Q2 2020 Focus Financial Partners Inc Earnings Call

Good morning, I would like to welcome everyone to the focus financial partners 2022nd quarter earnings call.

Joining today's call our Rudy eight off founder and CEO, Jim Shanahan, Chief Financial Officer, Rusty Mcgranahan General Counsel, and Tina Madon head of Investor Relations and corporate communications.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

I would not like trying to call over to Mr. Mcgranahan. Please go ahead.

Good morning, everyone before we begin let me remind you during the course this call we may make a number of forward looking statements. We call your attention to the fact the focus results may of course differ from these statements. These statements are based on assumptions made by information currently available to focus financial partners.

Risks and uncertainties that could cause the results of focus to materially differ from these statements.

'cause, it's made filings with the FCC, which some of the factors that may cause its results to differ materially from these statements, including without limitation uncertainty surrounding the current cobot 19 pandemic and finally focus assumes no duty and does not undertake to update any such.

<unk> looking statements with that I will turn it over door founder and CEO Rudy Adolph D.

Thanks, rustic [laughter] good morning, and thank you for joining us.

We hope that you and your family so remaining healthy unsafe and just on certain times.

This morning, we announced a war second quarter results with 313.1 million in revenues and adjusted net income per share of 71 cents.

Because 67% off a market correlated revenues a building advance you fixed off the Q1 market dumped <unk> primarily reflected in our Q2 performance. However, our weeks results exceeded the high end all of our expectations into our powerful information off to resiliency.

For our business our partner firms continue to do an outstanding job, helping to clients navigate the pandemic and defocus team works tirelessly to support our partners in all aspects off their response to this unprecedented event I'm extremely pleased because all financial and operating performance in.

You too and I feel very good about the outlook for Q3 and beyond.

Oh partners are working remotely very effectively and feeling confident client service remains Paramount and all parts does have to adopt it seemed to sleep do engaging base decline seen a beautiful setting into current environment. There's no such thing it's too much communication is prudent fiduciary device remains.

Utmost importance.

Deepened Democrats amplifies the value of trust.

There's also reinforces the importance of flexibility in how we advice service into extras declines.

Fourth most clients are sophisticated ultra high net worth and tighten it was individuals busy lives in multiple personal and professional demands.

They are dedicated us who depend on the advice us who can help them manage dose demands.

Do you want in integrated approach that is centered on just specific objectives and delivered into personalized way, especially into current environment.

Oh, what portion is well suited to meet this needs.

They were able to perhaps provide comprehensive services into unconflicted advice electing to products and services that best fit the needs of their clients regardless off provider.

They can adopt the infrastructure and technology, it's didn't need softest flights change moving face to face Klein communications to zoom is a good example.

Equally important our partner so entrepreneurs working with clients will often entrepreneur stem cells and half irrelevant around it understanding of declines lifes as a result.

It is we'll do this recent stood the apartments have high client retention. Despite the bullet type markets over recent months.

It is also by de our senior referrals. The pandemic has created an opportunity to attract new clients.

<unk> because they are working remotely and have more time to think through device in service needs. We anticipate that this flight to quality over device will accelerate further post crisis and did all part does will be beneficiaries.

We posted in new video to the Investor Relations section of our website. This morning in which some of our partnership with your perspective on what personal nice client service really means they discussed how do you approach taken by already used to superior versus other channels that sort of ultra high net worth antitrust clients and why I wasn't sure.

This models are a major catalyst for driving referrals gross into future.

[laughter] focus continues to play a prominent role in supporting all partners. We recently completed it tend to be ritual summit series that brought the apart doesn't imply used together for a discussion Swiss focus and industry experts. This serious covered the range of topics rather than to the pandemic, including business development investment management.

And in best practices in cyber security, but also addressing areas such as yes, she and impact investing.

We also continued to provide top harkness was arranged for value added services lending critical support they highlight the uncertain time. Additionally, you're helping them assess potential <unk> if they focus on gross many see an even larger and more compelling opportunity for long following this market dislocation compare.

<unk> to the post Oyo eight or nine period.

Our business isn't bettering day volatile markets well the diversity in fee based nature of our revenues our earnings preference the variability off our expense base into strong alignment that we have we saw partners. If we stood the recent market.

It's markets have improved our business has not experienced any recovery like Jim will provide more details but documentary estimates reinforced this point.

Although the slowdown in M&A activity has persisted into the third quarter conversations are picking up into our im in a momentum is expected to increase.

In Q2, we added one new partner from and completed one merger did they didn't Q3, we have completed one bertram insight to numerous betray expected to close in Q3.

Expects to announce additional transactions in the coming weeks, we are managing an attractive pipeline and continue to believe that they're large percentage off these transactions will sign in close later this year or early next it's the rationale for these transactions has not changed and in many cases has been reinforced by the pandemic.

It's we look at their remained off Twentytwenty all market. Just some true is that economic activity will improve further into back half of the year old old piece of recovery, maybe on even getting deeper system to rise in cobot cases. However, we continue to anticipate that an acceleration in M&A activity will begin in.

Q4 or early 2021.

We believe that the backlog of transactions. This growing didn't did the one level in Q2 wouldn't you stream and longer term industry trends. We believe these dynamics will be a driver or strong growth in our industry the months and used to come and many will fall part that's already have strong pipelines.

[noise] pre crisis client assets were already shifting from wire houses to our race while at the same time the need for skier most becoming increasingly important we scoring regulatory complexity and rising infrastructure costs.

