Q3 2022 Focus Financial Partners Inc Earnings Call

Okay.

Good morning, I would like to welcome everyone to the focus financial partners 2022 third quarter earnings call. Joining today's call are Rudy Adolf founder and CEO , Jim Shanahan, Chief Financial Officer, Rusty Mcgranahan General Counsel and Tina Madden.

Head of Investor Relations and corporate communications.

At this time all participants are in a listen only mode.

<unk> and answer session will follow the formal presentation if.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

With that Mr. Mcgranahan. Please go ahead.

Good morning, everyone before we begin 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 focuses 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 and finally focus assumes no duty.

<unk> 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 and good morning, everyone and welcome to our call.

This morning, we announced another quarter of strong results, which again exceeded our guidance on all measures. Despite an exceptionally volatile period in the capital markets.

We generated revenues of $519 9 million in the third quarter up 14, 4% versus the prior year and our year over year organic growth rate was three 4%.

Our adjusted EBITA was $128 7 million up 13, 4% versus the prior year and our adjusted EBITDA margin was 24, 8% or.

Adjusted net income excluding tax adjustments per share was <unk> 86 cents and tax adjustments per share was 26.

Despite the market correction, we delivered excellent revenue growth and improved margins demonstrating the continued strength of our fundamentals our results again show the resiliency of our business, reflecting the benefits of our revenue diversification and variable cost base combined with <unk>.

Our structural earnings preference, which helped mitigate the market exposure of our earnings guidance.

Our results are also reflects the value of trusted advice, particularly in this environment our partner firms deliver comprehensive wealth management services to high and Ultra high net worth clients, who take a long term view on structuring your wealth and they are engaged in every element of their clients.

Life's beyond just investment management.

I'll, let the market conditions are being prudent fiduciary advice is of the utmost importance reinforcing the loyalty and long term retention of these client relationships. In fact 18 focused partner firms. We are recently named to the 2022 Forbes top 100, Alright list.

Almost 20% of the total which nearly half of those also being named to the Barrons 2022 list of top 100 already firms.

This level of recognition to reflect the exceptional client service. These firms into all of our partners are delivering.

The current period.

Looking forward, we expect the same industry pattern as in prior times of volatility.

According to seriously always outperform in post crisis periods, increasing industry managed asset growth rates by 60% to 70% versus the compound annual growth rate of approximately 10% per year in normalized markets and substantially outpacing.

The wire houses and broker dealers. We saw this phenomenon in 2008 and nine and began in 2000 2021 two of the most significant market crises in the recent history and we believe that we will see it again bond's current markets recover.

I've mentioned these statistics before but they bear repeating because it is during periods like this they'd be execute the transactions did deliver some of the greatest upside and our partners experienced elevated client referrals collectively we believe these dynamics position us to outperform if markets recover.

Sure.

The strength of our quarterly performance was enhanced by our strong M&A activity year to date, we have closed or announced five new partner firms in 19 mergers, bringing our year to date transaction totaled 224 D. B.

Close to forethought private wealth from November 1st for Salt, which manages approximately $1 1 billion in client assets will deepen our presence in the rapidly growing Florida wealth management market.

The team is well positioned to benefit from our value add programs, particularly our client solutions.

If it's not the only from strong industry volumes, but also from changing seller dynamics.

They will also highlights that 52% of our a seek to become a buyer of other R. As as parts of their growth strategy, which was the driving force behind the merge activity that we have completed year to date.

This dynamic further reinforces our value proposition of providing entrepreneur Smith permanent girls capital and access to our value added programs to accelerate the growth and merchants are an economically attractive form of acquisition plus.

We are frequently asked by investors, where the current market conditions are impacting M&A activity.

Our experiences that emanate. This business is secular not cyclical because the primary catalyst of consolidation succession, and demetrios scale and not market dependent.

Even extreme market volatility like what we saw in O eight and 2020.

Tends to only delay transactions, leading to catch up periods of Heidi activity.

