated approach it has developed over time.

Speaker 3

Cardinal Point brings a unique value proposition to the Focus partnership, enhancing our existing network, while also expanding Focus presence in Canada. Alman Wealth Partners, which is expected to close in late Q1, It's an RIA based in Jacksonville Beach, Florida, with approximately $700,000,000 in client assets. Alman's dynamic multi generational principal group make it a preeminent firm to partner with in the attractive Florida market. Each of these firms, as well as Sonora Investment Management, which closed October 1, joined Focus because we are much more than just financial acquirers. We are permanent investors offering a unique combination of entrepreneurship, Gross Capital and Value Added Services.

Speaker 3

I've said this before and it is worth reemphasizing. Having Focus as a long term strategic partner with the resources, intellectual expertise and scale advantages that enable our partners to become stronger businesses, grow faster and serve their clients better is an important competitive distinction. The value added services we provide are an essential element of what makes us attractive to the firms that join us. These are services that our partners have specifically identified as a need, and we are working closely with them to build advisor This quarter, we began to offer dedicated trust services under the stewardship of Ted Simpson, who recently joined us to head Focus Fiduciary Solutions, our and Estate's offering for our partner firms and their clients. These services will create a significant opportunity for our partners' advisors to expand and retain multi generational client assets.

Speaker 3

Similar to the approach we took with our cash management and credit solutions, We are leveraging a network of 3rd parties, in this case, advisor coordinated independent trustees, We have the scale and expertise to meet the diverse needs of our partners' clients and can do so at highly competitive pricing. That team works on a consultative basis with our partners to develop solutions that are tailored to the client needs. As we turn our sights to the Q4, I have no question that Focus will continue to generate We are the market leader in arguably the most attractive segment of financial services. There's no other firm that has our track record Independent Wealth Management and operates globally with our scale, scope, expertise and resources. Since our first partners joined us in 2006, we have been at the forefront of the industry, but we are actually just getting started.

Speaker 3

We are a pure play partnership, capitalizing on industry consolidation that is in its early innings, a trend that we believe will accelerate further and will characterize this space for the foreseeable future. 2nd, our 3 M and A models, direct partnership at the holding company level, mergers on behalf of our partners End Connector's acquisitions comprehensively serve the needs of this industry. And as a result, we are attracting many of the best firms. As such, We expect that we will have a sustained pipeline of high quality domestic and international M and A opportunities for many years to come. 3rd, the continued growth of our partner firms.

Speaker 3

They are operating as entrepreneurs, but are also benefiting from our value added services, which are enabled by our unique scale and expertise. Their performance track records demonstrate the color of their businesses, which was particularly evident during the onset of the 2020 pandemic crisis. Our 3rd quarter year over year organic revenue growth of 28.8% underscores this point. 4th, a tax efficient financial model that derives its stability from its reliance on fee based and recurring wealth management revenues that are not subject to fee pressure the way the asset management industry is. Our financial model is also CapEx light with a highly variable expense base.

Speaker 3

And 5th, a prudently managed capital structure with acquisitions funded by a combination of increased cash flow and low cost debt and by selectively using equity consideration for transactions earn out payments. With that, let me turn the call over to Jim. Jim?

Speaker 4

Good morning, everyone, and thank you for joining us Our 3rd quarter results reflect the strong performance of our business, and we have continued to build momentum into Q4. Our partner firms performed well in Q3 and delivered another quarter of strong growth. We have a long track record of acquiring excellent firms that are value accretive, capitalizing on a rapidly growing market that is consolidating quickly embracing the entrepreneurship that make these firms industry leaders central to everything we do and we provide them with breadth and depth of resources unavailable through any other acquirer in the market. We manage our business and growth in a disciplined way and the strength and consistency of our financial performance It's a testament to that. We have a substantial market opportunity ahead of us, not just here in the U.

