Q3 2021 Focus Financial Partners Inc Earnings Call
[music].
Good morning, I would like to welcome everyone to the focus financial partners 2021 third quarter earnings call joining today's call, our Rudy Adolph founder and C. E O Jim Shanahan, Chief Financial Officer, Rusty Mcgranahan General Counsel and Tina Madden head of Investor Relations in a corporate communications Mister Mcclenahan. Please go.
It.
Good morning, everyone before we begin let me remind you that during the course of this call. We may make a number off towards looking statements. We call your attention to the fact that focus results may of course differ from these statements. These.
These statements are based on assumptions made by an information currently available to focus financial partners in involve risks and uncertainties that could cause the results of focus to materially different from these statements.
Focus has made filings with the S. C C, which lists some of the factors that may cause it's results to differ materially from these statements, including without limitation uncertainties surrounding it the COVID-19 pandemic and finally focus assumes no duty and does not undertake to updates and he's such forward looking star.
Eight minutes.
With that I will turn it over to our founder and C E O Rudy eight off Rudy.
Thanks, Rusty and good morning, everyone. We appreciate you joining our call today.
We delivered another strong court the in Q3, and we are having an exceptional year across every dimension of our business.
Financial performance exceeded our expectations on all measures position positioning us for another record year.
Be generated a third quarter revenue, so 454.5 million.
It just didn't it income excluding next adjustments bichir off 84 cents and texts adjustments Bashir of 14 cents an.
Our last 12 months cashflow available for capital indication grew 54.4% year over year, two 299.7 million reinforcing not only our strong performance, but also the economic value of our techs shield.
Our high growth business is complemented by a resilient.
Sufficient financial model that has consistently delivered strong results across market cycles. B R. Also proud that turned off or U S. R. A partner firms were recently included into Baron's 2021 list of America's top 100 already firms with most achieving just ranking for many years in a row, reflecting did concede.
Distantly high quality of the firms in a partnership.
Oh, a M&A momentum continued to accelerate in the third quarter as we close.
Two new partner firms and seven marriages on behalf of our partners, including a merger for connectedness in Australia.
The first quarter to date, we have closed and other 12th transactions and denounced three there's a pending closing this brings out a year to date total to 31 transactions, which included nine new partner firms twenty-two mergers for our partners, including eat mergers for connectedness across four countries I would.
Expanding international footprint is an important source of revenue diversification.
Our value proposition continues to resonate strongly and we are seeing an extraordinary level of potential transactions. Both in terms of new partner from some mergers on behalf of our partners connect US also continues to experience significant interest in the U S and internationally.
A good mix of transactions in a pipeline and dusting new opportunities to expand our business. Our partnership stood at 79 firms as of November 1st I've never been more excited about the caliber of firms. We are attracting not only are the industry leaders in their own right, but the further comp.
<unk> and diversify our partnership through the a track records of gross Israel as deep expertise in wealth structuring inclined service.
And Cora Cardinal point in the element.
Three a recent partner firms we have closed door announced are great. Examples of this combined these they oversee approximately 11 billion in client assets and we anticipate that they will add approximately 60 million in annual revenues and approximately 22.5 million in annually quiet base earnings and then.
Aw context, each Cora, which closed October 1st is a premier wells advice or any investment management firm in Cleveland, Ohio. This over 9 billion inclined assets. The firm is a scaled dwells miniature that is differentially itself through its diversified service model, which is compliment.
It by an impressive investment team and performance track record spanning more than 15 years.
Of course, but they cannot be well known for its deep investment management expertise offering its clients and the array of proprietary solutions in equity fixed income mutual funds in alternative investments.
[noise] Cardinal point, which close November 1st is a Toronto based whilst miniature abuse, approximately 1.1 billion inclined deserts, where more than a decade cognitive point his built their reputation as leader in cross border also management.