This industry continues to under consolidate which is amplified by current conditions be remain beneficiaries of these dynamics as is evidenced by our transaction volume due to date.

This year will be one of our strongest for M&A activity overall as well as one of our most active useful merges on behalf of our partner firms.

We anticipate that full year 2022 will also mark is strong here for exposition capital deployment with over 500 million invest it to grow and to enhance our partnership.

Be continued to add high quality, new partners and make good progress in executing our strategy to expand our international footprint.

Oh, a value add programs remain is significant differentiate for us both within our partnership and it's an important part of our value proposition to the firms who decide to join US. These programs are an important source of organic gross revenue diversification for our partners.

We are very pleased with the progress in both our business incline solutions with a number of our teams expanding as our partners increasingly take advantage of these programs.

We have a robust pipeline, including further international expansion.

Partners remain very active in pursuing murderous to accelerate the growth and expanded geographic reach and enhanced declines service capabilities.

Additionally, there continues to be if focus on talent in this industry <unk>.

<unk> are often attractive conduit for adding strong advisory teams, where there is a cultural and organizational fit.

Oh, the ability to sourcing execute these complex transactions as a <unk> a competitive edge for our partner firms.

We remain disciplined in a capital deployment and returned criteria, we have no need to raise equity capital into our business continues to generate a substantial amount of cash flow.

Multiple softening and we do not see the excesses of 2021.

This environment is also allowing for greater flexibility in the lining buyer and seller interest, enabling us to structure transactions to be supportive of our targeted three and a half times too when it halftimes net leverage ratio.

Oh M&A team is the largest and most experienced in the industry and his deep expertise and the complexities surrounding deal sourcing structuring and pricing as well as in navigating the nuances of transacting in such a relationship based industry.

There are key competitive advantages S V execute on our <unk> pipeline going into 2023 and S. We build additional scale and grow our partnership.

In a recent conversations with many of our apartment firms date continued to navigate the challenges of the Macroenvironment well defeat.

The feedback remains unchanged, despite the third quarter declining markets and bearish outlook from any <unk>.

The concept of the experienced trusted advisor <unk>.

Inconsistent client communications and well balanced portfolio structured for the longterm remains central themes.

These are the times did create numerous opportunities to engage was clines further solidifying dose relationships more than ever <unk> seeks stability in advice by advisers, who have served them for long periods of time.

The devices, whose advice Bruce itself in the outcomes and who have seen many market cycles, who is one of our partners sealed describes have been there and done that.

The other element of what we hear which was also a theme <unk> partner clients are evaluating this you're stumped around within a multi year context b.

Yes, it would be 500 up over 75 per cent from the beginning of 2016 to the end of Q3 22. There is no capitulation on long term financial plans is.

There's another one of our partners seal says this won't be the last downturn will see in our lifetimes behalf to play the long game.

It's the fourth quarter gets under way it remains challenging to determine how the macro environment really well, but we anticipate that market conditions will remain volatile for several additional court us at least.

Against this backdrop, we anticipate that we will achieve full year revenue groceries for 2022 off approximately 17% and adjusted EBITDA groceries for 22, a 15 per cent.

Yes, we have demonstrated throughout this year, we continued to weather this storm well and use it as an opportunity to position ourselves to accelerate growth markets and to call him he's recovered.

A decentralized approach to partnering this entrepreneur has enabled us to remain nimble in how we manage our business and positions us in the apartments to take advantage of the opportunities on the horizon.

The belief is attribute together with our embedded operating leverage build their eyes sustained outperformance if markets Debbie lives.

It is for these reasons that we are confident that focus will generate substantial gross and deliver superior value to its shareholders over the long term.

With that let me turn to call over to Jim Jim.

Good morning, everyone. We delivered strong results this quarter again demonstrated in the stability and resiliency of our business. It gets a challenge in macro backdrop.

The performance of our partner firms with strong and wild current conditions raise the obvious questions around inflation monetary policy geopolitical risks and the economic impact of the recession. Their clients continued to remain focused on their long term financial objectives.