According to <unk> really from 2006 through 2019, DRA channel grew faster than all other segments off their wealth management industry combined.

Independent advice, a managed assets increasing it cagar off 10.2 per cent compared to an average of 4.8% for all other industry segments.

This industry has also historically experienced strong gross falling market downturns. According to <unk> really all race have historically increased their I guess, the gross by 60% to 70% in the first two years after market disruptions compared to their long term girls average, creating an exceptional margin off.

Outperformance over other wealth management channels.

We agree this industry consultant, David Devault that historically, there has been four distinct phases of M&A activity around market crisis first the completion of transactions already announced second sharp slowdown in your transaction activity. It's always focused on clients. During this crisis.

Area third it post crisis search in transactions is already its realize that they don't want to go through the challenges off another market disruption. They don't have sufficient scale or they don't have a succession plan and force a return to normalcy.

You're willing to face tool and believe that phase three will be larger then we have seen historically, creating an inflection point for the wealth management industry overall.

We believe we are uniquely positioned to capitalize on these dynamics, which will create excellent growth opportunities for years to come in the U.S. and internationally.

On average our partner from so larger grow faster and more profitable than the industry as a whole.

They have talented management team steep decline pieces the necessary infrastructure in service offerings, all of which we believe position them to benefit disproportionately from industry trends and many of them already has strong pipelines.

And at the resonates in the first mover advantage in deal sourcing given our extensive network of relationships in the industry.

We have here rigorous investment process that has been refined over time, and we have consistently generated returns well above our IR our targets.

I'm proud of what we have accomplished in the months since that pandemic struck of to stability interest Cillian CFR business and to result in strengths of our financial performance and of how cold. It has further reinforced our core value proposition.

We have maintained our financial discipline and via our partner firms have not needed to except government loans, including PPP loans.

We viewed it as inappropriate to take resources from business is truly in need to have to support.

Focus is leaning in not just surviving this turbulent period I'm excited about that post crisis opportunity and I'm confident that we will benefit disproportionately.

Instead, let me now turn the call over to Jim Jim.

Good morning, everyone I hope you on your families or stay in safe and healthy our second quarter results were stronger than we estimated which is a testament to the strength of our business. We generated revenues of 313.1 million above the high end of our anticipated Ranch 296.

300 million.

The outperformance was due to improved market conditions and better than expected results from our firms who provide family office type services. Accordingly, our Q2 year over year organic growth rate was minus 0.3% compared to an expected minus 5% to minus 7% are.

And I per share was 71 cents versus 55 cents in Q2 2019.

Although economic and market uncertainty persisted throughout Q2, our partner firms continue to deliver excellent client service and managed to manage their business as well while simultaneously position themselves for future growth.

These attributes reinforce the unique competitive advantages of our partner firms share their stable high performing businesses with seasoned management teams and exceptional advisors are taken advantage of our resources and growing revenue as a results and perhaps most important we believe they have the nested.

Sorry, nimbleness and scale to thrive starting this uncertain period.

Now turning to the details of our piano the stability of our revenue model remains an important differentiator of our financial performance, we consistently earn in excess of 95% of our revenues from fee based on recurring sources. Our revenues are not dependent on revenues from interest income or on the direction of interest.

Rates.

Our to firms have high client retention, which has a further source of revenue stability. We also benefit from diversity in our revenue sources.

Approximately 226.4 million or 72.3% of our Q2 revenues or correlated to the financial markets of this amount 67% were build in advance generally based on Q1 market levels and 33% were built in arrears based on Q2 market levels.

The remain and 86.7 million, 27.7% of revenues were from sources that are independent of the markets primarily from firms up provide family office type services.

The covered related impact on these revenues in Q2 was not as meaningful as we head into the estimated.

Expand further on these types of revenue shortly.

We closed the acquisition of Australia based partner from its peak on May Onest mid Deca is expected to contribute approximately 800000 revenue and 250000 adjusted EBITDA in Q3 as already noted Q2 M&A activity was muted and we expect limited activity during Q3 there.

Pandemic resulted in an industry wide decline in M&A prospects prioritized client service over strategic transactions. However, we have closed one merger in Q3 to date and momentum is picking up.

We anticipate that transaction activity will begin increasing in Q4 or early next year, assuming that market stabilize.

Our Q2, adjusted EBITDA was 74.8 million up 18.7% year over year and our adjusted EBITDA margin was 23.9% well ahead of our estimated 22%. These results were two to the revenue outperformance I, just mentioned and better than anticipated expense management.

By our partners and at the holding company.

Regarding expenses management fees, our second largest operating expense for 77 million in Q2 or 24.6% of revenue relatively consistent percentage wise when compared to Q1 as a reminder, management fees are directly tied to the profit of our partner firms. This means that a major portion of our.

<unk> expense base adjust real time based on partner from profitability as our partners are closely aligned but across on managing the profitability of their businesses.

Expenses across the partnership came in better than we estimated primarily due to lower SG nine costs, such as travel entertainment business development and M&A activities as our partners and their clients continue to work remotely and social distance and restrictions remains in effect as we have often said our partnership is nimble with.

Partners doing an excellent job managing their costs and they continue to review discretionary expenses in light of market conditions. Additionally, we in our partners have not had currently don't see a need for any substandard staff reductions as client service remains our highest priority.