Speaker 4

S, but internationally as well, which will fuel our expansion for years to come. We have demonstrated success in not only taking advantage of the opportunity set immediately in front of but also at identifying where the market is evolving to and adapting our business to capitalize on what the future opportunities will be. With that, let's turn to the highlights of our Q3 P and L. Our revenues were $454,500,000 up 37.1 As organic revenue growth across the partnership was 28.8 percent, exceeding the 27% high end of our estimate, Our Q3 adjusted EBITDA was $113,500,000 up 45% year over year. Our adjusted EBITDA margin was 25%, In line with our estimate, we continue to expect that our margins will expand over time due to the scale driven operating leverage of our business.

Speaker 4

Year to date September 2021, our adjusted EBITDA margin expanded by approximately 1.8% compared to the prior year period. Our adjusted net income, excluding tax adjustments per share, were $0.84 33.3% higher year over year, which reflected the effect of the incremental interest expense associated with prefunding of our acquisition activity in the second half of this year. As a reminder, we drew down $650,000,000 of our $800,000,000 term loan on July 1. Our tax adjustments per share were $0.14 up 16.7 percent for a comparable period reflecting our strong M and A momentum. It is important to note that our tax efficient structure of M and A transactions continues to provide a significant benefit to shareholders in the form of tax savings and frees up additional capital for the execution of our acquisition strategy.

Speaker 4

As of September 30, our gross unamortized tax shield was over $2,000,000,000 the details of which are in our earnings supplement. Almost every acquisition we make increases the value of this tax shield. Our M and A momentum was Strong in Q3 and as Rudy noted that has continued into Q4. We closed the acquisition of 2 new partner firms, ARS on July 1st and Badgley Phelps on August 1. These two firms contributed a total of $5,400,000 in revenues and $2,100,000 in Q3 or about 38% in adjusted EBITDA margin.

Speaker 4

Based on mid quarter activity, We estimate Q4 full quarter revenues and adjusted EBITDA of $7,300,000 2.7 $1,000,000 respectively from these closings. Additionally, Q4 to date, we have closed on 3 additional partner firms and have one signed and pending close, which we estimate will contribute a total of $69,000,000 in annual revenues and $24,900,000 in annual adjusted EBITDA or about 36% in adjusted EBITDA margin. Based on mid quarter closings, we estimate $15,000,000 in revenues and $5,300,000 in adjusted EBITDA in Q4 for these Now turning to our Q3 expenses and cash flow. Management fees were 100 $7,200,000 or 28 percent of revenues, relatively in line with the prior quarter. Our non cash equity compensation was 1.3 As a reminder, our GAAP results are impacted each quarter by the remeasurement of our earn out liabilities.

Speaker 4

This remeasurement, which is estimated using Monte Carlo simulations, resulted in an increase on the non cash change in the fair value of estimated contingent consideration of $36,200,000 in 4Q3, reflecting future growth of our partner firms. Additionally, in Q3, we also issued approximately 64,700 Class B units in connection with an earn out obligation. As we have said previously, we selectively issue equity in connection with acquisitions and earn out payments. Regarding cash flow, our LTM cash flow available for capital allocation as of September 30 was 299,700,000 54.4 percent higher year over year reflecting the growth of our partnership as well as the addition of 10 new partner firms and 21 mergers during this LTM period. We paid cash earn out obligations of $33,700,000 In line with our Q3 estimate, we anticipate that we will pay cash earnouts of approximately $35,000,000 in Q4.

Speaker 4

Now for a quick review of our Q4 expectations. We estimate that our Q4 revenues will be in the range of $475,000,000 to 4.85,000,000 We estimate a Q4 organic revenue growth rate of 17% to 20%. Our Q4 expectations also reflect the contributions of new partner firm additions. We anticipate that our Q4 adjusted EBITDA margin will be approximately 25%. As I've mentioned previously, we will update our long term adjusted EBITDA margin target at our Investor Day on December 9th as part of our overall review of our business strategy and long term growth targets.