We are executing well against M&A pipeline and will remain confident that we will navigate the current challenges and emerge well positioned to capitalize on the floor growth opportunity within our industry.

Now for a few comments on the key elements of our queue three piano.

Ah revenues for 519.9 million increase in 14.4% year over year and above the top end of our guidance ranch or five O $5 million to $515 million.

The resiliency of our revenue in this market environment is account notable <unk>.

Q3 year over year organic revenue growth rate was 3.4% also about the top end of our zero two per cent guidance, primarily to at a better than expected revenue growth across all partnership of 87 firms.

I want to take a moment to get it to reinforce five key elements of our revenue diversification, which help mitigate the impact of declining markets as you saw this quarter.

I mentioned these on our call in August , but believed a bear repeater.

First approximately 23.9 per cent of our queue three revenues come from non market correlated sources, which is a significant percentage of our total revenues.

Unlike turned COVID-19 in 2020, when these revenues are impacted by the Lockdowns are not mark it correlated revenues are providing a valuable heche in this environment.

Second a growing percentage of our revenues come from international sources, approximately 6.4% of our queue. Three revenues were generated by our partner firms in Australia, Canada, the UK in Switzerland, which represented a new country for revenue diversification in Q3 with the closing of our partner firm Arctic.

One.

Third our billing structure reduces the impact of all of the markets in any given quarter approximately 65.6 per cent of our queue three market correlated revenues were billed in advance while 34.4% with built in arrears Destruct sure also gives us good visibility into our revenues and the <unk>.

Come in quarter.

For a partner firms each banish their own investment processes. Each respect to partner firm has its own investment committee and investment philosophy and follows its individual asset allocation methodology.

And fifth decline of our partner firms are high in ultra high net worth individuals and families whose approach to invest in is fundamentally different and out of the typical client of an asset manager. They are investors, who are generally focused on multi generational capital preservation and wealth creation. This mindset is reflected in how they invest.

Their assets and it turned in a market correlated revenues. The combination of these elements plus the variable nature of our management fees and Ernest preference is why our revenue in earnest performance has been so resilient. This year as a result of our shrunk Q3 revenues are adjusted EBITDA was 128.7.

A million reflect in year over year growth is 13.4% in our adjusted EBITDA margin was 24.8% above our guidance approximately 24 per cent irritate our margin was 25.1% reflect in the stability of our business despite market condition.

Additionally, our earnings preference Verizon important structural protection to our earnings and cash flows to help investors better understand the structural protections in our financial model. We have included slides 24 to 26 and are earning supplement.

On the M&A front, we recently closed on one new partner firm Forethought on November 1st and we expect to close an additional new partner firm this quarter Beaumont financial partners based on made quarter closings. We anticipate these firms will add estimated revenues approximately $3 million and adjusted EBITDA of a <unk>.

Suddenly $1 million in the fourth quarter.

More than 21 million, an annualized revenue and 7.3 million an annualized adjusted EBITDA.

Is rudy highlighted our pipeline of shrunk with a high quality transaction Max joining an international partnership with 87 Likeminded firms led by dynamic management teams is highly differentiated in the independence wealth management space, our value proposition continues to resonate with firms in the industry.

And we are highly sought after partner.

Now turn into our Q3 expenses and cash flows <unk>.

Management fees for 123 million or 23.7 per cent of revenues, which was a lower percentage compared to the second quarter of this year, reflecting the modest sequential decline in revenue in the variable nature of our management fees be.

Chris manager fees are second largest operating expense and are correlated to the profitability of our partner firms quarter to quarter. They provide an important source of earnings and cash flow stability in volatile markets non-cash equity compensation expense was approximately 1.5 per cent of revenues in line with our estimate.

And we expect this expense will be approximately 1.6 per cent of estimated queue for revenues.

The third quarter was impacted by the change in the estimated fair value of Earnouts pursuant to our Monte Carlo simulations on their cat.

