Q4 2020 Focus Financial Partners Inc Earnings Call
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Good morning, I would like to welcome everyone to the focus financial partners 'twenty, 'twenty fourth quarter and full year earnings call.
During today's call are Rudy Adolf founder and CEO, Jim Shanahan, Chief Financial Officer, Rusty Mcgranahan General Counsel and Tina about.
And the head of Investor Relations and corporate communications at this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
And any one should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and Mr. Mcgranahan. Please go ahead.
Good morning, everyone before we begin and 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 the focus this results may of course differ from these statements.
These statements are based on assumptions made by and 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 current COVID-19 pandemic.
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 Rudy Adolf Rudy.
Thanks, Rusty good morning, everyone and welcome to our call today and as always we value your continued interest and focus.
2020 at Wassa and unprecedented year and I'm extremely proud of what we accomplished and we delivered record financial and operating results. Despite the pandemic related challenges and we are in.
And the unique position within financial services, delivering strong growth and margin expansion during a time of crisis, while simultaneously, reducing our net leverage ratio.
Oh business demonstrated its resiliency and consistently outperformed relative to our expectations in many ways. The story of 2020, whilst at scale matters.
Cable is instrumental in helping us not just weather this storm, but to move past it and thrive did.
The depth and breadth and diversification of our partnership and combined with our strong M&A momentum and a robust value added services were all instrumental to this outcome. These dynamics position us for what we believe will be and even stronger year in 2021.
We delivered excellent results for our shareholders generating nearly $1 4 billion in full year revenues, the highest and our history together with adjusted net income excluding tax adjustment specially O off $2.46 index adjustment, especially O 47 and sets the.
These results demonstrate the value of health and well defined financial model and the outstanding job or our partners did in managing their business.
Our cash flow grew substantially with 2020 last 12 months casually available for capital allocation up 22, six per cent and reaching $205 million, enabling us to limit our debt usage in funding our M&A activities.
And our transaction volume increased.
The tax efficiency of our acquisition structure continues to generate substantial value for shareholders and enhances our cash flows.
Our partner from successfully navigated and evolving macro backdrop remaining agile and demonstrating and unwavering commitment to exceptional client service.
2020 was a year and which the value of prudent fiduciary advice was especially apparent the finest hour for our industry as a whole and.
And our partners, we are well equipped to face the challenges posed by the pandemic.
They did not experience any tangible client attrition despite volatile markets.
In 2000, and trying to be completed 25 transactions capping one of the best years and our history for M&A volume, we added seven new partners and completed eating virtuous on behalf of our partner firms and we expanded our presence in key wealth management markets across the U S and internationally and extended our track record of acquiring.
Excellent firms that are value accretive for.
And for mergers and a partner firms are aggressively capitalizing on the substantial industry growth opportunity that is emerging.
Of the 10 partner from so completed their transaction last year three completed their first ever merged with over 50 per cent of all 71 partner firms, having completed at least one virtual since joining focus and 20 per cent completing three or more.
We also remained at the forefront of the industry by providing innovative business and client solutions last year.
And these resources enable our partner firms to meet the growing needs of their clients in an increasingly complex operating environment.
By taking advantage of our scale best practices and expertise our partners are able to deliver ever increasing value to their clients, which is an important catalyst for organic growth.
For example, our partners continued to benefit from initiatives and business development technology enhancement, including cyber security operations and spend a pricing optimization, we remain actively engaged and just areas over the coming years.
And we also continued to grow focus client solutions for FCS or cash credit offering last year F. C. S advised on loans and other credit structure and approaching 1 billion for partner clients.
Last month, we announced a joint venture so Orion and advisor solutions, which will make the cash credit and related services developed by F. C. S available to more than 2000 and wealth management firms. So on Orion swell steak platform.
Orion is a proven leader and advisor technology based film behalf and longstanding relationship. This.
This is a significant new initiative and beta stage deleverage and collective expertise of both FCS and Orion.
Yes, yes team manages all aspects of delivering these services, making it extremely convenient and for advice. So steel stuff strategically the JV enhances our competitive position by further demonstrating our leadership in shaping and the adviser ecosystem.
And an important and innovative initiative and we do not expect the joint venture to have a meaningful impact on our results of operations in the short term, but believe that this joint venture will create important value overtime.
The connection was model is another outstanding example of how we are leveraging our scale value added resources and expertise to help wealth management advisers better serve their clients optimize the efficiency and solve for growth.
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And connectors complements our growing partnership and the dressers and important strategic need and the independent wealth management market.
It adds to our existing value proposition by enabling founders and teams who want to continue managing their client relationships and put the cultures by gaining the operational efficiencies of shared services.
And we anticipate that connects us would continue to expand globally and belief that it could quickly become one of our largest partner firms yes.