The from address as the complex needs of clients, who are domiciled in Bulls, Canada and the U S through their highly integrated approach. It has developed over time Cardinal point brings a unique value proposition to refocus partnership enhancing our existing network, but also expanding focus presence in Canada.
Oh man wealth partners, which is expected to close in late was caught up is an RIAA based in Jacksonville Beach, Florida with approximately 700 million inclined assets.
Elements dynamic multi generational principle group make it a pre eminent firm to partner with indie attractive Florida market.
Each of these firms as well as Sonora investment management, which close to October 1st joined focus because we are much more than just financial acquirers b a permanent investors offering a unique combination of entrepreneurship gross capital and value added services I've said this before.
Sure and it is worth Reemphasizing, having focus is a long term strategic partner Mister resources intellectual expertise and skill advantages that enable our partners to become stronger businesses grow faster and surf declines better is an important competitive distinction.
The value added services, we provide are an essential element of what makes us attractive to the firm's to join us.
These are services that to our partners has specifically identified is neat and we're working closely with them to build adviser friendly solutions that leverage our scale in purchasing power.
The most recent example of this is trust services. This quarterly began to offer dedicated trust services under the stewardship of that Simpson, who recently joined US to head focus fiduciary solutions our trust in the states offering for our part the firms and declines these services would create a significant opportunity for.
Partners advisors to expand and retain multi generational apply and deserts similar to the approach we talk with our cash management and credit solutions, we are leveraging in network or third parties. In this case advice, a coordinated independent trustees with the scale and expertise to meet the diverse needs.
Partners clients and can do saw it highly competitive pricing.
That's team works on a consultative basis with our partners to develop solutions that are tailored to dislike needs.
As we turned our sights to the fourth quarter I have no question that focus will continue to generate outstanding business growth in financial performance driven by the combination of five elements.
First B R D market leader in arguably the most attractive segment of financial services. There's no. Other firm that has our track record in independent wealth management and operates globally with our scales cope expertise and resources.
Since our first partners joined US in 2006, we have been at the forefront of the industry, but yeah actually just getting started.
B R. A pure play partnership capitalizing on industry consolidation that is seen it's early evenings a trend that we believe would accelerate further and build characterized this space for the foreseeable future.
<unk>, our three M&A models direct partnership, but the holding company level merge us on behalf of our partners and connectors acquisitions comprehensively surf the needs of this industry and as a result, we are attracting many of the best firms as such be expected. We will have is sustained.
[noise] pipeline of high quality domestic and international M&A opportunities for many years to come third the continued growth of our partner firms. They are operating as entrepreneurs, but they'll also benefiting from our value added services, which are enabled by our unique scale and expertise.
The performance Trek records demonstrate the color of their businesses, which was particularly evident during the onset of 2020 pandemic crisis.
Our third quarter year over year organic revenue growth of 28.8% underscores this point.
Force It techs efficient financial model that derives its stability from its reliance on fee based in recurring belts management's revenues that are not subject to feed pressure the way the asset management industries. A financial model is also capex light with a highly variable expense space and.
<unk>.
It prudently manage capital structure with acquisitions funded by a combination of increased cashflow in low cost that and by selectively using equity consideration for transactions are enough payments.
We set let me turn to call over to Jim Jim.
Good morning, everyone and thank you for joining us today, our third quarter results reflect the strong performance of our business and we have continued to build momentum into the queue for our.
Our partner firms performed well in Q3 and delivered another quarter of strong growth.
We have a long track record of acquiring excellent firms that are value accretive capitalize on on a rapidly growing market that has consolidated and quickly.
Embracing the entrepreneurship that make these firms industry leaders central to everything we do and we provide them with breadth and depth of resources unavailable through any other acquire in the market.
We manage our business and growth in a disciplined way and the strength and consistency of our financial performance is a testament to that we have a substantial market opportunity ahead of us not just here in the U S, but internationally as well, which will fuel our expansion for years to come.