Accordingly, we recorded a positive 30.7 million non-cash change in fair value of estimated contingent consideration in our statement of operation.

Market conditions drove there it reduced estimate these liabilities as of September 30th.

As markets recover these estimates typically increase.

As of September 30th or L. T M Castro available for capital allocation was $345.8 million increase in 15.4% year over year reflect in the shrunk financial performance of our partnership despite volatile markets.

A gross unamortized tack shields was over 2.8 billion as of September 30th which will support a cash flows in future periods.

We also paid cash or not obligations of 47.9 million in deferred purchase consideration obligations of $1.5 million, which was in line with our queue. Three estimate and we anticipate that are earn out payments will be approximately 38 million in Q4.

Now for a few words on our queue for P&L expectations.

We estimate that our queue for revenues will be in the range of 505 to 515 million a sequential decrease of approximately one to three per cent.

This range does not include an estimate for performance fees.

While our guidance reflects the effects of the decline in market conditions in the second half of this year. It also demonstrates the benefits of the revenue diversification I mentioned earlier we.

We expect that our queue for organic revenue growth rate will be approximately negative 10% to in part to a comparatively strong Q4, 21, which included approximately $20 million a performance fee revenues.

The $20 million a performance fees in the prior year has a negative four per cent impacts on our queue for 2020 organic revenue growth estimate.

I also want to remind you that are advanced billing structure, which general reflects market levels in the prior quarter also results in a lag effect of markets on our organic revenue growth rate.

The time in an amount of our performance fees varies based on the source. For example, one of our partner firms that specializes in alternative investments is working on a real estate fund transaction. We have not included that estimate in our queue for revenue guidance because the transaction may close in Q1 of next year.

As we typically do we'll probably to fully ear update on our performance fees on our queue for earnings call.

We anticipate that our queue for adjusted EBITDA margin will be approximately 23%, which we estimate would bring our full year March into approximately 24.5 per cent. The estimated sequential decline in our margin is due to lower revenues that we anticipate in Q4.

A partner firms continued to take it very thoughtful approach to manage in their expenses. They are mindful of the risk of reducing expenses too severely in reaction to current market conditions limited their ability to respond as markets recover.

Lower market levels have an impact on our revenues, they're not currently make and significant adjustments to their operating expenses are.

A partner subjects discontinued a center on buildings stable businesses that deliver consistently high levels of client service periods. Like these are also on our partners to see higher levels of client referrals.

Additionally, talent recruitment and retention remains of Paramount importance. It is difficult to find advisors in their thirties, and forties with experience and manager and sophisticated high and ultra high net worth clients a partner so focused on it sure that they deliver superior client experience across cycles and capture.

The full potential during the recovery.

However, <unk> challenged market conditions persist for a long period of time or partners can adjust their expenses accordingly.

Now, let me turn to our balance sheet Ah September 30th we had approximately 2.4 billion at that outstanding and we ended the quarter within that leverage ratio of 3.98 times, which was in line with our guidance, we estimate that our queue for net leverage ratio would be approximately 4.25 times.

I know the impact of Verizon rates on our interests <unk> remains a focus for the investment community. As a reminder, 850 million of our 2.4 billion of data stay on it has liver spots from a floating rate to a fixed weighted average rate of 62 basis point, plus the spread of 200 basis points.

We typically use 30 to a library not term loans assume at 30 to a library was 200 basis points higher in Q3, rather than the average fiber rate of 221 basis points in effect or in the corner on our term loan Barnes, we would've had incremental quarterly profile may interest expense of approximately $8.2 million.

Which is not of our 850 million hedges.

This type of pro forma increase, especially when evaluated on an after tax basis as a headwinds, but manageable for business with annualized revenues in excess of 2 billion.

While we selectively use equity as an acquisition currency from time to time I would like to reiterate a point Rudy made wishes, we do not have to raise equity capital given the depressed levels of which are stock is currently trading such a race would not be attractive. Additionally, while we have not use are authorized 200 million.