Speaker 4

Now for a few comments on our balance sheet. We ended Q3 with approximately $2,300,000,000 of debt outstanding and a net leverage ratio of 3.54 times, in line with our Q3 estimate. Assuming markets stay constant at current levels, we anticipate that our Q4 net leverage ratio will be between 4x and 4.25x. We remain committed to our net leverage ratio range of 3.5x to 4.5x, which we believe is the most appropriate range given the highly acquisitive nature of our business. To close, we continue to deliver Strong growth and financial performance in Q3 and we anticipate that this will continue into 2022 and beyond.

Speaker 4

We are uniquely positioned to benefit from the large and growing independent wealth management industry, which according to an Envestnet report stood at approximately $6,000,000,000,000 in 20.19 in the U. S. Alone and is expected to grow to $9,000,000,000,000 by 20 24, expanded at a compound annual growth rate of 10%. According to several sources, the addition of international markets Just in the countries we invested in adds another approximate $4,000,000,000,000 to this total. It bears repeating that Focus is a pure play investor in the growth and consolidation of this industry globally.

Speaker 4

No other acquirer in this space, public or private, offers our track record and value proposition, which is supported by the benefits of permanent capital investment or has anywhere near our scale. It takes time to build these capabilities and we have a distinct first mover advantage. Taken together, all of these attributes contribute to outstanding and sustained financial performance, Industry leading growth and enduring competitive differentiation that creates sustained long term value for their shareholders. With that, let me turn the call over to the operator for Q and A. Operator?

Operator

Our first question is from Owen Lau with Oppenheimer. Please proceed with your questions.

Speaker 5

Good morning and thank you for taking my questions. Could you please talk about the outlook for acquisitions and how would the potential change in tax rate impact the pace of your M and A? Thank you.

Speaker 3

Yes. Hi, Owen. Thanks for your question. Yes, as we said, the overall Pipeline could not be stronger. We are very pleased with both quality, The diversity, the both domestic and international, probably working on more deals than I can ever remember that we have.

Speaker 3

And Yes, tax may or may not have some implication here in the U. S. Obviously, there's no implication in international. But let's always keep in mind that the fundamental driver of industry consolidation, the fundamental driver Of the ultimately our acquisition business is really the aging of The founders and the founding generation, you have heard the statistic before, 50,000 advisers just in the U. S, 65 years and older, managing $3,000,000,000,000 in client assets.

Speaker 3

Yes. These forces are so much stronger than just your taxes here or there. So we have no question that Our momentum in next year and in the years after is going to continue to be very, very strong.

Speaker 5

Got it. That's very helpful. And then, Rudy, you touched on cash and credit program and also the new trust services. Could you please give us a little bit more color on these value added services? Any numbers you can give it out?

Speaker 5

And then any other potential value added services you think could be material longer term? Thank you.

Speaker 3

Yes. So We have pretty much the type of services that we want to offer. It's now about depth, Deeper penetration, increase in sophistication, increase in scale and purchasing power in all the services that we are offering. Maybe there's 1 or 2 others that we can think of, But I think we have what we need. Cash credit continues to be a very successful program.

Speaker 3

We have participated, The consultant advised help with the closing of €2,000,000,000 in transactions here since program inception. And we view this as just using the scale, the aggregate scale of Our organization using our purchasing power to create better solutions than any of our Partners or quite frankly anybody in the industry could provide for the end client and for our partners. So very good momentum. We announced earlier this year the Orion joint venture, you may remember, in the cash and credit area, Just had a conference call with like 500 of their clients, which was again very, very successful and well received Early days, but we believe this is a high differentiation program. Trust, we just launched.

Speaker 3

It's now about Education and again lining up the right trust companies to provide preferred solutions for our Clients and our partners, we have a very good roster right now with about 10 of them, both domestic and international, and The early indications are very positive. The key theme for all of these value added programs is ultimately about equipping our partners with all the capabilities, all the skills of a high end private banker without any of the package. But we are really going beyond the private banker in the sense that we have The concept of open architecture to the high end of the credit market, Which certainly to my knowledge has never been done before. Yes, you have Quicken Loans and so on in the mass market. But a curated sophisticated lending solution, We are using a whole number of different banks as preferred providers and passing this through for the 2 clients It's really a new solution, and we are very pleased where we are at this point.