Yesterday, we announced the launch of accelerate and innovative new program that is unique to connect us.
Accelerated is highly curated.
Leveraging longstanding relationships with Premier service provide us already used extensively by focus 71 partner firms suites.
So its emphasis on shared resources accelerated will create significant efficiencies and scale benefits for advisors and clients and like it.
And do you live with capabilities across five business components, which will substantially enhance connects advisers ability is to accelerate growth by offering comprehensive integrated and highly personalized and client solutions.
Clearly in 'twenty, and 'twenty would be demonstrated focus value to our partners and clients and therefore, our ability to sustain growth improved margins and maintain our net leverage ratio targets.
And therefore as we transition to 2021, we are reaffirming our strategic vision for the growth and scale that we believe focus can achieve by 2025.
Revenue of approximately $3 5 billion and approximately 100 partner firms also we plan to revisit our target for profitability is to put and that makes upsides. Our initial goal of adjusted EBITDA of approximately $840 million was based on a margin of 24 per cent.
And we believe our partners have learned how to become more efficient during the pandemic and while still early days. We believe that is connected to scales. It will further enhance our long term adjusted EBITDA margins.
And we are operating in an industry, leading scale and have substantial momentum, which is amplified by connectors.
Based on current market levels. We believe these dynamics will and enable us to deliver full year revenue and adjusted net income excluding tax adjustments per share growth in excess of 20% in 2021 and returned to double digit organic revenue growth, while maintaining our targeted net leverage ratio.
And all 352 for five types.
On the M&A side, we have closed one additional connected to steel and the U K and announced one partner from addition year to date, and we and dissipate announcing another partner from a precision and shortly which will be up substantial transaction for us.
And we expected our M&A activity in Q2 will be strong and we have a significant pipeline. It was a good mix of direct deals mergers and connect those acquisitions that carries us well into 2021.
And we also anticipate that we will further expand our international presence and connects dose will accelerate the pace of activity.
And outstanding Q4.
We are continuing to benefit from the search in industry M&A activity.
Based on where we stand today, we expect the 2021 will be and exceptional M&A year for our business.
And we estimate that we will have about $1 billion and firepower to invest and what time between our unfunded revolver cash on hand and cash flow generation.
Value proposition continues to resonate strongly in the industry and mergers and adding significant value to our partners.
But we will remain disciplined and our acquisition process is always be see many attractive opportunities to deploy capital.
In closing we are extremely pleased with our 2020 financial performance and strong finish to the year in terms of M&A momentum.
And as we turn to 2021, we are confident in the forward potential of our business as we advance towards our 2025 for objectives.
Theres, a phased evolution to a business like ours, the scale and profitability be half today enables us to invest and our future growth and ways that would not have been possible, even three years ago in 'twenty and 'twenty further reinforced the value creation of our scale advantages.
And the diversity of our partner portfolio creates numerous opportunities to grow and we believe that our unique model to continue to make us the partner of choice.
I have shared and grow thinking before but thought it was worth repeating.
Net company so destroyed the crisis good companies survive for them great companies are improved by them.
The crisis of 2020 strengths and focus beyond our expectations and significantly advanced our unique competitive positioning.
I'm very excited about our momentum in 'twenty and 'twenty, one and beyond and I look forward to seeing how the year unfolds.
And we step let me turn the call over to Jim Jim.
Good morning, everyone. Despite an unprecedented year with many uncertainties our business demonstrated remarkable resiliency.
Our growth and financial performance were strong and our M&A momentum was excellent.
The ongoing stability of our revenue model and high proportion of fee based and recurring revenues continue to drive strong growth and our cash flow generation.
It bears repeating that the combination of consistently high cash flow is invested and accretive transaction.
And the large and growing tax shield created by our M&A activities are unique and the wealth management industry and generate substantial shareholder value.
Now turning to the details of our P&L.
Our Q4 results were excellent coming in and well ahead of our expectations. We recorded revenues of $379 7 million, 10% above the top end of our estimated range of 335% to 345 million.
And parts of our organic revenue growth rate of seven 3% versus our initial estimate that would be essentially flat.
This revenue outperformance was the result of better than expected family office type revenues associated with clients and the entertainment industry, where client activities are improving favor.
Favorable market conditions for our revenues billed in arrears and certain nonrecurring revenues associated with client activities and incentive fees earned by certain of our partner firms, including the OCI business. We recently acquired.
Approximately $19 million of this revenue outperformance and will not repeat in Q1, but could occur in future periods.
Our Q4 revenues of $379 7 million were up 11, 6% year over year with approximately $24 6 million or <unk> 63 per cent of that increase coming from organic growth by our partner firms inclusive of mergers demonstrating the power of scale across our 71 partner firms the Roma.