Dollar stock buyback it does remain available.

In closing the benefits of the diversification of our revenues are once again evident in our financial results darn another very challenging period in the markets are partners businesses are built on deep long stand the client relationships that have withstood the test of time across market cycles, we fully expect that the resiliency <unk>.

<unk> of our results will continue to be evident as we navigate the ongoing market turbulence, we and our partner firms are actively planet for when markets recover, which we believe will offer substantial growth opportunities at as it has after other major crises.

Now, let me turn the call over to the operator for Q&A operator.

And this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation call will indicate your line is in the question queue you.

You May press start to if you would like to remove your question from the queue.

Participants using speaker equipment may be necessary to pick up your handset before question just darkies.

One moment, please while we call for questions.

Our first question comes from the line of Greg decent Tyler with Bank of America.

Please proceed with your question.

Hey, good morning, Rudy Jim I hope, you're both doing well.

Thanks, Greg how are you up on it.

I'm good so it's great to see so much emanate heavy to share given that it's a challenging year for most companies, but I'm curious how much softer is the competition for new deals versus the last few years and also how valuation multiples trend did this year versus the last couple of years yeah.

So I indicated on early of calls the <unk> see yourself fitting in multiples, but even more important b C more flexibility on structuring of the transactions <unk>.

And yeah, you today to be its announcement announced 24 transactions correct. Your state you'll do will be mmm yep numerous additional announcements S. I said at the end of last year. This is going to be one of August M&A years, and that's exactly what we are what we are seeing.

From a competitive perspective, yeah, it's quite frankly dead 2021, bullshit very unusual year yeah.

Sometimes I called it amethyst hour because there are some very aggressive competitors the all gone.

From what we can tell <unk> I'll see a more rational in mora kind of constructive market from an emanate perspective.

Now even think I looked into next year, it's going to be again, you from what we can tell at this point it very solid market from an M&A perspective, and most importantly deed, but they can't times like these when we look back.

We do some of the best transactions Bvb, if ever done because there is just natural tailwind that their recovery both benefits. These new partners, but of course also benefits focus. So it will all be like are we all from an emanate perspective, we are very excited about this 24 transactions and you will hear about quite a number.

Both models.

[noise]. Thanks journey Uhm, just as my follow up I wanted to update on the contingent payment liabilities I see the number I think it's about $329 10-Q, I was down a decent amount I think a lot of that is probably just the markets by is that still the best estimate for future payments that you're gonna need to make.

On deals already announced and maybe just a little color and what drove the decline.

[noise], one second alright.

If you know this is all of this is always the immortal that'd be around me. So it's Ah Monte Carlo analysis, and you are correct that the biggest impact is basic Kelly the the assumption for the markets.

And that you really feed into this model.

[noise] Yeah, Craig the liabilities of 189.1 million is sent our 10 kill at September 30th and we recorded a an adjustment to that earn out in our income statement for the the forecasts.

Of the the long term Ernest who are Monte Carlos and that was a pick up in the income statement and two three [noise].

Thank you Jim.

Dot com.

Our next question comes from the line of Alex those things with Goldman Sachs. Please proceed with your question.

Hey, guys. This is Michael on for Alex So I guess in kind of in a similar vein here, but.

Leverage capacity if if this deal activity remains the healthy as it has how do you think you'll manage hunting makes between cash and equity going forward and obviously not not necessarily issuance of new equity, but but using equity to fund this deal. Thanks.

Yeah I'm Michael.

This is more the point I made before really comes in very helpful and <unk>, it's not just at B C. A softening it from a multiple perspective, but you also see more flexibility from at structuring of the transactions.

In <unk>, yeah in number off the <unk>, we will be announcing and you're not too far future literally support for our leverage meeting the upfront multiples are below our target leverage range. That's something that is very helpful from a capital deployment perspective.

With.

Then of course in addition, you'll need to remember that our catch generation, you'll be announced 344 $46 million from a T. T N perspective.