Speaker 5

Got it. Thank you very much, Woody.

Speaker 3

Thanks, Owen.

Operator

Our next question is from Alex Blostein from Goldman Sachs. Please proceed with your question.

Speaker 2

Good morning, Rudy, Jim, everybody. Question, I guess, on the pace of M and A transactions for you guys, really robust Activity over the last several months, several quarters now. When we think about the constraints, the financial Obviously being the leverage, you guys I think are guiding to a little bit of a 4 times debt to EBITDA into the 4th quarter. Not surprisingly that's ramping given the old activity. So do you still generally expect to be below 4.5 As a kind of target over near and longer term and to what extent does that affect So could we anticipate a moderation as you kind of get into the 4s?

Speaker 2

Or the other things you're doing that could kind of keep you on the similar pace that we've seen recently?

Speaker 3

Yes. Thanks, Alex. Dean, momentum is just Yes, incredible. There's no other way to put it. Yes, 31 deals announced year to date.

Speaker 3

And reality is we were always committed. We are committed to the 3.5% to 4.5% range. That is the what we believe the right range for us operating as a public company. And clearly, when you look at our performance last So this year and particularly in the or in the Q2 last year, it was always extremely strong and it demonstrated the resiliency of this business model. So we think 3.5%, 1.5% is the right range.

Speaker 3

You have seen already now, but also So in a number of future transactions, as we always said, we are willing to use equity. And yes, we have a number of transactions where there is And then, of course, as you know, our cash generation is just extremely strong, About $300,000,000 this year growing at very, very significant pace. So we believe Yes. We, on the one hand, certainly are not opportunity constrained, meaning that there is so many opportunities out there. But the combination of our cash flow, of course, the tax shield, our ability to use equity It gives us all the flexibility that we currently need.

Speaker 3

And as I said, told Owen before, Yes, I don't see next year or any of the coming years, you have some significant change in the pace of M and A that M and A opportunities that we see.

Speaker 2

Yes, just to maybe add

Speaker 4

to that is we clearly have dry powder with the undrawn term loan and our revolver and so forth, but the cash element continues to grow on an LTM basis and success begets success. And this cash flow limits our use of leverage for future periods. And then as we continue to structure transactions in a tax efficient manner, The tax deductions also shelter the cash flow. So we think the future is bright and we have great opportunity here with the M and A pipeline, but We'll continue to be prudent in terms of managing our leverage and our guidance.

Speaker 2

Great. Thanks for that. My second question is around operating leverage dynamics And appreciate, Jim, you guys are going to give us updated targets on EBITDA margins at the Investor Day in December. But I'm really just kind of trying to better understand what's going on. I mean, Over the last couple of quarters here, so when I look at the sort of Ebok margin, right, so kind of consolidated margin in the business, It's been improving nicely over the last 3 to 4 quarters and kind of goes in line with scaling of your partner firms, so that makes a ton of sense.

Speaker 2

But then if I look at the EBITDA margins, it's been coming down a little bit and that's really just a function of the management fee Kind of payout and the expense growing as a percentage of that EBITDA number, if you guys kind of follow what I'm saying. So is that a function of The leverage is coming from some of the larger firms and you have less equity in those firms and therefore the expense ratio is skewed in the wrong way keeping the EBITDA margins Flattish as opposed to you sort of participating in the operating leverage from your management team partners. So I'm just trying to kind of better understand Yes. The scaling of the affiliates relative to the scaling of Focus.

Speaker 3

Yes, yes. So let me talk about the operating leverage here. So First, just the fundamental trend. In 2015, the EBITDA margin was 19.7% And your Q3, we reported your 25.3 percent EBITDA margin. So the megatrend from a margin improvement I kind of couldn't be stronger.

Speaker 3

And it's really on multiple levels. One is, yes, our partner firms. Yes. And you are correct. Really many of the larger partner firms ultimately see margin improvement.

