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M&A observers see risk in CI’s US Wealth spinoff

Canada-based asset management firm CI Financial, which is aggressively buying investment advisors registered in the United States, said on Thursday it would Sell ​​up to 20% of your US wealth management business Through an initial public offering, using the proceeds to pay off debt that helped fuel the spending binge.

But observers close to RIA’s mergers and acquisitions space say closing the US money business is a bold move that will speak volumes about the health of the market, and test CI Financial’s rapid growth strategy. Going forward, CI Financial will have to be more transparent about its acquisitions and, given the equity performance of other publicly traded wealth management firms in the U.S., may not expect valuation officers there to have an overall There could be consequences for the industry as a whole.

CI Financial CEO Kurt McAlpine said in an email interview with WealthManagement.com, “CI believes that the growth and success of its US wealth management business is not accurately reflected in CI Financial’s current share price. is.” “As the fastest growing US wealth management platform, after starting without any assets in early 2020, to become a national, leading RIA network with $133 billion in assets in two years, CI believes ​—that its U.S. wealth management business would be an attractive stand-alone public company.”

A source close to RIA M&A Space, who declined to be named, said the move made some sense that CI Financial’s stock, which is traded on both the Canadian and US exchanges, has been trading for the past several years. It has been under pressure for years, with analysts flagging it. The increasing level of debt of the firm.

The firm’s US-listed stock price is down 27% year-over-year. And while the company doesn’t break out the specific debt to wealth business, its gross debt has more than doubled from $1.6 billion (Canadian dollars) in 2019 to nearly $3.8 billion (Canadian dollars) in 2021.

“I think what might ultimately bite them is … too much pressure to disclose … the biological evolution numbers, which they no longer need to do,” the source said. “There’s going to be a lot of pressure to disclose the details of the transactions they’re doing, the multiplier they’re paying, the debt that pertains specifically to US transactions.” CI is not currently required to disclose the specifics of its US RIA transactions because they are not “physical” deals.

But the strategy only works if they can get that high multiplier on the US money business, this executive said.

This executive said that in private markets, where companies such as Mercer or Wealth Enhancement Group are active buyers, RIAs are valued at around 30 times. This is where CI Financial has been aggressively trading deals by buying more than 30 firms since entering the US market in January 2020.

Publicly traded Focus Financial, also an aggressive buyer, trades at 9.5 times EBITDA, according to a March Deutsche Bank report. Silvercrest is trading at around 13 times earnings, this executive said.

“They have to start convincing the market that there is a plan to integrate all these very independent businesses into a single … CI Private Wealth,” he said. Many of the firms that CI has acquired are not obliged to name CI Financial.

Matthew Crowe, president of Mercer Capital, a business valuation and financial advisory services firm, said CI’s move was a surprise to him as it already has access to the public markets.

“They already have what they’re going after,” Crowe wrote in a recent LinkedIn piece, adding that the performance of publicly traded consolidators such as Focus Financial, Silvercrest and CI Financial is increasing. Equity markets have remained “weak” though.

“(CI Financial) is public on an exchange that is very close to the United States. It is well known that almost half of their business is a US wealth management business. They have already gained a lot of attention and notoriety and their stock is reasonably liquid. It’s not clear why the US market would then trade at a different valuation, he said. “I think you’re adding a layer of spending to the corporate entity that can’t meet anything.”

Crowe said using equities to pay off debt in a period of rising interest rates could have unintended consequences.

“Debt capital is generally considered cheaper than equity capital, net-net, so usually the only reason to issue equity to replace debt is if you feel that either you cannot repay the loan or you Concerned that the cost of debt is going to rise significantly,” as may be the case with rising interest rates, he said.

“Unfortunately, the same interest rate sensitivity that causes you to do this probably isn’t going to bode well for the money management industry in general because it’s not going to do good things for the financial markets, and therefore AUM, and therefore revenue.” And hence the profitability at these wealth management firms.”

Crowe said that if consolidators feel their balance sheets are overstretched, they may withdraw from the M&A market, which could lower valuations across the board.

“The strong pricing in the private market is being created by people like CI Financial who are looking for cash right now. It’s a slightly closed system, and that probably tells us a lot about the direction of the industry.”

Another source close to the M&A space, who also declined to be named, agreed that the low valuation of wealth management firms in the public markets raised further 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 get more value than you’re supposed to,” he said. “I can’t imagine what they are thinking, given that Focus trades below the price that CI is paying in the market.”

He says CI’s strategy has always been a bit confusing because McAlpine is quick to say that CI Financial is not building an “aggregator” model; The firm is not forcing these RIAs to change immediately.

“There’s a lot of people in the industry who are looking at this whole situation and saying, ‘What’s the end game here? said the executive. “Are they really adding any value if they’re just buying at top dollar and the pitch is just ‘we’ll leave you alone’? How do you get any rapport? If you’re buying the firm and leaving them alone How do you get a scale?”

The source said there is a perception that public companies benefit from “fixed capital”, while firms funded by private equity have their own investors and the willingness of fund managers to consider monetization timelines. .

But in truth, public companies that stumble are also vulnerable, he said. Manning & Napier, a publicly traded investment management firm, was recently taken private With the support of billionaire Terry Pegula.

“If CI’s stock doesn’t perform, now they’re vulnerable to someone coming in from outside and saying, ‘We’re going to pay for this, and there’s a new sheriff in town and we’re going to take it. are in different directions.'”

Jim Dixon, CEO and founder of Sanctuary Wealth, says the move will create some uncomfortable moments for CI financial executives, as they will have to answer to equity analysts, and there will be a lot of scrutiny about the transactions they do and will do. . going forward.

Still, he thinks the positivity outweighs the negative.

This is evidence that the RIA business has had multiple exits for earlier investors and firm principals, he said. The public market, he said, is a great way for some of the RIA firms bought by the company to get liquidity.

“I think one thing a lot of people are saying privately is, ‘How many national RIAs can go public? Is it $100 billion in assets and $100 million in revenue?'”

He said several industry participants are trying to find out. At what point exactly is an RIA set to become a sustainable company in the full light of the public markets?

“I think a lot of eyes are on this business and a lot of eyes on this opportunity because it’s going to tell,” he said.

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