Because we are significant beneficiary of the low interest rate environment. Our interest expense declined 26% from 13.6 million in Q1 to 10.1 million in Q2.

We expect rates to remain low for the foreseeable future as a reminder, 850 million or 75% of our term loan is hedged at an effective rate of 2.62% inclusive of the 200 basis point LIBOR spread.

The second quarter 2020 was impacted by a 16.5 million increase a noncash changes in fair value of estimated contingent consideration, reflecting an increase in the fair value of estimated earnouts pursuant to our Monte Carlo simulations strong market conditions drove an increase in the fair value estimate.

These liabilities as of June Thirtyth.

As markets recover these estimates typically increase.

Our non cash equity compensation expense was approximately 1.7% of Q2 revenues and we believe that this percentages are reasonable proxy for their main the quarters of this year.

Our cash available for capital allocation was 192.4 million for the four trailing quarters ended June Thirtyth 20 to.

65% better than the prior year period, reflecting the growth in the business. The addition of new partner firms. We added in the last 12 months and the increase in our adjusted EBITDA margin.

We paid 30.9 million and earn outs in Q2 inline with our expectation of approximately 30 million and we anticipate that we will pay earn out so approximately 20 million in the second half 2020 of which approximately $15 million will be paid in Q3.

Now, let's turn to our current expectations for Q3.

Given the ongoing market uncertainty and the unique visibility we have in our key now we've decided to share our current expectations for revenue for the remainder of 2020, we will revisit this approach at year end with respect to future periods. We estimate that our Q3 revenues will be in the range of 315 to 325 million.

This range incorporates an estimated year over year organic growth rate that is essentially flat from same store organic sources, reflecting lower levels of merger activity by our partners and a modest decline in our non correlated market revenues.

Excluding the effects of the headwind of our non correlated revenues. We estimate this growth rate will have been in the mid single digits.

As I mentioned last quarter some of our non correlated.

Revenues are driven by family office type services for clients in the entertainment industry and relates alive. This movie productions and alike.

I mean, it's inherently difficult to predict these revenues and the current environment if conditions do not change we believe that up to 25 million of these revenues could potentially be at risk for the remainder of 2020 with roughly half this amount affecting Q3 and half effects in Q4.

However, we estimate that this decline will have no material impact so our second half adjusted EBITDA given the additional cost savings we have achieved across the partnership and our preference protection.

Our partner firms have done an excellent job managing their business.

Which reflects that our proactive approach to reducing their discretionary expenses.

Accordingly maintained in our earnings preference continues to not be a concern.

We estimate that our Q3 EBITDA margin will be approximately 23% reflecting year over year expansion of approximately 1.1 percentage points. If current market levels persist through the ended the year, even with some uptick in expenses related to travel business development and M&A activity we have.

Dissipate that our EBITDA margin will be a minimum of 23% for the remainder of the year as our firms continue to be nimble in managing their profitability.

Now turning to our balance sheet.

Our quarter end.

Data Outstand, there was approximately 1.3 billion and our net leverage ratio was 3.85 times.

At current market levels, we anticipate that our Q3 period net leverage ratio will be between 3.7 times and four times remain committed to maintaining our net leverage ratio of 3.5 times to 4.5 times and continue to believe this is the appropriate range for our business given our highly acquisitive.

Nature remain highly selective and the transactions we per sale and disappointed in how we manage our balance sheet as we grow our business.

Now for a quick update on liquidity.

In Q2, we repaid the 200 million, we drew down on a revolver in March at the initial onset of the pandemic, we had no immediate need for the cash in market liquidity has some stabilized the repayment had no impact on our net leverage ratio. We continue to have approximately half a billion of undrawn revolver capacity.

To conclude this market crisis is again demonstrating that the performance of our model under pressure.

Our Q2 results in Q3 estimates are testament to the resiliency and predictability of our business. We also reflect the underlying strength and stability of our partner firms, which was a function of how well they are managing their businesses and their high client retention.

While we anticipate that covered related uncertainties will persist for some time market conditions have improved translated into an immediate sequential increase in our Q3 revenue and earnings estimates despite muted M&A activity.

We believe that the strategy consistency of our financial performance together with the Capex light nature of our business and the lack of dependency on interest rate revenues are highly differentiated in terms of the sustainable value that to create for shareholders, but are undervalued by the market our $1.5 billion intangible tax shield also.

Create substantial incremental value for our shareholders.

We also believe that the size of our for growth opportunity is underestimated in the US alone we participate in a six trillion dollar industry that is expected to experienced rapid growth in consolidation in the next several years to pull the firms that to join the focus partnership is large with attractive growth characteristics.

With over 200 billion, a client assets and a partner from portfolio there will be difficult to replicate we believe that we're uniquely positioned for significant growth over the long term.

Ill now turn the call over to the operator for today operator.

Thank you will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation telenovela indicate your line is in the question Q.

For participants using speaker equipment, maybe necessary to pick up your hands at before passing the Starkey one moment. Please we pull for your question.

Okay.

Our first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Thanks, Good morning, everyone.

First on the higher referral activity and the flight to quality commentary year to date can you comment on what this could mean when you're thinking about the organic growth excluding market appreciation for your partners.

Yes, good morning crack and.

Thanks for your question, what we're seeing is.

In the into supplement this.

Page 20 that basically is out that structurally dis industry DRA industry does better into downturn.

And.

Then quite frankly recovers one year in two years after the downturn it quite frankly, most impressive numbers, we above both wire houses the introducing broker dealers would be doing so it's the.