Speaker 3

And this then just translates to our percentage of ownership into our P and L. But quite frankly, in the small firms, they scale very fast, and we see Partner level operating margin, quite frankly, our thriving merger business is an important contributor to this. Still a little bit small, but well, coming exactly with the PACE that we expected, Connectus is also going to be a higher margin business as we discussed on prior calls. So I wouldn't read too much into quarter over quarter trends. I think it's the long term trend that really matters here.

Speaker 3

And yes, Jim and I are not ready to give you the numbers. You have to come to Investor Day in December, But we are going to revise our 2025 and beyond margin target upwards. And, well, I'm not ready to give you the number yet, Alex.

Speaker 2

Okay. Fair enough. We'll see you in December.

Operator

Our next question is from Kyle Voigt with KBW. Please proceed with your question.

Speaker 6

Hi, good morning. Maybe just ask a follow-up on Alex's question. Rudy, I know you've selectively used equity transactions in the past strategically, especially for tax purposes. But I still think a very high percentage of your deals Over the past few years have been done with cash consideration. So as you look ahead and just given the commentary on equity consideration, I'm just wondering if I'm inferring correctly that you're are you more willing to use a higher percentage of equity consideration on an ongoing basis now or am I Am I inferring incorrectly there?

Speaker 3

Yes. No. Hi, Kyle. You're inferring correctly Yes. With cash being so cheap for us, the blended rate of 2.5%, Yes, of course, it's highly, highly attractive.

Speaker 3

But then at the same time, we have to be quite frankly got a lot of It will be for larger transactions, and we have historically used it for larger Transactions. And quite frankly, of course, there's a lot of interest in the equity. And then we have this unique ability, Kyle, where we can issue upstairs equity and where we can use downstairs equity for obviously through our upsea structure, It's actually a real competitive advantage because when you have the downstairs equity, again, it's for larger deals. Basically, it's a tax free Change on the LLC side, which is very, very unique and I don't think anybody else can offer in the same format as we can. So It's a very powerful currency.

Speaker 3

So yes, you're hearing correctly from time to time, particularly for larger transactions, we are going to use Some of our equity currency options, but the majority will continue to be ultimately cash.

Speaker 6

Understood. Thanks for that, Rudy. And just a question on the leverage ratio. You've guided to that 4 to 4.25 range by the end of the year, just over 3.5 turns now. I guess when we take into account the organic growth in 4Q And we also take into account the run rate pro form a EBITDA related to the deals that you've announced that are expected to close in that quarter.

Speaker 6

We're still struggling to maybe see how there would be more than a half a turn added to the net leverage ratio in the 4th quarter specifically. So I don't know if Jim, maybe you could help us kind of bridge that gap a little bit. Is there anything that we're really missing? And then also, Maybe we could get a little more color on recent purchase multiples and if those have changed at all? Thank you.

Speaker 3

Yes. So let me talk about the multiples first, and Jim, you can jump in on the leverage guidance. And It's obviously for every quarter we give very narrow guidance, very precise guidance. And so we can basically help you with your model there. But On the multiple side, quite frankly, we like what we see.

Speaker 3

We always have the ability for Very for high quality fast growing firms to flex on the upside, we have For smaller firms, for mergers, some of our international deals, we see very attractive multiples. Ultimately, we will give you again on Investor Day an update on the returns that we are generating, And they continue to be very, very attractive. So we are very comfortable where we are. We use the flexibility that we have when we have to. But first and foremost, just look at the quality of the firms that we are bringing in.

Speaker 3

31 deals year to date, this is going to be our most Successful M and A year and we expect to achieve again very, very attractive returns On the let's say the 2021 or what we expect will be the 2022 vintage of partners joining us?

Speaker 4

Yes, I think we closed this quarter Q3 at 3.5x on the net leverage ratio. We've Close in the queue, we've deployed over $400,000,000 of cash for transactions. We've closed, I think 13 transactions already in Q4 and we have a range of 4 to 4.25 is the guidance for Q4 at this time and we continue to work on transactional activity.

Operator

Our next question is from Craig Siegenthaler with Bank of America. Please proceed with your question.