We have demonstrated success and not only taken advantage of the opportunity said immediately in front of us, but also at identifying where the market has evolved furniture and adapt in our business to capitalize on what the future opportunities will be.
With that let's turn to the highlights of our Q3 piano Ah revenues were 454.5 million up 37.1% year over year and slightly above the top end of our estimated range of $440 million to $450 million as organic revenue growth across the partnership was 28.8.
[noise] percent exceeded at 27% high end of our estimate.
R Q3, adjusted EBITDA was $113.5 million up 45% year over year are adjusted EBITDA margin was 25% in line with our estimate we continue to expect that our margins will expand over time due to the scale driven operating leverage of our business.
Year to date September 2021, our adjusted EBITDA margin expanded by approximately 1.8% compared to the prior year period.
Are adjusted net income excluding tax adjustments per share or 84 cents, 33.3% higher year over year, which reflected the effect of the incremental interest expense associated with Prefunding of our acquisition activity in the second half of this year as a reminder, we drew down 650.
$50 million of our 800 million term loan rates on July 1st.
Our tax suggestions per share or 14 cents up 16.7% for comparable period reflect in our strong M&A momentum.
It is important to note that our tax efficient structure of emanate transactions continues to provide a significant benefit to shareholders in the form of tax statements and freeze up additional capital for the execution of our acquisition strategy.
As of September 30th or gross on amortized tack shield was over 2 billion the details of which are in our earnings supplement.
Almost every acquisition, we make increases the value of this tax shelter.
Our M&A momentum was strong in Q3 and is Rudy noted that has continued into the queue for we closed the acquisition of two new partner firms a R. S. On July 1st and Badgley Phelps on August 1st. These two firms contributed a total of $5.4 million in revenues and $2.1 million, an adjusted EBITDA in queue.
Three or about 38%, an adjusted EBITDA margin based.
Based on mid quarter activity, we estimate queue for a full quarter revenues and adjusted EBITDA of $7.3 million and $2.7 billion, respectively from these closings.
Additionally, Q4 to date, we have closed on three additional partner firms and have one signs and pending clothes, which we estimate will contribute a total of $69 million in annual revenues and $24.9 million in annual adjusted EBITDA or about 36%, an adjusted EBITDA margin base.
Based on big quarter clothes, since we estimate $15 million in revenues and $5.3 million, an adjusted EBITDA in queue for for these firms.
Now parents, who are cute three expenses and cash flow.
Management fees were 127.2 million or 28% of revenues relatively in line with the prior quarter.
Non-cash equity compensation was 1.3% in Q3 revenues in line with our expectation and we estimate this expense will also be approximately 1.3% of estimated queue for revenues.
As a reminder, our GAAP results are impacted each quarter by the remeasurement of our earn out liabilities.
This remeasurement, which is estimated use in Monte Carlo simulations resulted in an increase in the non-cash changed in a fair value of estimated contingent consideration of $36.2 million for Q3 reflect in future growth of our partner firms.
Additionally in Q3, we also issued approximately 64700 class b units in connection with an earn out obligation as we have said previously we selectively issue equity in connection with acquisitions and earn out payments.
Regarding cashflow or LTM casual available for capital allocation as of September 30th was $299.7 million, 54.4% higher year over year reflected in the growth of our partnership as well as the addition of 10, new partner firms and 21 merger store in this LTM period.
We paid cash earn out obligations of 33.7 million in line with our Q3 estimate we anticipate that we will pay cash or an ounce of approximately $35 million in queue for.
Now for a quick review of our queue for expectations, we estimate that our queue for revenues will be in the range of $475 million or 485 million, we estimate a queue for organic revenue growth rate of 17 to 20 per cent are queue for expectations also reflect the contributions of new <unk>.
Partner firm additions.
We anticipate that our queue for adjusted EBITDA margin will be approximately 25% as I've mentioned previously we will update our long term adjusted EBITDA margin target at our invest today on December 9th as part of our overall review of our business strategy and long term growth targets.