Yes, we need to trust the element, that's being proof from doing to down year that ultimately it's too.

Some market share shifts.

We are seeing already be a hearing from a number of part this that their referral volumes are good a very good.

Given that the ultra high net worth space this elite and Nick that ultimately.

Until you can book do you see these assets, but yes, I have to say having them out there Vista partners I really like what I'm seeing and most certainly we're very optimistic towards.

21, then in the in Twentytwenty too.

Thank you already and that just as my follow up here are you seeing.

The growth rate.

Between the largest Ari A's relative to our eight that are below the industry average and Im just looking for some perspective on maybe how scale is an advantage outside of operating leverage and this is I think especially could they look at how focused on even larger Ari a's at their through mergers.

Yes, yes.

It's actually a very important question in the in during Investor Day.

We demonstrated we proved dead focused partner firms are larger.

Grow faster operate at the higher margin and.

Sort of high network clients then.

Typically in the industry, so be a very much geared towards the too much larger firms and then you are correct, yes through all the value added programs they'd be provide including.

The.

Yes, I will emerge activities speed make large firms sobi help large from skidding very very large share up by the standards of this industry.

So.

Yes.

Really scale matters Bcltwo celsis kind of the ultimate if you want in Haynesville scaling this industry.

In the quite frankly did this crisis right now.

Makes it even more important you had the then you need to work remotely the unlike in our case almost 4000 people are doing.

Yes, you need more sophisticated technologies you need a protocol on cyber security that is.

Very well thought out in tested.

Quite frankly, you need flexibility is that many of the smaller firms see us simply don't have so what we believe is not just if you will see an increasing gaining market share.

For our industry. The next two years that is just normal Oh, but too is you are seeing accelerating trend towards industry consolidation.

Great. Thank you already.

Thanks, Rick.

Thank you. Our next question comes from the line of might carrier with Bank of America. Please proceed with your question.

Good morning, taking the questions.

First really it sounds like fuel activity is picking up and you had good confidence is you're heading into 2021 has there been any shift in like the competitive backdrop for the deals you Crazy train.

Given that yes, I don't think everyone. You maybe isn't you to see it isn't that you guys are obviously, there's still a lot of uncertainty out there. So there is some like opportunities that kind of you take advantage of.

Yes, Hi, Mike.

So year to date, we've closed eight transactions.

Two directs the into in six merger transactions and yeah industry volumes are simply down in the in Thats just effect.

It's inane generally in the World This of course down temporarily.

We see.

I would but when we look at our pipeline and we just made some in announcements recently there will be more announcements. So we're quite pleased with.

How the pipeline is coming together right now.

It's still a little bit smaller deals, but in aggregate quite frankly, the momentum is building and be very much like what we see in terms of industry dynamics.

We've seen a couple off kind of.

More unusual transactions.

Bundles Trust announced yesterday recent international buyer.

We're quite frankly, we were stunned by about probably you did it didnt get multiple square in Dallas.

That they must have faith.

Meaning.

Usually being used to be very aggressive bias in this industry.

And.

Quite frankly, Dave we don't see that much anymore.

Certainly and it just trunks you have to cycle. So it's more like.

International players Seo, sometimes private equity supported players that are.

That seem to be a way out of sync with typically industry multiples in the in both the show in what they're doing right now.

Having said that.

We really never kind of played the state into megarry deals into his industry viewer and do some middle tier, but a billion to the 3 billion to the 5 billion of course for mergers. We go below the billion. There is plenty of opportunity the multiple stood be of seeing very consistent with what we have gotten into past.

And.

Quite frankly.

Given this kill into scope that we have put focus here, we can constantly funnel our capital to the areas, where we get the highest returns in the near this gives us a flexibility that quite frankly nobody else in this industry in the U.S., but also globally has.

Yeah, I would just supplemented obviously were operating in a six trillion dollar industry I mean, what's important to us versus it is the target culturally.

Good fit for focus as it is a good growth profile.

Is it affirm that's interested in our permanent capital is interested in an entrepreneurial independence model that can grow at our value add and.

And we'll remain disciplined on the multiples as Rudy mentioned, so there's a large industry that we're playing in cell, we see attractive growth there from the M&A perspective.

No. The average return the ever tried doing this we disclose spray a they'd be generating the in deals has 25% 50% of deals create the returns north of 30%.

We believe that this return pattern.

We will be able to sustain for four for many many years and of course, it's important lead students simply by the value added programs that we have that via sync uniquely if it's two largest player in this industry that really can't change during the course into direction of businesses after they join us.

Got it gives us a quick follow up just given where the margin came in during the quarter you had a better than expected and even in near term outlook holding up better than you think you assume some would have expected are you feeling that there is more potential upside.

Over the longer period of time, just given what you're seeing with.

The model now.

Yes, I think.

Tim.

Yes, I think Q Q2 was a bit of an anomaly respect of you know during that covered environment everybody was home there's not many.

Costs, so sort of the estimates came in much better with an EBITDA margin of.

23.9%, but you know we guided towards 23% for for Q3 now the first half of the year was at 23.5 now that's where we are operating at the business today and that kind of cobot environment, obviously have a long term target of 24%.

You know as we continue to work on the scale of the business, we will revisit that guidance in future periods, but the guidance at this point as.

23% for Q3.

Yes, Thanks a lot.