And and $14 8 million or <unk> 37 per cent of the increase came from partner acquisition starting the year.
Of the approximate $19 million revenue outperformance that will not repeat in Q1, approximately $13 8 million of that favorably impacted our Q4 organic revenue growth rate.
Excluding this amount our Q4 organic revenue growth rate would have been and three 2%, which reflects strong year over year growth for them and exceptionally strong Q4, 2019 and also considering the live event revenue headwinds that our family office firms continue to experience.
Our Q4, adjusted EBITDA was $90 7 million nine 3% higher than the strong prior year period, and our adjusted EBITDA margin was 23, 9% slightly ahead of our expectations are.
Our adjusted net income excluding tax adjustments per share was <unk> 72 cents up 14, 3% compared to the prior year period, and our tax adjustments per share were 12 cents unchanged from the prior year period.
And a full year basis, our revenues were a record 1.36 billion and 11, 7% higher than the prior year driven in part by and organic revenue growth rate of seven per cent.
Our adjusted EBITDA was 321 8 million $19, 2% higher than the prior year and our adjusted EBITDA margin was 23, 6% one five percentage points higher primarily reflected lower levels of SG&A expenses relative to revenue as a result of COVID-19.
Adjusted net income excluding tax adjustments per share was $2.46 up 25, 5% year over year, and our tax adjustments per share or <unk> 47 up 11, 9% from the prior year.
Despite the pandemic related slowdown in the first half M&A activity 'twenty and 'twenty was one of our strongest years ever we can.
Closed seven new partner firms and 18 mergers for a total of 25 transactions in.
In Q4, we closed on five partner firms and San mergers and Q. Once a day, we have closed the merger for conductus and the U K.
We also signed a new partner firm Hill investment group and anticipate sign and the additional new partner firm Rudy referenced shortly which has about $5 billion and client assets.
We estimate that the five partner firms added in Q4 will add an incremental $2 7 million and Q1 adjusted EBITDA due to the mid period closings.
We estimate that these two partner firm transactions could contribute approximately 21 million and total revenues and approximately $8 million and acquired base earnings on an annualized basis.
Due to the time and they will not significantly impact our Q1 results.
As Rudy noted, our M&A momentum heading into 'twenty and 'twenty, one is excellent and M&A activity across the industry is increasing and our model continues to resonate for direct deals and mergers alike.
Connect us gives us a third acquisition model further expands our addressable market both in the U S and internationally.
And the opportunity set is considerable and Australia, Canada and the U K. The three countries, where we have focused our expansion efforts. According to industry sources and U S dollars approximately $1 seven trillion and client assets is managed by approximately 100000 advisors and Canada and in Australia 25000 advisors.
Manage approximately $600 billion.
While the actual closings of transactions is always hard to predict our pipeline for 'twenty and 'twenty. One is substantial across all components of our M&A business, including and at many of our partner firms or increase and their merger activity to accelerate their growth.
Texas also has a strong pipeline and will further expand its global footprint in 'twenty and 'twenty one.
And anticipation of this we increased the size of our term loan by an incremental 500 million and January of this year upsizing from our initial $375 million of the launch and are heavily oversubscribed transaction.
We used a portion of the proceeds to repay the borrowings under our revolver to reset our dry powder.
This transactions and that impacts our net leverage ratio as Rudy mentioned, where the firepower of about $1 billion, we are well positioned to capitalize on future acquisition opportunities.
However, our acquisition strategy remains based on a highly selective approach supported by strong multiple discipline. We are stringent about only pursuing acquisitions that meet our return criteria and are a good fit for our partnership. We are also disciplined about the multiples, we pay which are competitive but reflect the unique benefits to become.
And our focus partner firm.
And we acquire high quality entrepreneurial firms with substantial growth potential who wants to maintain their operational independence and will benefit from our scale advantages value add resources and permanent growth capital.
Now for a few comments on our Q4 expenses and cash flows management fees, our second largest operating and expense, which are tied to the profitability of our partner firms were approximately $102 4 million or 27% of our revenues.
We and our partner firms and we remain disciplined and nimble and controlling discretionary expenses, even with the increase and M&A activity.
For Q3 discretionary expenses remained low as most of our partner firms continue to work remotely. Additionally, our borrowing costs remained low as we were a significant beneficiary of the low interest rate environment.
And Q4, we recorded noncash charges totaling $19 8 million, reflecting changes and the fair value of estimated earn outs pursuant to our Monte Carlo simulations under GAAP stronger performance and market conditions drove an increase and the estimate of these liabilities as of December 31.
Our full year, 'twenty and 'twenty cash flow available for capital allocation was $200 5 million 22, 6% higher than the prior year period. The increase resulted from growth and the business the new partner firms, we acquired and our increased.
