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US Private Equity Firm Clayton Dubilier & Rice $7bn+ acquisition of Focus Financial Partners

Updated: Oct 30, 2023

Acquisition Overview

Last month (02/2023) U.S. private equity firm Clayton Dubilier & Rice made the decision to buyout Focus Financial Partners in an all-cash deal at $7bn+. This deal is part of a recent focus for private equity firms on wealth management platforms, considering them an attractive investment as well as support Focus Financial in speeding up its growth plan and bolstering its client service, whilst also granting CD&R a fresh avenue for investing in the wealth management sector which has seen cases of consolidation in recent times as companies aim to build upon the services they offer and capture a larger portion of the market.

Deal Structure

Focus Financial Partners, a top independent wealth management organisation is set to be acquired by Clayton, Dubilier & Rice (CD&R), a private equity firm, in a deal around a value of $7bn+. The transaction, projected to be completed in Q3 of 2023, values Focus Financial at $53 per share in cash, which is 36% more than the average price of the stock for the 60 days before the announcement of the deal. This means that the stockholders will receive a higher price for their shares than what they could have sold them for before the deal was announced. In CD&R's acquisition of Focus Financial Partners, the implied equity value is $5.5 billion without taking into account any debt that Focus Financial may have had at the time of the acquisition. This means that CD&R is valuing Focus Financial's assets and operations at $5.5 billion, excluding any liabilities that the company may have had. This can be seen as the estimated value of the company's equity or ownership in the company that CD&R is acquiring.

With respect to the advisors of this transaction, RBC Capital Markets, Bank of America and Moelis are offering financial advisory to CD&R, with Simpson Thacher & Bartlett LLP and Debevoise & Plimpton as supporting advisors. while Goldman Sachs and Jefferies advising Focus Financial, with Vinson & Elkins LLP as supporting advisors.

Focus Financial Overview

Focus Financial Partners is an organization made up of independent, fiduciary wealth management firms. It was established in New York in 2004 by Rudy Adolf, Lenny Chang and Rajini Kodialam and has offices in New York and San Francisco, as well as partner firms across the US, Australia, Canada, and the UK. Focus Financial provides comprehensive wealth management services to individuals, families, and businesses through its network of partner firms across the United States, Canada, the United Kingdom, and Europe. Focus Financial Partners operates in the Registered Investment Advisor (RIA) market, which is the fastest-growing segment of the wealth management industry. Focus’s partner firms offer a range of services, including investment management, financial planning, tax planning, and estate planning. Focus Financial Partners is committed to providing its partner firms with the resources, support, and expertise they need to deliver the highest quality of service to their clients.

Founded: 2006

Number of employees: 5,000

EV: $6.30bn

LTM Revenue: $2.1bn

LTM EBITDA: $506.7mn

Market Capitalisation: $3.4bn

Clayton Dubilier and Rice Overview

Clayton, Dubilier & Rice (CD&R) is a US private equity firm that focuses on building stronger, more profitable businesses in various industries including industrials, healthcare, consumer, technology, and financial services. The firm is headquartered in New York City and has additional offices in London and Paris. CD&R primarily invests in North American and European companies across a variety of industries, with a focus on industrial and consumer sectors. The company has been in operation since 1978 and has managed investments worth over $40 billion in more than 100 companies, with an aggregate transaction value of more than $175 billion.

The firm has a long history of successful investments, including in companies such as Hertz, Sally Beauty, and Belk. Notable past purchases including the UK based supermarket chain Morrisons and Wolesley (UK’s largest supplier of building and plumbing materials).

Industry Insight

Many firms in the wealth management industry are joining together to become bigger and offer more services so they can be more competitive and increase their share of the market. Consolidation allows firms to combine resources, reduce costs, and potentially offer more comprehensive services to clients. By gaining a larger market share, firms can also benefit from economies of scale and potentially increase their profitability. Overall, recent trends suggest that the wealth management industry is becoming more concentrated, with larger firms potentially dominating the market in the future.

This trend is expected to continue in the coming years, with private equity firms playing a key role in driving M&A activity. Additionally, the macroeconomic backdrop, such as interest rates and regulatory changes, is expected to have an impact on the industry. For example, rising interest rates may lead to a shift in client preferences for certain types of investment products, while new regulations could increase compliance costs and create operational challenges for firms. The wealth management industry is poised for continued growth and evolution, and the acquisition of Focus Financial by CD&R is a clear indication of the ongoing consolidation and strategic positioning taking place within the industry.

Strategic Rationale

The acquisition of Focus Financial by CD&R presents a strategic opportunity for both companies. The acquisition of Focus Financial provides CD&R with a new opportunity to invest in the wealth management industry. The industry is currently experiencing strong growth due to long-term trends, and it is also consolidating, which means that there are opportunities to buy and merge with other companies in the industry. So, the acquisition is a way for CD&R to enter and expand in the growing wealth management industry. CD&R has a track record of successfully investing in financial services companies and sees Focus as a strong player in the independent wealth management space, which is a high-growth segment of the industry. On the other hand, Focus Financial views the transaction as a way to accelerate its growth strategy and expand its offerings to clients. By becoming part of CD&R's portfolio of companies, Focus gains access to additional resources and expertise, which can help it to drive growth and increase market share. The driving forces behind the transaction include the consolidation trend in the wealth management industry, the need for independent wealth managers to gain scale and remain competitive, and the opportunity to create value through synergies and operational improvements.

Long Term Prospects

The Registered Investment Advisor (RIA) market is where Focus Financial Partners operates, which is the fastest-growing segment of the wealth management industry. There is an increasing demand for fiduciary advice and the market for it is witnessing a rapid consolidation.

In 2021, RIAs outperformed national full-service wealth managers, receiving a higher share of net flows compared to their share of total client assets. The growth of the RIA market is due to advisors moving away from national full-service wealth managers. The consolidation of the wealth management industry is set to speed up, particularly for medium-sized and smaller independent wealth managers.

Finally, in my opinion, it could be argued that Focus Financial with the support of CD&R would be in a good place to bolster its position in the US RIA market. With partner firms located in 35 US states, you could say that Focus Financial is in an advantageous position within the US RIA market already hence making it a good fit for CD&R to acquire to follow the recent focus for private equity firms on wealth management platforms.

Written by Magnus Yeung (London School of Economics and Political Science)

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