Thanks, Mike.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Great. Thanks, Hey, good morning routing and good morning, Jim.

So the pipeline, obviously sounds pretty robust it sounds like you guys are seeing some really early signs in the fourth quarter and early 21.

Can you help us contextualize what that means in terms of the actual kind of acquired EBITDA. The you anticipate to see over the next 12 months.

And obviously appreciate that there's a challenges of predicting very specifically, but I'm just trying to get a sense of how material improvement in the M&A landscape is going to be for you guys from a from an earnings perspective.

Yeah.

Of course that is very difficult to say in term Sofia, what's the EBITDA acquired six 912 months out.

So I can't really give you any any guidance that that's helpful. Having said that.

We really like what we see stay tuned it will be a number off a inbound segments.

That the dying to works I'm. So you will see with steer the deals to be announcing.

Yeah that the momentum is really building up in building up very nicely.

It's it's more a small and medium sized deals at this point.

Yeah, I, usually do one or two large deals a year. So there's no no large deal that be currently basically.

In the process of getting ready for the announcement, but are the old pipeline is good and you'll be belief is going to be even better than it has been to get into next year Importantly, Alex a V.F. city are committed to our minimum IR our target of 20%.

Which means here, we continue to be very selective a and of course, our multiple disciplined neo speaks for itself and basically yes, certainly historically they never focus deploys capital Oh, we can generate very attractive returns and you everybody. If this is going to continue for many years to cover.

The industry dynamics here.

Great.

And just a follow up a Jim just building on Mikes last question around DNA is it possible to give us a sense of how much of the Genie improvement came from partner firms operating more efficiently versus kind of focus I'm kind of corporate overhead genie, maybe be running a little bit below the norm.

And as we all kind of learn through this crisis of new ways of kind of conducting business. How much of these gains do you guys think and ultimately stick around.

Yes, I think what's unique about our business model as you know Alex is that the partners operate our business.

So they are making the decisions on the compensation, they're making the decisions on the SG anyway and as a result, you know there isn't the alignment of interest with their management fees, which are which are variable on the profitability, so rather than going into specifics of each of the line items were partners make those type of decisions, but we.

Do as we give guidance on the overall EBITDA margin, which is 23% for Q3.

Yes, Alex did the business the business Hes.

Obviously has its changing has been changing and the.

Really travel is different the we'd be conducting due diligence is different.

Yeah, we held deals get negotiated this is different so actually very importantly, the way new clients join US no, but we have learned that I just missed it did some of our partner firms and they hit if.

30 $50 million clients, so very large share ultra high network clients.

Who join to oil selected our partners.

Based on never having head physical meeting yeah. This is unheard of in this industry. This this is well simply impossible in their pre Corona environment.

And if you're getting more and more examples were very wealthy clients ultimately based on you assume conferences and based on refer of course, the referral source basically makes big decisions remotely that would have never happened thing to Pos Similarly, many clients you historically.

Still got could you use space.

They are likely to come to you office to root to review.

Your portfolio saw or other issues and the industry is going to remote basically all these are now happening in the.

If I assume and in Blue jeans, and other technologies did the becomes really natural it's a formal feet direction dish should ultimately translate into some efficiencies to should ultimately up translate into a broader wait to attract a new clients then but this industry has his story.

Can be seen so yeah, I am convinced that some of these efficiencies.

But also gross dynamic so over time are going to be around with us for many years ago.

Got it so maybe a little bit more structurally better profitability.

Okay. Thanks very much.

Thanks, Alex.

Thank you. Our next question comes from the line of Kyle Voigt with KBW. Please proceed with your question.

Hi, Thanks for taking my questions.

Just the first of all on for Jim. So if we look at their revenues build in arrears. Those are 74.7 million in this second quarter, which is just very very modestly from the 74.2 million in one Q.

Just curious why we didnt see a bigger increase there given the market performance from from March 30, Onest two a June thirtyth.

Yes, so as we eventually Kyle we have many different types of building methodologies across the 60, plus a partner firms, we don't homogenized the billing.

You know some bill monthly some bill quarterly in arrears advance and so forth. We also have firms that bill on a daily and 80 basis sign of aerospace and so that's part of the reason, perhaps the method you're doing is on our quarter end basis as a management.

Okay fair enough.

And then Kyle.

Callahan, so keep in mind that if these portfolios of very conservatively positioned.

And.

So yes, you are the upswing on the equity side of course was helpful.

You get the Russell was was it was not that helpful.

So net net it said the it's really the positioning of the portfolios that ultimately can Dave the impact of the markets, which.

Just one of the reasons why a rabbit the quality of our revenue Ccs, usually usually very very high.

Right Okay.

And then really just a follow up on that the M&A discussion.

It sounds like you really want to be stay disciplined on acquisition multiples, especially not where you're playing in that mid tier size from acquisition database.

But within that tier can you just talk about acquisition multiples like has there been any creep over the last year in those multiples and.

Do you expect any drift higher just given that you are seeing some some different buyers come in and then also that the copper financing is obviously a lot lower for.

Central acquirers.

Yeah. So we have done to since 2006.

And Oh look through there you know the long term multiple evolution see a four it likes to like a target.

Maybe today VP, one turn more didn't look people to beat the notes excluding those seven so there's very little kind of structural change in in multiples are you afford particular vitriol steel seats of course, driven by the but individual transactions, but quite frankly, it's all about disciplined yes.

Yes, we have seen some as I mentioned before some.