Adjusted EBITDA margin.
And we paid $7 7 million and earn outs during the fourth quarter and we estimate that we will pay about 10 million and Q1.
Our cash flow for future periods, we will continue to be enhanced by a $1 7 billion an amortized gross tax shield as of December 31.
Now turning to our Q1 expectations given that the pandemic related and uncertainties continue to persist. We will continue to provide quarterly guidance. We estimate that our Q1 revenues will be and the range of $375 million to $385 million. This range reflects an estimated organic revenue growth rate of approximately.
Suddenly 7% to 10% as.
And as mentioned earlier, our Q1 guidance excludes the 19 million nonrecurring revenue from Q4 as well as an estimated $10 million and typical Q1 revenue seasonality related to family office revenue activities.
Though we expect a $10 million and seasonal revenues to recur in Q2.
Additionally, we estimate that our Q1 adjusted EBITDA margin will be about 24 five per cent and with current market conditions, we expect our full year 'twenty 'twenty, one and adjusted EBITDA margins should be 24% or better.
And I'll turn it to our balance sheet as of December 31, we had approximately $1 5 billion and debt outstanding and our net leverage ratio was three eight and nine times at.
And at current market levels and with the acquisitions, we expect to close in Q1, we anticipate that our Q1 period and net leverage ratio will be between $3 75 to four times.
Remain committed to maintain and our net leverage ratio between three five and four five times and we continue to believe this is the appropriate range for our business given our highly acquisitive nature and highly attractive cost of debt.
We continue to prudently manage our balance sheet.
It is also important to remember that our strong cash flow generation and enables us to limit our use of debt as we grow our business.
To conclude.
We delivered a very strong quarter and Q4, even when compare to the excellent Q for 2019, and we had and our 'twenty and 'twenty results overall were excellent and particularly given the macro backdrop.
And our model has proved this resiliency and stability and unprecedented market conditions and our partner firms performed exceptionally well. We further evolved our acquisition strategy through connect us and enhance the business and client solutions, we offer to our partner firms. We are optimistic about the outlook for our business since one and 21 and we are well.
And positioned to continue capitalizing on the secular tailwind and shaping this industry.
I'll now turn the call over to the operator for Q&A operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue.
You May press Star two if you would like to remove your question from the queue for PAH.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yes.
Yeah.
Yeah.
Okay.
Thank you. Our first question comes from Craig Siegenthaler with Credit Suisse. Please proceed with your question.
Hey, good morning, Rudy hope you're doing well.
Hi, Craig how are you.
I'm good I'm glad and so my my first one is on M&A and you.
We were pleased to see the pick up and acquisition and merger announcements and the back half of last year, but can you talk about how momentum has continued into 2021 and do you think gels and 'twenty. One has the potential to be a record and many are for focus so more than 25 transactions.
Yeah, Hi, Craig.
As we indicated and in our remarks, our pipeline is excellent.
We are quite frankly and in many ways, we have almost busier than ever and I'll give it to be the 25 deals by weighted prior year was a record unit with 34 deals and then we did 25 deals in the year before.
So we.
We see a very good mix of holding company transactions.
Usually 1 billion plus transactions.
B C.
And number of commercial opportunities for our partner firms.
Including relatively large mergers you lost EBITDA.
And plus merchant transactions.
And as more unusual quite frankly, we are very very excited about the international.
In fixed on my call today I'm joined by my co founder Rodine.
Regina do you want to spend a second on the international and connectedness deals.
Sure. Thank you Rudy.
We are very bullish on our pipeline across and definitely international and connectors. My day starts these days with our with the United Kingdom and beyond just for North America, and just Sunset with Australia.
Our value proposition the focus value proposition and connect this value proposition is resonating globally.
And we believe the combination of the unique resources that we bring entrepreneurial flexibility share value added for boats and permanent capital.
E rather than in combination for the rightful across these geography.
Yeah.
Great. Thank you for the.
And the color there I did have one real simple follow up I think the last time, you gave us a lab and it was roughly 200 billion and you probably grown a lot since then and just given the market and all the acquisitions announced.
Do you have where AUM was either at December 31st or where it is today roughly.
Yeah, absolutely. So as you know we don't see this is a terrific number for us.
It's really a business benchmark.
Having said that actually I'm glad you are asking because this is the first time for our CFO, Jim Shanahan, Let me talk about 250 billion and client assets, Oh, Hey, Bob. So we are obviously, we have grown significantly but it's we always said consistently since the time of our IPO.
It's it's an interesting number to know, but it's not really a core core business driver and the way be RVO operating the business.
And I understand thank you Rudy.
Thanks.
Yeah.
Thank you. Our next question comes from Mike Carrier with Bank of America. Please proceed with your question.