Speaker 7

Good morning, Rudy. Hope you're doing well.

Speaker 3

Hi, Craig. Welcome back.

Speaker 7

Thank you. Thank you. So, I just had a question on your alternative investments. I believe your largest LA based Affiliate has a pretty robust auth platform, and they're in the process of leveraging their platform to help some of your other partners Get broad access to all of us. Can you update us on this effort and just see how it's been progressing?

Speaker 3

Yes, yes, absolutely. You're referring to SCS, Which is actually a Boston and L. A. Based firm and New York based firm. And yes, we certainly believe Yes.

Speaker 3

The alternative program is one of the very best in our industry. It's well above $10,000,000,000 with Terrific track record behind it. So it's about a third of the asset base. And we call the program a portfolio Where we make these solutions from SCS, but also other firms Like COVID in Chicago has very high quality real estate investments, hedge funds and other Solutions and there will be other partners who will have the ability to participate. So through portfolio optimization, other focus Partners, you can tap into these programs.

Speaker 3

The example I used in the past and that's going very well is California based From Vista, it was kind of our guinea pig. They are a Silicon Valley based firm and really were very interested in enriching their investment solutions. And in the moment, they could tap into the SCS program, Not just could they broaden their value proposition in ways that they could have never done any other way because it takes years years and enormous scale to build a program like this. And quite frankly, it resulted in larger clients converting with larger, per definition alternative asset Percentage of allocations and just a very, very attractive mix that they needed to serve an increasingly ultrahigh net worth clientele that they are serving. And we are making this program more broadly available at this point.

Speaker 3

In fact, We are heading to our partners meeting next week, actually our first in person partners meeting, which is very exciting actually. And there we have a pre session where all the CIOs of many of our partner firms come together and talk about their unique solutions and basically make them available to other partners firms who may be an interest. And of course, SCS will be one of the featured speakers there and we Very high level of interest in what they can offer. Now here's the important thing, Craig, and thanks for your question. So this is not a distribution model.

Speaker 3

So this is not what the wirehouse would do or asset managers who basically, If you want to push underperforming overpriced products down the throats of their clients, that is absolutely not what we are doing. We are basically creating simply excess, Yes, access to high quality solutions where our partners at their choice can access these if they want to. Yes, this is very much in the spirit of entrepreneurship and decentralization. But whether it is alternatives, Whether it is cash credit, what we discussed before, whether it is trust solutions, multifamily office solutions, valuation programs and other things, Yes, they all ultimately are a result of the by the standards of this industry enormous scale that we have built. And this scale simply creates better outcomes for our partners and for their clients and alternatives It's at the very top of this list.

Speaker 7

Thank you, Rudy. And maybe Tina will chime in and correct us on this one. But I believe you generally point us to a rough client AUM mix of fifty-fifty equities to bonds like when we're running stress scenarios. But do you know what the rough mix of client AUM invested in Alta today inside of that mix? I imagine it's probably in that equity side.

Speaker 3

Yes. So usually, we are saying between 50% and 55% equities and the balance non correlated. And the alternative component, we don't really break out. But given that we are serving the and yes, it would be the non correlated, that's Correct. Part of the asset mix.

Speaker 3

But of course, given that we are serving high net worth, ultrahigh net worth families, Yes, the overall level of alternatives is actually pretty high. I mentioned before SCS is a $30,000,000,000 firm, Over DKK10 billion are alternatives. That probably is one of the highest allocation and is driven by the sophistication that they have in this area. But from an overall perspective, particularly in this low yield environment that we are currently in, alternatives are a very important part

Operator

Our next question is from Michael Young from Truist Securities. Please proceed with your question.

Speaker 8

Hey, good morning. I wanted to ask just a question on the M and A, maybe kind of 2 parts. 1, as your AUM base Getting larger, do you plan to run faster with more M and A deals at a similar size or look at larger deals? And then 2, just kind of what are you seeing in terms of interest and demand out there, in terms of acquisitions by the 3 buckets? Is there more demand for Connectus or becoming a partner firm, etcetera?