Pretty unusual multiples you know the that we believe you have you don't know, but we believe were paid in the recent transactions that are [laughter] electric vehicles to insane, what I can get there.

Having said that via disciplined yogi half their power off this enormous cope off this organization where became constantly funnel.

Operator yacht capital to where we get the highest returns and we will maintain our discipline people, we're maintaining our our return hurdles. Yes of course, you're correct we benefited from there.

Very low cost of funding 262 basis points locked in for the next three to four years.

Pre tax cost of debt. So this of course gives us a a great flexibility, but no M&A business, you got to be disciplined and.

Really proof over the years that.

Our discipline and this will continue into future.

Thanks.

Thank you. Our next question comes from the line of Gerry O'hara with Jefferies. Please proceed with your question.

Great. Thanks for taking my questions and good morning, perhaps just just one more on on the pipeline appreciate the kind of starts in the the DAC and.

As it relates to the prepared comments of or kind of the stepwise function I suppose but have occurred post crisis. Serge I think remove mentioned that you know that theres a belief there that this is going to be larger than anything you saw historically. So curious if you could just give a little bit context or color as to why you think that.

It is or what some of the dynamics are that will be driving that thank you.

Yeah.

Jerry So I'm going to be put this speech 20, Andy.

In the supplement that Doug I think speaks for itself and this is just empirical data based on the you know what's happened thing probably a crisis.

And that means the already space is going to disproportionately win if history is any guide yeah wanting to use off the crisis and that's just the effect, where ultimately clients will probably go bad advice on the suitability standards from broke Chris.

Or from traditional banks you are building was defeat moving over to the our race space.

We believe there will be some more breakaways. So it devices, leaving the they're wire houses, which is not a big part of our business, but it is supportive of business. This is very muted right now yeah, but they've been things normalize here you see an acceleration.

Of this Pos and yes, absolutely a Jerry we are convinced that Kobe. It is going to really accelerate industry consolidation. It is very difficult to run its small from that may not be date that technicality technologically.

And so that definitely doesn't have to be sources to really run the operations and technology in there.

In in into Revolting vitamins, we see quality that its clients do surface expect.

And you small firms are going to recognize that you know what I think it's better for me to charge, who joined larger for him to take advantage of all of these capabilities and the yeah. We believe this is going to drive consolidation in certainly in our judgment.

In a very powerful way the next couple of years.

Okay. Thanks, and then perhaps one for a fruit for Jim I'm going to get maybe an update on the cash and credit program.

Yes, if you saw any sort of meaningful uptake in the in the past quarter or if maybe how how conversations have evolved as it relates to that that program you offered to the other partner firms. Thank you.

Yeah, maybe I'll talk about the been closer to the program, but the reality is this program. We are sometimes you have to be Lucky life.

Can we be created in support of our partner just into right moment.

We could facilitate quite a number of clients who did not have access to PPP program CRB could facilitate this does axis would this bank network that behalf.

The FDIC insured cash program.

We have capabilities to have up to 58.

More million dollars, if deicing sure it's highly attractive rates.

Is particularly doing day earlier part of the year has been very very well received so it's not in there was never intended to be a big source of profitability for focus.

Ultimately better we help our partner has helped the appliance.

The more you know of course, the <unk> the more to the will be able to get new clients referrals and do more for the existing client base, which then translates into more revenues and profitability and of course, because the ocean apartments get their share. That's the essence of household crews operates and that's true for.

Focused line solutions as well you're working on additionally areas did we are interested into expand you shift from cash in credit.

I will probably have updates later this year on that.

But it is just a perfect example, we're only does scale of our business. It allows us to create these type of programs that quite frankly in this.

Deps nobody else does industry has since this is a competitive advantage for our partners.

As they ultimately yasir if declines.

Great. Thanks for taking my questions.

Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

Hi, good morning.

Why would the third quarter organic growth the relatively flat when the the act where you was flat year over year as of June Thirtyth.

The Barclays AG was was up I think six or 8%.

And you've done more than a dozen tuck ins over the last 12 months.

Yes, yes, okay, Jim why don't you go.

Yes, so as of yet noted earlier, Chris you know we have some headwinds in terms of the family office type of revenues that I mentioned 25 million for the second half of the era.

So plus or minus 12, and a half and not in a in Q3.

You know, we said that didn't happen we've seen mid single digits in Q3, obviously, there's been some lower surge that age.

And ER in Q3, we had we had one merger and our client portfolios. Obviously are our balance you know when you think about for advanced spill and maybe the S&P is up but the russes down.

So maybe not necessarily is helpful. As your model and out so weve.

Provided the guidance.

Revenues through 16 to 325 and all.

That that equates to a relatively flat organic but.

On an adjusted basis for the 12.5, there will be mid single digits.

Okay that makes sense I apologize I joined touring late so that makes sense Jim.

Submit the mid single digits, which we believe theyll give him a word as into what's what's happening into many macro site is actually very impressive you know you just need to adjust what the athletes and entertain a business.

Okay, Yeah that makes more sense really thanks for that.

And then just to put a finer point on the discussion around margins. The can you tell us at least roughly what TNT expense normally runs at the corporate level and what it was in I'm guessing it was near.

Yeah, we don't break out a yet t. any or or any of the expenses on diesel that we'll see if you don't disclose does.

Having said that you of course, we have your business that are where people travel a lot.