Now for a few comments on our balance sheet. We ended Q3 would approximately $2.3 billion of debt outstanding in a net leverage ratio of 3.54 times in line with our Q3 estimate.
Assuming markets say constant at current levels, we anticipate that our queue for net leverage ratio will be between four times in four to five times.
Remain committed to our net leverage ratio range of 3.5 times to 4.5 times, which you believe is the most appropriate range given the highly acquisitive nature of our business.
To close we continue to deliver strong growth in financial performance in Q3, and we anticipate that this will continue into 2022 and beyond we are uniquely positioned to benefit from the large and growing independent wealth management industry, which according to an address that report stood at approximately six trillion.
2019 in the U S. Along and is expected to grow to nine trillion by 2024 expand then at a compound annual growth rate of 10%.
According to several sources. The addition of international markets just in the countries who are invested in as another approximate for trillions of this title.
It bears repeating their focus is a pure play investor in the growth and consolidation of this industry globally no. Other acquire in this space public or private offers our track record in value proposition, which is supported by the benefits of permanent capital investment or has anywhere near our scale. It.
It takes time to build these capabilities and we have a distinct first mover advantage.
Taken together all of these attributes contribute to outstanding and sustained financial performance industry, leading growth and enduring competitive differentiation that create sustained long term value for their shareholders with that let me turn the call over to the operator for Q&A operator at this time, we will.
Conducting a question and answer session, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tunnel indicate your line isn't the question queue. You May press start to if you'd like to move your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing this darkies one moment, please while we pull for questions.
Our first question is from Owen low with Oppenheimer. Please proceed with your questions.
Good morning, and thank you for taking my question could you. Please talk about the outlook for for for acquisitions, and how would the potential change in tax rate impact of pay Sophia emanate. Thank you.
Yeah, Hi, Owen.
Thanks for your question as we said the overall.
Blind could not be stronger.
Very pleased with.
Both call it the the diversity there both domestic and international.
When you're working on more deals than I can ever remember that we have.
Yes texts may may not have some.
Some implication he in the U S O Z as no no indication in international but let's always keep in mind that the fundamental driver you know of industry consolidation date that the fundamental driver of the.
Ultimately our acquisition business is really the aging of the founders and defending generation you have heard this statistic before 50000 advisers just in the U S.
65 years and older managing.
Three trillion in client assets, Yeah. These forces us so much stronger than just a texas here or there. So we have no question that our moment to mean next year and in the years. After is going to continue to be very very very strong.
Got it that's very helpful. And then where do you you touch on a cash and credit program and also the New trust surfaces could you. Please give us a little bit a little bit more color on on these value added surfaces any numbers you can keep it out and then any other potential.
A value added stuff assist you think could be material don't gotcha. Thank you Yep yep. So we.
We have pretty much the type of services that we want to offer it's now about depth deeper penetration increasing sophistication increase in scale and purchasing power in all the services that we are offering maybe there's one or two others that we can think of but I think.
We have what we need cash credit continues to be a very successful program.
<unk> participated.
A consolidator advised help boost.
Closing of.
2 billion in transactions since program inception, and you'll be view. These is just using to scale the aggregate scale of vulgar or organization using up purchasing power to create better solutions than annual FA partners quite fit.
And can anybody in the industry.
Provide for the inclined and for our partners. So very good momentum be announced earlier this year. The Orion joint venture you May remember indication credit area just at a conference call with like a 500 of the next lines, which was again very very successful and well received early days, but.
B B belief this is a highly differentiation.
Asian Program Trust, we just launched it's now about education in the gain lining up the right trust companies too.
Provide preferred solutions for our clients and our partners. We have a very good roster right now is about 10 of them.
Both domestic and international and Mir certainly early indications are very positive. The key theme for all of these value added programs is ultimately about equipping our partners with all the capabilities all the skills of a high end private.
Anchor without any of the package, but really going beyond the private bank in the sense did we have introduced the concept of open architecture.