Speaker 3

Yes, yes. Thanks, Michael. So I never believed and when you look through Focus' history in kind of elephant hunting, the big flashy deals, We continue to see the biggest opportunity in the north of €1,000,000,000 and Probably $5,000,000,000 range. Of course, we do do transactions larger like Ancora, it's a $9,000,000,000 firm. But yes, 1st and foremost, we look for firms that simply are aligned with our vision.

Speaker 3

You want to protect Your clients through continuity of advice, you want to have access to value added services, you want permanent capital and you want to in an entrepreneurial way, quite frankly, focuses the only game in town. And we are looking for firms where this resonates. So I don't see us getting into the need or in being it attractive to be in this Elephant business, Which is the implication of your question, Michael, is yes, we simply do more deals Yes, in our sweet spot range, occasionally also some larger deals, occasionally some smaller deals. But we have the largest M and A team in this industry. We are operating on a global scale or in multiple markets.

Speaker 3

And quite frankly, I have no question We can, by keeping the mix quite comparable as it has been for a number of years, to basically meet our objectives And I could stay on the absolute forefront of industry consolidation and ultimately creating Value to clients and advisors through the scale and sophistication of the model that we have.

Speaker 8

Okay, thanks. And my second question, I don't know if this is a better one for Rudy or Jim, but just as we think about kind of the macro pressure of inflation and therefore higher rates headed into potentially 2022 or 2023. I'm just trying to think of how that flows through kind of your business model and any reviews you've done to that effect, particularly as it relates So maybe operating margins and management fees, I'm not exactly sure how those behave kind of in an inflationary environment.

Speaker 4

Yes, I think from the revenue standpoint, as we've often said, our revenues are fee based recurring in nature. It's wealth management holistic service. So we don't have interest revenue as a component. The interest expense It's more driven on rates for our P and L and we constantly evaluate our fixed and variable exposure. We have $850,000,000 of our term loan is hedged at this point, dollars 6.48 of it is a 50 floor, so that operating cost Already being incurred and we'll continue to moderate what the Fed does in terms of the long term interest rates, but We don't think it's anything significant that will limit our goals at this point.

Speaker 3

Yes. And Michael, yes, just strategically, and I said before, just Stay tuned. We will update our return numbers here at the Investor Day, And they will be very, very strong. And of course, from a pure macro perspective, there should be an inverse relation between interest And it's the overall weighted cost of average weighted average cost of capital that of course is critical. But then also what's the returns that you are generating based on the multiples and the growth that you are paying?

Speaker 3

So quite frankly, Any smaller changes from a macro perspective have very little impact on what we are doing. And if there was some more dramatic changes, Yes, that's the power of our business model and this entrepreneurial decentralized structure that we have. We can adapt 2 different rate environment, different market environments, extremely fast. And if there's anything we have demonstrated Q2 last year This business model is just extremely resilient and very flexible to ultimately adjust to just about any reasonable scenario that It's good that near Mac who could throw it the business.

Speaker 4

Okay, thanks.

Operator

We have reached the end of the question and answer session, and I will now turn the call over to Rudy for closing remarks. Rudy?

Speaker 3

Yes. Thank you. To conclude, I'm extremely proud of the level of growth and momentum our business is achieving. We are firing on all cylinders and our results this quarter are reflective of that. This outcome could not have been possible Our partner firms who continue to perform exceptionally well, deliver outstanding service to their clients and define leadership in this industry.

Speaker 3

It would also not have been possible without our holding company team. We have said many times that we have the best team in every facet of our business and our results this quarter are again reflective of that. We're extremely well positioned, not only for a strong finish to in our second quarter, but also to deliver strong Sustained growth and execution for years to come. We look forward to telling you more about that at our Investor Day on December 9. And many of our partner firms will be there as well as they will there's no better way than they conveying the Focus story.

Speaker 3

And we are very much looking forward to seeing many of you at Investor Day. Thank you all for your interest.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Focus Financial Partners Q3 2021
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