You ever partners meat clients see a troubling entertainment is very important for them. It is very important for the holding company of envy meet with new prospects. When we meet with our of course, I O existing partners and quite frankly, even be you know speak at industry and other functions.

The big component did to be did not stools this year or the partner meetings. Yeah. So twice a year, we have a partner meetings do so relatively large even cod so expensive to events.

But they also very helpful for the way, we built the business and to have you did not do a partner meeting Oh. It just if it first half of the year, we're not going to do on a second part of the year. We hope this would normalize next year. So this of course will have an expense impact, but we don't break out the G.

Yes for.

Okay, and then lastly, just in terms of deal multiples.

You know, you're maybe paying a turn higher than what you were a decade ago.

[noise] I guess, just just wondering why why not increase the multiple you're willing to pay a little bit more just asking because you could argue that theres been a change in the way that market perceives or pays for recurring revenue business is a growth industries and you would still arguably have the multiple arbitrage component.

Yeah, but we certainly have a lot of financial flexibility yeah. The as I've said before is see a 50% of out deals create iris north of 30%.

D. so of course really really attractive returns.

We have yet because of the scope of this business yet we have the ability to deploy our capital where we see the best or return opportunities and as long as we can deploy our capital yeah, exactly where we want to at the returns to be targeting.

Quite frankly, there's no need to kind of to change anything into model, yes, we have flexibility vehicle tremendous flexibility.

And people use it for you right opportunities, but focus has never and we'll never yeah do a yuppie multiples that economic Kelly not justified and yeah that basically our it based on assumptions and economic stake or your fantasy of you've never done that people.

Never do this and quite frankly discipline is our middle name and this has made this the largest later in this industry.

Okay. Thanks Rudy.

Thank you. Our next question comes from the line of Dan Perlin with RBC. Please proceed with your question.

Yes, good morning, it's Matt Roswell on for Dan to hopefully quick questions now combine them first is when you're having GAAP M&A conversations, especially with some potential partner firms bridge seen any changes in terms of.

The willingness around the earnings craft, France, the percentage of EBITDA and then quick modeling question given lower M&A activity should we expect this trend to lower.

Interest expense quarter on quarter should we expect got to continue for the rest of the year. Thank you.

Yes, Hi, Matt to you know the preference.

Is the is the quid pro quo for our partners, having at high level of entrepreneur autonomy and are ready to run their business. Yes. So they run the business we have to preference. Yeah. This is the in Yang Yeah, Oh, the way, how our deal so structured and quite frankly.

Yeah. It's always since 2006 was always a big part of the conversations doing deals.

But at the same time yeah.

Yeah I'll partner, so certainly are interested in focus here. They ultimately choose our model because they want to remain entrepreneurs and they understand that the a distant creates a financial dynamic where we need to preference. So it's not that hard to ultimately for the right type of partner.

To a basic Kelly negotiate this deal conversations quite frankly, if it few tree if a prospect yeah, it's not willing to bet on their own business, you know Bible would be bet on their business. So this is all about alignment of interest.

It's been a your partners in us and quite frankly, the preference and yeah, it's an interesting subject.

Usually before your or two.

After they from joint us, but they typically firms will have a outgrown. It you know that if you asked most of our partner firms yeah, What's what's focuses referencing the deal.

Remember that number because it's not a relevant.

So deal dynamics here, if I said, it's multiple discipline model, it's planned strategic discipline.

What made this business was successful and if no intention.

The change and you.

Yeah, and then just maybe on the second question, Matt specifically math for modeling purposes, we've disclosed 850 million of the term loan with the hedges and effective rate of 2.6%. So the excess on the term loan today, you know 30 day LIBOR is plus or minus.

0.20, plus the spread of 200.

And then any revolver borrowings based on the rate grid, or a plus or minus the 0.20% plus a 175 spread.

Okay. Thank you very much.

Thank you. Our next question comes from the line of or excuse me I, one loud with Oppenheimer. Please proceed with your question.

Good morning June good morning, everybody. Thank you for taking my questions.

So you mentioned that revenue came in better than expect said are partly due to better than anticipated family office surface, rather than the old type Breslin yields could you. Please talk about what actually happened there.

And then you also mentioned.

Cash and quality coal when could you. Please also talk about what our organic growth initiatives on it and market conditions and M&A that can potentially drive better then extended results going forward. Thank you.

Yeah, maybe Uh huh.

Jim by don't addictive prescription it yeah. They see the first question so I think.

You know Oh and inherently you know we were in Q2 during a collaborative environment things are hard to to estimate.

Our original guidance was over Q2, three four about 25 million. It came in slightly better you know the current guidance right now is for the second after the year.

We estimate.

25 million as I mention half in Q3 has in Q4.

You know called it is specific event matter, it's not a systemic matter in our revenue when things start to.

Exit called and we were at this revenue will well come back in a in future periods. You know you sort of put it in perspective, you know 25 million on it on a business that has well north of a billion dollars of annualized run rate revenue. It's a it's a pretty small singer.

Yeah and on and over in the on the on your second question is so yes view into business. So for me off helping our apartment firms.

Grow and surf their clients better and yea, we have two type of program CRB have focused business solutions diesel older programs were just any step into business model often already we have resources expertise purchasing power.

Excess.

To help our our partners whether its operations technology marketing your incentive programs.

<unk> risk management compliance insulin into force so debts focused business solution spin be have focus client solutions. This is where we generate a where we create programs where we take the scale of this business baby take advantage of just kill off this business to create the client facing solution CFO.