Good morning, and thanks for taking the question.
And in the past you guys had a target audience for possible M&A.
Wanted to get your take on how that opportunity expand with the launch of accelerate with Nexus and Texas.
And how that expands not only like the the opportunity, but also the potential revenue and margin opportunity for the firm over time.
Yeah. So as you know we have always had a really client centric view to our M&A activities, meaning it really starts with what are the services that.
High net worth and ultra high net worth families need and.
And then we are basically looking better for you saw alright.
And these are high and multifamily offices.
Every reasonably targeted more IV.
Our first OCI O join us so it always started with what are the services declined and client needs and how can be surround this client with these key capabilities and yes, you're correct Bose.
Connectors and.
And now the accelerated announcement from yesterday broadens, our M&A footprint in so many ways connectors.
Fills in the gap between direct holding company deals which of course, we have done since day one.
America transactions, which is always the largest number of deals that we did last year and was 18.
We're basic Kelly if from keeps its identity and brand.
But at the same time, we leverage this very powerful infrastructure.
We have built that ultimately gets steam efficiency and gross operating on the dose that.
Quite frankly, we believe are quite unique and as industry.
Yeah, and just from a margin perspective.
Obviously, you reported a 23.9 our guidance for Q1 is 24.5.
And the connect this activity was at the end of the year you know we did a three a merger opportunities there are.
And one in the U S and we just announced one in the UK so over time.
We will revisit our long term EBITDA guidance.
Guidance and how connected contributes to that.
Okay, Great and then.
And just as a follow up some.
Some of them like new services and best practices.
You guys have been adding on the platform for that.
For the firm views like any sense on how that has improved productivity and organic growth at the firms.
Yes and of course most of these we.
We have launched quite recently as you know.
We have two type of programs. We are focused business solutions. This is where we use and really have for quite a while.
Our scale, our purchasing power and our expertise to.
And to ultimately help our firms simply grow faster and improve the margins and <unk>.
Quite frankly, when you are looking at the growth numbers that would be the publish and Bob from growth.
Partner for individual partners from girls, Yeah of course.
And our important contribute to argues focus business solutions.
Line solutions, and we talked about cash and credit you lost UBS.
Roughly about supported a $1 billion and either cash or lending solutions on behalf of partners.
And yes services beyond that.
Still in the works you ultimately help.
Yes.
Hey.
Private banking capabilities and the capabilities of a high and private banker.
And without any of the package to our partner firms and yes, we believe over time that these will be very substantial enablers.
And our partner firms and of course, ultimately this will translate into into economics.
We also recently announced our Orion joint venture.
Yes, I'm sure you've seen it.
Yes, it's still in the beta stage, but this is where we basically make our cash credit capabilities.
Saleable to overtime, you'll ultimately all Orion clients, who want to opt into these programs. They are Ryan since 2000 advisors is of course, one of day, leading technology providers in this industry and somebody that we have.
A group that would be it works for me is for for many many years. So yeah not in 'twenty, one but over time, we believe.
And a meaningful contributor.
Most importantly.
Yeah, you've seen our guidance, we expect to go to double digit.
Organic gross numbers in 'twenty one.
And as you know historically, our organic growth was mostly from higher than that so it's really all of these programs together.
Ultimately, we believe will.
Significantly boost our organic growth that you have seen.
In the fourth quarter and for the rest of the year.
Okay, great. Thanks, a lot.
Yeah.
Thank you. Our next question comes from Jerry O'hara with Jefferies. Please proceed with your question.
Great. Thanks, maybe and maybe a two part question just around revenue.
And if you could maybe give a little color as to what some of the drivers are that lead to lead to the I guess higher than anticipated family office revenue rebound in the quarter and then also maybe more broadly how we should think about what appears to be year and incentive fees, but if it's if it's more broadly spread out throughout the year.
And any context or color there would be helpful. Thank you.
Yeah.
Jim and go through some of the numbers, but what we have seen is of course as you know.
Business overall.
And just extremely well last year.
But we did have and we publicly disclose <unk> heads.
And some drag.
About $12 5 million per quarter that came from the life Entertainment business.
And what basically happened this year and.
Morphing of this business, meaning it's still down and already life events, but people on Youtube people are in different channels people.
Get back into the business did ultimately lead to an acceleration in this segment. We are not quite where we are where we need to be or have been and I should say.
Bob.
Quite frankly see this reacceleration.
And that <unk> seen partially here in the fourth quarter of Jimmy and want to go through some of this.
Yeah, Yeah, so as Rudy you just mentioned and.
And we are sitting here in November.
And in a COVID-19 environment, where we're looking at the activities at these type of clients you know clients are intelligent and the entertainment industry. They find new ways of generating revenue and activities, you know Netflix and prime and and things like that as as Rudy was mentioning and.