It's just extremely strong so we will be able to sustain a strong M&A momentum into 2023.

Without having to tap into into equity in in in any way you know, we we are very key or there is absolutely no need to raise equity for US you know we have enough cash flow and kept <unk> sustained the M&A momentum.

Momentum, we will always use some part of consideration as we have done historic <unk> using equity to increase his alignment between partners send us and quite frankly, it's very often text right ma'am as well, but yeah. We are in a very good position to complete an excellent E.

In 22, and you will see significant momentum into 23.

Alright, thank thanks for reading, so not necessarily issuing equity been using equity is part of the funding makes it sounds like that's that's that's gonna be Michael.

Yeah. If you if you go back from when we went public to 2018 through today, we've used equity in a very limited basis, but we always have the the currency available where generate in a lot of cash flow, we don't need to raise equity as we've been noted and are prepared remarks, but certainly for select transactions new part.

There's that join US we use we use equity, but it's been historically, a very small percentage. So it's very consistent this past practices.

Okay. That's helpful. I guess for my follow up.

Last year and four two you had that performance free you've kind of spoke about that in the guidance, but can we expect anything like that and and four 222 or any other kinds of events driven one time, one time you revenues. Thanks.

<unk>, Yeah. So baby provided the queue for a forecast you have you were very clear that we did not make an assumption around performance fees.

And so really you need to look at Q4 lost your expert Foreman's fees and you look at our guidance to give you the intrinsic growth of the of the business day.

It's one particular transaction, where the timing is just right currently hard for us to see it could still hitting queue for it could go into Q1 via feel very optimistic diploma.

Central performance the will come in relatively comparable to last year, but Ah one thing we have seen this year and I said doesn't prior earnings calls by over all of course did the performance of the business has been very strong, but timing both of transaction clothes sings timing of.

Yeah performance fees is simply harder to predict this year than it waltzing prior year, so yes could still be in queue for but we didn't put it into the forecast could be a cube Walden event, but it's highly like keep you going to see just performance fee and it's purely timing.

Alright, Thanks, Scott you're very helpful.

Our next question comes from the line of Brian Kinney with Morgan Stanley . Please proceed with your questions.

Hi, good morning, Thanks for taking my question.

Hi, Ryan.

What is it again I bet on the expense side. So the compensation ratio ticked up <unk> and then heard the comment on the prepared remarks that tolerate touch and as important. So just wanted to clarify is the right take away from that that the comp ratio should continue to pick up or that it should just remain elevated.

Yeah. So if you go through all the ratios for this for this quarter what what you see is we looked at the margin based on you know how we share the economics with with our partners and clearly see the <unk> March and went up about 2.7%, but the SG&A went down and so did the the management fee.

Which led to the the.

The margin being ahead of our of our guidance. We obviously, we've acquired us in new firms in in queue for we don't you know go into the exact split of all the expenses between Comping SG&A, but we do expect some growth in the in the cough.

<unk> edition of the new partner firms also in queue for we expect a little more SG&A type cost <unk> partners meet in typical your end client type of events, which is all baked into our guidance in Q4 of 23 per cent.

Yeah, Ryan on the on the compensation side, our partners I have really not adjusted expenses and I think it's the right call. The there's a competition for talent.

<unk> have exceptional of people working in this business and reality is you'll need to prepare for day for the upswing and to be all belief that for every 2020 2021.

And so we don't know when this is coming but it will be coming and we need to have the capacity to really take advantage of the demonstrated in 2021 <unk>.

The tremendous operating leverage this business has <unk> some tailwind so our philosophy and our partners philosophies of course managed prudently and and Ah through the current environment, but very much be prepared for the upswing ended stick on your <unk>.

Of time, and it's going to come.

Thank you and then just have to follow up with a stronger dollar impact the international expansion strategy at all.

Well, it's a good time to to to buy an international.

But the <unk> just based on currency, but yeah of course, only 6% of our revenues are international at this point, but yes. It is one of many factors.