For our partners see a that basic and help them surf surf these clients better.

Cash credit discipline off the first programs that we announced and as I said before so we really like what we see and a young man. It would be just we're lucky to create create this program you're in a perfect possible time.

Other areas to be looking into but I've nothing specific to announce at this point, a but they fit the areas of great interest is insurance trust.

You know trust estate planning a type of services, probably some areas on the investment side to be looking in where we can again used to scale up group to create better client a better access to solutions for clients. So it's a whole gambino various fit we are working on cash credit is real.

Just adding a client value and shareholder value at this point, but yeah, there will be more programs incredibly announced they miss it soon.

If you already taking yet the aggregate size. So this business well over $200 billion inclined sets you up 1000 people three actually four countries fuel.

The operating in Yeah. This puts us into a very unique position that nobody else is industry has and that quite frankly will continue to create advantages for us for four years to come.

Got it I think it's very helpful. If I mean I.

If I now want to go back to examine a.

Again could you. Please comment on the key obstacle saw on M&A in decent and is it still the difficulty of doing due diligence face to face can you use zoom to close the deal right now or or it's about that flies isn't come down enough that you would like this.

Yeah. So of course emanates, let's just down the globally in just about any area, but it's it's recovering and yeah. We are seeing it Joe it. So we see now on pipeline you'll be if not an eight deals year to date, which is a relatively small number four for us.

Yeah at this juncture, if the year obstacles or one of course is really understanding but those steam picks up the crisis.

The marketing people is payable some easier, but they just do a holistic in picked off the crisis on wealth management firms, Yeah, and yeah. There were lots of examples in terms of recovery based just on market volatility there'll be no. This industry doesn't really really well.

But understanding how health crisis is off unique dimensions impacts the industry and individual firms.

Okay, clearly wasn't area that a be willing to surf into or you'll be just very carefully about now and so yes. I said prior is going to be like what we see a this industry is going to do extremely well and has adjusted to a to this new environment better than Oh, we didnt, probably anybody could have fixed.

Two.

Is we are usually out the are meeting this prospect I'm meeting with young negotiating deals a year in person quite frankly, I'm doing due diligence in person and the of your very comfortable now that you can do do things remote.

Lee to two large extent, yeah, I'm not sure I would do this for very large deals remotely I don't think that would be prudent, but ford middle of two rolled deals behalf that they sneaks we have to capabilities to basically do a closed transactions remotely third most of management decision.

As we explained into Q1 earnings call is we aim.

Mike you want to keep some of our powder dry.

If significant fire power is stream explained before and as you've seen our financials.

Youre half a billion dollars Omar.

At this point, but what we learned in a weight into all nine well stay attending some dry powder, yeah, particularly as things start to normalize again, if the macro outlook that we see is correct. Yeah MPC to certain activity. You know then basically we will have plaintiff capital to sustain this.

So.

To external factors, one internal managerial decision to be very prudent Vista capital that if it hadn't deployed today it's opportunistic.

Okay. That's perfect. Thank you very much money.

Thank you. Our final question comes from the line of Patrick O'shaughnessy with Raymond James. Please proceed with your question.

Hey, Good morning, just one question for me what is your little at this point of returning back to 20% plus growth in 2021, it beyond and what would need to happen to get back to that level of growth.

Yeah. So we absolutely believe envious demonstrated this a pretty much since 2006 and most certainly as it is it public company note that yeah. It Twentytwenty girls targeted a is appropriate for this business when you look at Dawar supplement.

Every get provide the numbers since 2014, you see revenue growth of 30% it'd be talk rose, 31.8% net income grows 30.8% adjusted net income per share growth of 29.6%. So we've actually exceeded the twentytwenty target consistently since 2014 and and quite frankly.

Before.

Well the ultimately our assumption is or that there will be a normalization of M&A activity. Obviously, we discussed extensively on his call of you're starting to see this there is going to be a more kind of less volatile market environment, you know and you're quite right.

The or be a reputation continue to deploy capital you have pretty much along its very similar multiples and structures as we have done in the past.

We think these are realistic assumptions you know we have no question that the market opportunity stereo. This focus has never been kind of limited by the market opportunity.

It is ultimately a I wouldn't resources now own get the scope that we have yet to really pursued us. So youre twentytwenty used to write target for us into long term.

I'd be hope, we'll get there sometime see into next year.

And yes, we said via not interesting despite what's happening this year, we don't see a need at this point to adjust our 2025 targets you know that to be it'll be established on investor day, everything seems to be normalizing it will be just tremendous opportunity you're going forward.

Thank you.

Thank you Weve reached the end of our question and answer session I'd like to turn the call back over to Mr. eight off for any closing remarks.

Yeah. Thank you into it so in closing.

We continue to be extremely proud of how well our partner so serving their clients and managing their businesses. During this prolonged period of uncertainty and the end market volatility.

They have to clients trust because of the expertise consistency effectiveness and willingness to go the extra mile.

They have shown extraordinary commitment and dedication.

I want to thank our holding company employees, who continued to go above and beyond in helping apartments or if their clients.

Our business has risen to de test of this pandemic. It is stable resilient and will emerge stronger enabling us to take advantage of these substantial growth opportunity post crisis. We believe that we are uniquely positioned to capitalize on industry dynamics reinforce our competitive advantage.

Which is if the markets recover yeah. Thank you all for your interest but Mike.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Uh huh.

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