We came in about $5 million higher than we expected based on these activities at the end of the year and.
In November and December and we like what we see going into 'twenty. One that these activities will continue to approve obviously live events still arent happening, but theyre learning ways to do and other activities and as you recall, where essentially the outsourced CFO for all these clients dealing with their taxes.
Their contract reviews their insurance needs all of those types of things so as those activities increased with the clients certainly our revenues with those activities increase as well.
And then also there was some incentive fees incentive fees are not a large part of our business at all.
$19 million and Q4, we have obviously and annual revenue base over one 3 billion.
And these kind of came in and in December when you measure them.
And generally don't come in.
Through the year. So it was about $19 million, I'd say, plus or minus 15 of it which probably.
Incentive fee related.
And that was in Q4, so that drove the outperformance.
Performance against the top end of our guidance for Q4.
Okay. Thanks for taking my questions.
Okay.
Okay.
Thank you. Our next question comes from Alex Blaustein with Goldman Sachs. Please proceed with your question.
Great. Thanks, Good morning, Rudy <unk> and Jim I would love to expand on connect is a little bit more I know Rudy you provided sort of higher level comments around how that addresses your guys its addressable market.
Can you help us understand I guess, a couple of things around specific sort of like what's the EBITDA contribution of connected today, what is their EBITDA margin today to kind of help us think through growth and scaling and that platform and.
And then slightly bigger picture, but do you think that activity and connectors overtime could spill into your other partner firms meaning that.
They could start to pursue more sort of standardization and kind of learning the lessons from connectors and the benefits. There may be some of those are a platforms are getting by being more standardized across kind of back office and milanov Middle office too.
Kind of expand for the rest of the for the rest of the firm.
Yes, absolutely.
And we just launched it so it's too early to talk about specific numbers still don't you have seen here, we have and we have already announced and number of initial.
<unk>, what's important to us to highlight as we believe this is probably the first time, where we're a program and he has been launched from the global scale and that is very unique and we ultimately believe ultimately a very powerful proposition, but rather than hearing from me, let's talk to.
The real.
Brain behind connectors, Virginia, do you want to handle some of Alex's questions.
Yeah. Thanks Rudy.
Alex but of course for dealers and we always look to add shareholder value, but like <unk> said connected that's just starting.
We are very excited about the accelerate program that we launched yesterday and.
And connected to the global from accelerate is a global program that brings together.
Every element that is needed to fulfill the promise of connectors, which is.
Growth.
Advisory efficiency and expanding the client value proposition.
Nothing and accelerate has he built and they will come it is all being constructed based on multiple conversations with our partner firms and the needs. They have expressed for big clients.
Unique into leverage between focus and connectors comes from the fact that we have built and accelerate that.
And on the shoulders of yours, and institutional expertise and the scale of the 71 focus partner firms and the vendor relationships that we have developed this is what enables us to bring together. This ecosystem. What is unique about it is not just the fact that we have put these vendors together to provide technology.
<unk> content and services they are integral and focus proprietary solutions and to this like clarity like our etsy evolutions and on top of that we are bringing intelligent smart integration that is what makes us unique for us they'll there'd be global customization by country absolute.
Some of these vendors will be common across some of them will not and there has to be global customization and.
And we connect this fun will use accelerates.
Accelerated available by choice and refocus partner for them. So what would you.
Do we see D into leverage do we see the benefit across the focus family absolutely.
Great. Thanks for that very very interesting.
Another follow up maybe and not and I'm not sure. If you guys will be able to answer it but I'll try anyway. So a $1 billion of dry powder that you guys talked to.
Obviously, you you highlighted very robust pipeline multiple times on this call.
Any way to help us frame how quickly you ultimately expect to deploy that $1 billion.
Well.
And youre going to ask that Alex.
Yeah.
So and.
Obviously, it's a very good question.
But we never thought about it and it's not that we got this $1 billion sitting in our checking accounts and it's burning a hole into our pockets.
This is capital that we can draw on if and.
And when we need and what has meet this model.
So successful is ultimately you've been very disciplined in fact, Alex.
When you look at the multiples we paid in 2020 versus 2019 versus 2018 basically constant in fact.
Touchdown book again, so basically constant which ultimately means is because.
Because of our cost of.
And of that.
Our weighted average cost of capital is down based on the interest rates quite frankly, our returns and continue to be very high.
You'll probably remember about 25% returns an average returns of almost 50% of our deals create more than 30% returns. So it's not about.
And the speed of deployment, it's about the quality of deployment and yes. We are very confident that we will be able to deploy a good part of it is in a relatively short timeframe, but there is absolutely no rush and I always tell the team.
The only thing gets worse to not doing the deal is doing a bad deal and this discipline has really helped us.