Where are we do see a a a good opportunity to deploy U S dollars into international markets. But this is just one out of many other factors that go into distance into these dumb decisions.

Thank you.

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

Great. Thanks, and good morning folks where do you think you are limited to a pipeline of you know a strong pipeline of value added programs, but hoping you might be able to kind of give us a little bit color a little bit more color is to you know what might be forthcoming there or or perhaps if I misheard you just sort of some context around <unk>.

Some of the business solutions that might be really resonating with partner firms are in the current environment. Thank you.

Yeah, absolutely and we yeah, we we really like the progress that that'd be it may be having an just programs top of the list dot alternatives. We have some firms have barely D. Yeah terrific expertise in the alternatives area and via making this program.

Available to other partners in the moment to Miss is very strong dear.

And just give them the markets are you know the world of the traditional 60 40 or 50 545 portfolio is simply he's gone so you'll need to have a more sophisticated yesterday location and your true multi S at strategies and having this expertise.

From some of our.

Apart from that have done this for many many use available to other partners is a very very powerful part of our value proposition and much more to come on that in the in the future credit.

Very strategic programming behalf over 10 credit specialists snub working in the holding company. Your program today, <unk> <unk> like $2 billion of credit advice, and really wrestle needs and you will continue to be an important part of value added.

It should be explained in the past you'll be if really brought the concept of open architecture too high end private banking has never been done before and is resonating and really empowering our partners in a in a in a very exciting life insurance, we have now to be as high up to a specialist.

Who work with our partners scene in devising declined steal earlier days, but we liked what we see and B belief again. This is open architecture.

Approach towards your insurance and estate planning.

Going to do have significant legs.

Trust.

Yeah, we have just hired a second trust expert already at an estate lawyer to basically help our partners. The it's programmed it again resonates well still early days, but very much our core value proposition.

The reason why you see such an excellent momentum on the M&A side is ultimately directly linked to these type of programs.

<unk> quite frankly, <unk> credit insurance Trust I couldn't think of anybody in this industry, probably globally, who has this steps off expertise and level of purchasing power behalf and it's truly distinct if you're from an incline perspective info my partner perspective.

Great. Thanks for that and then maybe one for Jim on Slide six you detail the sort of the earnings preference both from new partner firms and and I think <unk> acquired base earnings, but can you maybe remind us or just sort of help us think about how those those figures are.

Impacted and in an environment that we've seen you know during the day, we're both equity and fixed income <unk>.

And next markets are down and where the resiliency in the protection is within that that sort of framework.

Yeah, We show this slide as as a data point of the end of the new partner firms that we've acquired since 2019 is we've often said firms that have been with us for for many years or above their target <unk>. So we generally by between 40% to 60% of the economics. So when you're way ahead of you are.

Target earnings, we and the partner firms the management fees are Sharon pro rata and the upside and the downside. The purpose of this slide is to say okay. Here are the firm said you you've acquired in this fairly recent past, where perhaps they might not have grown way past their target audience or most recent <unk>.

Germs may be a little below their target earnings. So you have a little bit of color in terms of the the earnings preference that we have in the recent past.

And keep in mind, the when you look on the same store gross prospect, if you're a partner firms, including virtuous girl, 14.8%. Excluding merge was 10.2%. So it doesn't take a long time until firm so you'll simply outgrow.

Friends and that's why we used as to your rule, but quite frankly, even with the level of market disruption that we all have seen <unk> Russell downloaded over 20% it doesn't really it hasn't kicked in in any material way except for do for recent <unk>.

<unk> so.

We laughed about our partner portfolio is your date just have done so well over the years that for most of the any other preferences simply historic footnote, yeah, not not very important economic concept anymore.

Okay. That's helpful. If I could actually just sneak sneak one in quickly as we wrestle with the performance fee dynamic do you do you won't disclose what performance fee eligible assets are by chance to answer this might be now and that's fine I'm just just want to make sure we're kind of on no, but let's be so we don't disclose.