To their high end of the credit market, which certainly to my knowledge has never been done before yes, you have quicken loans and so on the mass market, but.
<unk> did sophisticated lending solution.
Using a whole number of different banks is preferred providers in passing designers through for the two clients is really a new solution and we are very pleased where we are at this point.
Got it thank you very much worthy.
Saint Laurent.
Our next question is from Alex blow steam from Goldman Sachs. Please proceed with your question.
Good morning, Rudy General everybody.
Question I guess on the piece of M&A transactions for you guys really robust activity over the last several months several quarters now when we think about the constraints of the financial constraints, obviously be the leverage you guys I think I got into a little bit of a four time that you guys are the fourth quarter.
Surprisingly, that's ramping giving me all the activity. So do you still generally expect to be below a four and a half as a kind of targeted albert and urine and longer term and to what extent does that affect kind of a piece of activity. So could we anticipated moderation as you kind of get into the fourth or the other things.
You're doing that could kind of keep you on the similar paycheck will see recently.
Yes.
Thanks, Alex.
Dean.
Momentum is just incredible there's no other way to put it 31 deals.
Announced to date and Ah reality is zebra always committed to be committed to the three and a half to four and a half reach that is.
What we believed in the right range for us operating as a public company and clearly when you look it up performance lost so it this year and particularly into <unk> into <unk> into second quarter last year.
It was always extremely strong and it demonstrated the the resiliency of this business model. So he thinks we now have when you halfies derived range.
You have seen already now but also in the in and out of future transactions is we always said we are willing to use equity and we have a number of transactions where it is an equity component infect our equities is seen as soon very attractive.
Currency these days.
And then of course as you know our cash generation is just extremely strong.
About $300 million this year growing it very very significant pace. So we belief that we on the one hand, certainly are not opportunity constrained meaning that there is.
So many opportunities out there, but the combination of our cash flow you know of course detect shield our ability to use equity give socio older flexibility that that'd be currently need to enter as I said told the Owen before.
I don't see next year or any of the coming years, some significant change in the pace.
Of emanated and many opportunities that we see.
Alright, just tomato.
Add to that is we clearly have dry powder with the undrawn term loan and a revolver and so forth, but the cash element continues to grow on an LTM basis in success begets success and this cash flow limits, our use of leverage for future periods and then as we continue to structure <unk>.
And his actions and a tax efficient manner the tax deductions all sheltered a cash flow. So we think the future's bright and we have great opportunity here with the M&A pipeline, but we.
We will continue to be prudent in terms of managing our leverage in our guidance.
Great Thanks for that.
My second question is around operating leverage dynamics and you know appreciate Jimmy you guys are going to give us an update it targets on EBITDA margins at the bastard et cetera.
But it really just kind of try to that or understand what's going on and then sorry for some of the last couple of quarters here. So what I look at the sort of E. Bach Margaret Alright, so kind of consolidated margin in the business, it's been pretty nicely over the last three to four quarters and it goes in line with scaling of your partner firm so that makes it themselves.
But then if I look at the EBITDA margins, it's been coming down a little bit and that's really just a function of the management fee kind of pay out an expense growing as a percentage of that and back number. If you guys got follow ups and so is that a function of the leverage is coming from some of the larger firms and you have less equity in those firms in there.
For the expense ratio skew in the wrong way, keeping the EBITDA margins flattish as opposed to you instead of participating in operating leverage from from your management.
To your partner, so I'm, just trying to better understand.
Hailing only affiliates relative to the scaling I'll focus.
Yep Yep. So let me talk about the operating leverage here. So first just the fundamental Trent.
In 2015, the Evita marching was 19.7% and your Q3, we reported you're at 25.3% EBITDA margin. So the mega trend from a margin improvement.
Kind of couldn't be stronger and it it's really on multiple levels.
One is yes, our partner firms Yeah, and you are correct, yeah really many of the larger partner firms your.