And with this business over the years.
Great I thought that would be your answer, but I figured I'd try anyway, alright, thanks, everybody for thrive.
And.
Thank you. Our next question comes from Chris Schuttler with William Blair. Please proceed with your question.
Everybody and good morning.
A few questions on connect this so first should we should we think about the multiples that you're paying and connect us as being very close to what you would pay and traditional mergers.
And.
Then in your traditional model I think the.
The employment agreement with our partners typically means they are locked in for a handful of years. So how does that differ with connect us.
And then lastly.
Could connect us be it sounds like it's a healthy part of your pipeline, but could it be.
25% to 30% of the EBITDA that you had this year.
Yeah, Hi, Chris I'm, So glad we have for Virginia on the phone here because.
And that's good.
Clearly the.
It's first and foremost you as I've said in the prior question, it's first and foremost filling in and against that we had in our M&A model.
Ultimately quite frankly, it was something that Virginia and her team really develop.
From some of the learnings and the U S and experienced and the U S. Both for the Australian market.
And we ultimately believe that.
The effective multiple yes, because these are highly synergistic transactions, because if you've got infrastructure Ulta.
And ultimately.
The effective multiples will be just as attractive for quite frankly, a more even more attractive and what we have today, but regina and I want to add something.
Okay.
Absolutely as Judy said that is that from Mike of connectors, we have a robust pipeline.
The only thing that I would like to adds to what Judy said is connected certainly expands the market for us because it caters to the need of an advisor base that is asking for something different and what our direct model and how much is offer it as a hybrid and yes. This shared services platform is definitely going to help both net revenue.
And with advisors and efficiencies, which will eventually be accretive.
But what we do want to emphasize is connect is just not changed the quality and caliber of the firms of the advisers that they're looking for.
The disciplined approach that behalf to affiliating ourselves with client and server centric fiduciary advisors is consistent irrespective of which model focus discipline.
Yes, we have the same contractual protections.
And so we had been in our traditional transactions so really no change.
From this perspective.
Thank you and then just one for Jim just the.
You gave the earn out payments expected for the first quarter can you give us a rough number for for 2021.
Yeah, we don't provide guidance at this point on the on the full year, Chris It's just it's hard to estimate.
We'll be publish and.
The 10-K shortly so the aggregate.
And out onto the the GAAP methodology and Monte Carlo for the business acquisitions is about $170 million that gets paid out over and over several years and we've given guidance of $10 million for for Q1.
It's just it's too hard to estimate.
And with precision the annual basis with these earn outs and may be.
Okay got it thank you.
Thank you. Our next question comes from Patrick O'shaughnessy with Raymond James. Please proceed with your question.
Hey, good morning so.
And with connect this how do you make sure that incentives of the selling firms are going to be aligned with yours over the long term given that you are going to be owning a 100 per cent of the economics I think historically with a partner for a model.
And 40% to 60% you have for names preference and and so you know clearly economically the selling partners is aligned how do you make sure that.
The selling partners with connect and start going to be incentivized to continue to grow the franchise.
Yeah, absolutely and as I said, let me have for Geneva.
But first.
More than any contractual or other provisions.
And simply be really careful who you let into the into the partnership here and we continue as Virginia, just said to be very selective.
Make sure that the.
Ultimately D Inc.
<unk> of these partners are in line with Us and.
And quite frankly, it's ultimately through a formulaic.
Sure and indeed economics of the business plus some incentives on top of it. So again, it's a very close alignment slightly different and what we have we saw our core business.
But ultimately because we control the platform here.
Because ultimately we are the platform for this partner firms of course have much more influence over this part of the business and.
So we are very very comfortable that.
Based on all the expertise that we have built and the formulaic.
Approach here on the.
On the economics that ultimately these partners on just ANSI line.
And steel with visa.
We saw core transactions, Virginia, and anything you want to add.
I'm sure the economic alignment and ongoing incentives are very inherently and part of connectors and as part of connected but every firm.
Just like every focus partners, we make short, but its not just gen. One that is in line with Gen. Two and Gen. Three that is a line that is a core aspect of our model and that is completely consistent across focus definitely for connectors.
Great. Thank you and then a question about the competitive landscape in terms of acquisitions, obviously theres a lot of money chasing U S. R. As right now a lot of private equity backed consolidators out there.
Is it less competitive when you're bidding for advisory firms outside of the U S.
Yeah. So first.
No.
Our fourth quarter last year, we did 15 transactions five new partners and mergers and last year and totaled 25 transactions.
So clearly our unique value proposition and trust resonates and will continue to resonate well you have to be just very very disciplined.
And I said at the beginning.
And quite frankly last year, we call it a little bit internally the year for drunken sailors.
And yes, we have seen very unusual transactions last year and.