Ultimately see marching improvement and just inches translates 12 percentage of ownership.
In into our P&L, but quite frankly into small firms the scale very fast and B C. It partner level operating margin quite frankly, our thriving merger business is an important contributor to these.
I'm still a little bit small, but well coming exactly with the pace.
That would be expected connectors is also going to be a higher margin business as we discussed on prior calls so again I wouldn't read too much into quarter over quarter trends.
Think it's the longterm trend that really made us here and yes, yes, Jim and I am not ready to give you. The numbers you have to come to invest a day in December but we are going to revise our 2025 and beyond marching target aborts, and well I'm not ready to.
To give you the number yet Alex.
Okay Fair enough, we'll see you in December.
Our next question is from Kyle avoid with K B W. Please proceed with your question.
Hi, good morning.
Ask a follow up uhm on Alex's question.
Rudy I I know you've selectively use equity in transactions in the past strategically, especially for tax purposes, but I I I still think a very high percentage of your your deals over the past few years years have been done with cash consideration.
So as you look ahead and just given the commentary on equity consideration I'm, just wonder if I'm inferring correctly that you're you're more willing to use a higher percentage of equity consideration on an ongoing basis now or in my for my interest in my inferring incorrectly there.
Yeah, No hi, Cal you infer incorrectly.
With cash being so cheap for US yeah. The blended rate of 2.5% of course is highly highly attractive, but then at the same time yet to be quite frankly go to a lot of flexibility on the equity side it will be for larger.
Transactions.
And we have historically used it for a larger transactions and you're quite frankly of course, there's a lot of interest in the equity in 10 behalf is unique ability Kyle Ruby can issue upstairs equity and where we can use downstairs equity for yes, obviously swell up see structure we.
Pictures of real competitive advantage because.
And you have the downstairs equity again, it's with larger deals you know basic Kelly you. It's it takes weeks change on the LLC side, which is very very unique and I don't think anybody else can offering to seem format as as we can so it's it's a very powerful currency. So yes, you're hearing correctly from time to time, particularly.
For larger transactions were you going to use some of our equity currency options, but the majority will continue to be ultimate cash.
Understood Thanks for that Rudy.
And just a question on the leverage ratio.
You have guided to that four to four and a quarter range by the end of the year just over three and a half turns now I guess when we take into account the organic growth and four Q and we also take into account the run rate pro forma EBITDA related to the deals that you've announced that are expected to close in that quarter Uhm, we're still struggling to maybe see how that would be more than a half.
Turn added to the net leverage ratio in the fourth quarter, specifically, so I don't know Jim maybe you could help us kind of bridge that gap a little bit is there anything that we're really missing and then also maybe we can get a little more color on recent purchase multiples and if that if those have have changed at all thank you.
Yeah. So let me talk about the day multiples first Jim.
Jim you can jump in on the leverage guidance and.
It's obviously for every quarter, we get very narrow guidance very precise guidance and so we can be that can help you with your model there, but on the multiple sites are trying to be like what we see we always had the ability for.
Very for high quality fast growing firms to flex on the upside behalf for smaller firms for mergers some of our international deals.
We see very attractive multiples, you're ultimately b B, we will give you again on Investor day, an update on the returns to be a generating and they continue to be very very attractive. So we're very comfortable wherever you are yoga use the flexibility.
Did we have when we have to but first and foremost just look at the quality of the firms that we are bringing in.
31 deals you today this is going to be our most successful M&A year, and we expect to Korea to achieve again very very attractive returns on the on let's say the 2021 or what we expect will be the 2022 vintage of partners joining us.
Yeah I think.
We close this quarter Q3, a 3.5 times.
On the net leverage ratio, we've disclosed in the queue, we've deployed over $400 million cash for transactions we've closed.
Think 13 transactions already in in queue for and we have a range of Ah four to four and a quarter is the guidance for Q4 at this time and.
We continue to work on a transactional activity.
Got it thank you.
Okay.
Our next question is from Craig's Siegenthaler with Bank of America. Please proceed with your question.
Good morning, Verde hope you're doing well.
Hi, Craig well it come back.
<unk>. Thank you. So I just had a question on your alternative investments I believe you are Larges L. A based affiliate has a pretty robust platform.
And they were in the process of leveraging your platform to help some of your other partners.
<unk> access to off can you update us on this effort and just see how it's been progressing.
Yeah, Yeah, absolutely are you, referring to FCS, which is actually a at Boston in Delhi based firm in New York based firm and Yeah, We certainly belief.
The alternative program is one of the very best in our industry, it's well above $10 billion with.
Terrific track record behind it so it's about a third of the asset base.
And we called the program a portfolio optimization, where we make these solutions from FCS, but also other firms like Covid codes in Chicago has a very high quality real estate investments hedge funds and other solutions and there will be other partners, who will have the ability to pay.
To participate so some portfolio optimization other focused partners you can tap into these programs.
The example, I used in the past and it's going very well, let's see California based from this study was kind of a guinea pig they are as Silicon Valley based firm.
And really we're very interested in enriching do investment solutions and in the moment they could tap into the Ses program not just could date broaden their value proposition in ways that they could have never done any other way because it takes years and years and the enormous scale to build a program like this and.
Quite frankly had resulted in a larger clients converting with.
With larger for definition alternative asset percentage of locations.
And just a very very attractive mix that they needed to surf and increasingly ultra high net worth clientele that they are serving and your V are making this program more broadly available at this point in fact.
We are heading to our partners meeting next week.
First in person partners meeting, which is very exciting actually and Debbie Hefted precession will oldest C. I O C. R of menu for a partner firms come together and talk about the unique solutions and basic and make them available two other partners firms, who who may be an interest and of course <unk> will be one of the future.
<unk>.
We expect very high level of interest in what they what they can offer now Houston important thing, Craig and and Thankfully a question. So this is not a distribution model. So this is not what the wire house would do or or asset managers Yahoo. Basic Kelly now if you want Bush underperforming overpriced proud.
That's down the throats of declines that is absolutely upload via doing we have basic Kelly, creating simply excess access to high quality D solutions, where our partners at their choice.
In excess these if they if they want to you know this is very much in the spirit of entrepreneurship and decentralization, but whether it is alternatives whether it is cash credit what we discussed before but it is trust solutions multifamily office solutions evaluation programs and other things you know the all ultimate.
Lee are resolved off the by the standards of this industry enormous scale that we have failed and <unk> simply creates better outcomes for near for our partners and for their clients and alternatives. This at the very top of this list.
Thank you Rudy and maybe Chino chiming in practice on this one but I believe you generally point is to a rough client next at 50 50 equities divines like when we're running stress scenarios.
But you know what the rough next of coin <unk> invested in office today inside of that next I imagine, it's probably in that equity side.
Yeah, so usually via saying between 50 and 55% it can reduce into balanced non correlated and the alternative component, we don't really break out but given that we are serving D and yes. It would be the non correlated that's correct.
Part of the you know if the asset mix, but of course, giving <unk>. We are serving high net worth ultra high net worth families. The overall level of alternatives.
Pretty high I mentioned before S. C is is a $30 billion firm.
Over 10 billion alternatives that probably is one of the highest it location and it's driven by the sophistication that they have been this area, but from an overall perspective C. A particularly in this low yield environment it'd be a currently in.
It is a very important part of serving your clients in a sophisticated way.
Thank you ready.
Our next question is from Michael Young from Truest Security. So please proceed with your question.
Hey, good morning, Uhm wanted to ask just a question on the M&A, maybe maybe kind of two parts. One you know as your a U N basis getting larger do you plan to run faster with more than than a deals that are some more size or or look at larger deals and then to just kind of what are you seeing in terms of interest and demand out there.