And some firms you are buying it double triple year, the type of multiple state would be worse, and we need to bid.
And quite where it would be worth and theres always and shareholder value destroying transactions.
We would never do this to our shareholders.
Our disciplined speaks for itself.
And because of this unique.
Building block around ultimately the entrepreneur and the value added programs.
Our unique approach to what successions and very important the fact that would be a provider of permanent capital via the.
And the public company and this space.
At least of any scale and our ability to be a provider of permanent capital is very differentiated versus private equity for example.
Every transaction you had happened and see how this thing is going to be on the block again in year three years five years ago whenever and.
And in the second go around the principles of these firms.
We have very little control over.
Who the pes are going to sell it too so in reality.
We are very confident and.
Our track record and the quality of our pipeline and speaks for itself that we will have almost unlimited opportunities for for used to come just one number to illustrate this.
So really came out with.
Reported reasonably.
And the advancing and pointing to and.
Just in the U S and.
And M&A opportunity in this space of two eight trillion dollars.
T as trigger and visit T $2 eight trillion in the next five to 10 years, we mentioned before our focus today is.
250 billion plus yes, so just the sheer size and just adjust U S numbers.
It's just extremely high we are the largest and this space is the longest direct recurrent and not just of transactions but of value added.
I think you and a rock solid position and.
I'm very confident in 'twenty, one is going to be a very good year again.
Okay.
And you still there.
Yeah.
Okay.
Thank you. Our next question comes from Kyle Voigt with <unk> W. Please proceed with your question.
Hi, Thanks for taking my question.
Maybe just on the on the margins.
Calculating incremental EBITDA margin in 2020th over 35 per cent.
And so very strong.
Is there a way you could help us understand how much of this is maybe due to any change in the ownership percentage of the businesses.
The acquired during the year versus simply realizing scale benefits and operating leverage.
And then secondly.
And maybe second part for that question is and a growing revenue environment can you share a bit more about how you think about the balance of wanting to pay and retain advisors versus kind of driving margin expansion for for shareholders.
Yes, I think maybe I'll just I'll just start so kind of we are into Q3, we had an earnings supplement where we announced the acquired base earnings and the estimated revenue and that was with for the firms. We ended up close and five so the five firms new partner firms and Q4 were somewhere around 36 37 per.
And <unk> of our margin there.
Obviously SG&A costs as you have seen us relative to revenue have not been going up so that's a positive on the margin and then.
The the $19 million of the one time and Q4.
We had about a 26 margin percent.
Percent impact to adjusted EBITDA margin.
That's a little color for you on the margins.
And as we were saying from a long term perspective.
We're not changing our 2025 guidance at this point.
But clearly.
Clearly, what we have learned in 2020, and but our partners have learned.
And is a more efficient approach towards running the business.
Jim and I, and yet clear or not with the precision that we like which of these are temporary because it's related to corona.
And which of these are permanent but.
Very much we are going to look to.
Throughout this year.
How do you expense bases evolves and yes dancing a day.
And potential that we will be revising the 24% upwards.
And one point once we have been a clarity and to kind of day, the ongoing cost structure of the business.
And maybe just a clarification question and Jim sorry, if I missed this but in terms of that the 20% revenue target we provided for 2021.
It sounds like you don't really need more help from from markets from the current levels to reach that but I guess I'm wondering if we need to see a return of that there's live events for the second half of the year are you assuming that those come back and order.
Good day at that 20% target.
Well I think.
And we hopefully we're all optimistic that we all get vaccinated and the first half for this year and Ah and activities will start to.
Increase and the back half for the year. So we're not breaking out the guidance for the 20% between the market and the the non market.
And we did give some some guidance on seasonality of that type of revenue and <unk>.
Q1.
But we're comfortable with the guidance at this point of over.
Over 20% of our revenue growth for 'twenty and 'twenty one.
Okay, great. Thank you very much.
And welcome.
There are no further questions at this time I would like to turn the floor back over to Rudy for closing remarks Rudy.
Yes. Thank you.
So we are extremely proud of what our company accomplished in 2020, and how well our partners for their clients and manage their businesses. During these challenging times they have shown extraordinary dedication and perseverance.
I want to thank all of our holding company and please who went above and beyond and so many ways. It's the supported our business and a challenging environment.
With the rollout of effective vaccines and stronger COVID-19 treatments.
Hope that the world will begin returning to normal later this year.
And we're looking with great optimism towards 2021, and beyond our ability to deliver substantial growth and margin expansion.
While deleveraging during the crisis combined with our tremendous capital flexibility and unique scale position us to take advantage of our industry, leading position to expand our model and the U S and in selected international markets and closing I wish you all good health and thank you for your.
And our interest in our business Bye bye.
Okay.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.