In terms of acquisitions by the three buckets it or is there more demand for connect us are becoming a partner firm et cetera.
Yep. Thanks.
Thanks, Michael.
So I never belief and when you look through focuses history in kind of elephant hunting the big flashy deals we continue to see the biggest opportunity in the north of a billion and probably 5 billion dollar range of course, we do do.
Transactions larger like encore.
It's a 9 billion dollar firm.
But your first and foremost we look for firms that simply are aligned with our vision you want to protect your clients who continuity of advice you want to have access to a value added services you want permanent capital and do you want to operate in an entrepreneur away quite a.
Frankly for because it's the only game in town and we're looking for firms with this resonates so I don't see us getting into the.
Neat or even being it attractive to be in this elephant business, which is the implication of your question. My please yeah, we simply would you or do more deals.
Sweet Sweet spot range occasionally also some larger deals location and some smaller deals, but we have the largest them in a team and does industry.
We are operating on the on the global scale or in in multiple markets and Uhm quite frankly I have no question did we can by keeping them mixed quite comparable ensued has been for for a number of years, two basic and meet our objectives and stay on.
On the absolute forefront.
Of industry consolidation, and ultimately creating value to clients and advisers through the scale and sophistication of the model that we have.
Okay. Thanks, and my second question I don't know if this is a better one for for Rudy a gym, but just you know as we think about kind of the macro pressure of inflation and therefore higher rates headed into potentially 2022 or 2023, you know I'm just trying to think of how that flows through kind of your business model and then.
He reviews, you've done to that effect uhm, particularly as it relates to you know maybe operating margins in management fees not exactly sure. How those behave you know kind of in a inflationary environment.
Yeah, I think from from the revenue standpoint, as we've often said our revenues are fee based retiring in nature, 12th Madison holistic service. So we don't have interest of revenue.
As a as a component.
The interest expense you know is more driven on rates for our piano and we constantly evaluate our fixed and variable exposure.
We have $850 million of our term loan and shakes his.
Hedge at this point.
648, a it is a 50 floor so that operating cost is already being incurred in.
We'll continue them a moderate what the fed does in terms of the long term interest rates, but we don't think it's anything significant that will limit our goals at this point.
Yeah, and Michael you, just strategic Kelly and I said before just stay tuned we will update our.
Return numbers.
At the Investor day, and they will be very very strong.
And of course from a Pew macro perspective, there should be an inverse relation between interest rates and multiples.
And yeah, it's doable waited cost of average or read.
Ready to emerge cost of capital that of course is is is critical but then also what's what's the other returns that you are generating business multiples into gross that you are paying so quite frankly any smaller changes from a macro perspective is there literally based on what we are doing and if there was some.
Dramatic changes.
That's the power of a business model and to see entrepreneurial decentralized structure that we have you have.
You can adapt to different rate environment different market environments extremely fast and if there's anything beef demonstrated the second quarter last year is this business model is just extremely resilient and very flexible to ultimately adjust to just about any reasonable scenario that's good.
That <unk> throw it through at the business.
Okay. Thanks.
We have reached the end of the question and answer session and I will now turn the call over to Rudy for closing remarks Rudy.
Yes. Thank you to conclude I'm extremely proud of the level of growth momentum. Our business is achieving we are firing on all cylinders and our results this quarter a reflective of that.
This outcome could not have been possibly we saw the our partner firms who continued to perform exceptionally well deliver outstanding service to their clients and define leadership in this industry. It would also not have been possible be solved our holding company team. We have said many times did we have the best team in every.
Facet of our business and our results this quarter are again reflective of that.
Extremely well positioned not only for his strong finish two in a second quarter, but also to deliver strong sustained growth and execution for years to come.
We look forward to telling you more about that that our investor day on December 9th and many of our apartment firms will be there as well as they will there's no better way then they convene to focus story and we are very much looking forward to seeing many of you at the Investor day. Thank you all for you.
Interest.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Uh-huh.