[noise], yeah, what what what the <unk> under the underlying yes. It is but what we do it's V. Dating Q4 last year <unk> is close to <unk> actually amount of performance fees.

He was $20 million in in Q4 21. So we we give you the specific number once we know it and as I said before is the simply have it calendarization issue. We don't know he said Q for we don't know if it is Q1 very high probability we will have substantial performance fees.

In in depth widely simply gave guidance for queue for that excluded. This concept yeah. The the transaction that was discuss relates to a real estate portfolio sale transaction not a typical year ends high watermark type of concept so when the trans.

Action closes that's when we would expect a performance fee and.

We think it's could be this year, but it's my likely Q on next year.

Okay. Thanks for taking my questions. This morning.

Alright next question comes from the line of Kyle K.

<unk> W. Please proceed with your question.

Hi, This is actually mamoun on for Kyle So I just wanted to switch gears, a little bit on the topic of international expansion kind of earlier. This year, you <unk> optimism for the opportunity and the Swiss wealth market falling the octagon acquisition. So first off at the time it sounded as though this.

Acquisition was expected to open up the opportunities that from you guys in the country. So just curious maybe one on the progress on the efforts and the country here and maybe two why are we haven't seen any.

Maybe acquisitions announce yet since your initial entry any any call me that'd be great.

Yeah. So on octagon quite frankly, we are very pleased with what we have seen in fact, <unk> very exciting announcements about new hires and other activities. Subsequently happened and we will of course collaborating with Vista leadership of.

Octagon, so we really like what we see you will hear more about this in the not too far future.

And quite frankly, the closest thing only on July 1st So give us a little bit of time, but I will <unk> on the opportunity and specific Kelly dismiss market, but quite frankly also other international markets continues to be very positive that.

The the question before about dusted all our help <unk>, but you know one step at a time, you'll be a very strategic at the love would receive his octagon, yes, there will be more but yeah, let's let's focus on making octagon as successful as can be.

[laughter] totally I totally is there and then just for Jim more of a clarifying question disorder.

Bring it back to the performance three question, but did I catch that the that you were saying that was.

The one forthcoming would be similar in size of the one last year of that 20 million and then if you could just kind of remind us just the margin on those those fees I believe that's significantly higher if not you know around 50 per cent, but yeah. If you could kinda flush out those details.

Yeah. The the estimate is plus or minus $15 million of revenue and maybe plus or minus 50% margin on this type of transaction.

But you know that's an estimate as of today will see what actually comes to fruition when it's closed.

Okay, great. Thank you guys.

And our next question comes from the line up all <unk> Oppenheimer. Please proceed with your question.

Good morning, and thank you for taking my question. Thank you for all data yeah. Thank you for the update a raft of new and adjusted EBITDA growth guidance. What this year could you. Please also comment on your longer term 2025 target as well you said any change off your longer term revenue growth and adjusted EBITDA margin.

<unk>. Thank you.

Yeah.

That's obviously a very important question we.

When the date hour invest the day in December when the updated our focus 2025 numbers.

We will send a different economic world with different outlook than what we are living through today, but I think I've said it before for every 2020 days of 2021. So we don't know when there is and a.

And turn around from a market perspective, assuming it it comes within just 2025 momentum or rather period. This will make them there'll be very helpful of course to get us towards 2025 at this point, Jim and I don't really think B b.

Should update this number see of course, if you would expect the other markets and the macro environment to remain as challenging as two days ago, maybe I'm getting more challenging.

For some period of time than 2025 would not be possible, but reality is it will turn around it's a question of when and S. We have demonstrated in 20 Warmness. We have demonstrated you're reading throughout all day cries crises that VB lift through since 2006 hour.

Industry Ah suffer.

Suffer as much less than anybody else, which we of course, demonstrating resolve results yoga in India, whilst management space and sold us focus and vignettes to turn around and you'll see it just an enormous acceleration of industry grows by 60, and 70% versus normal and you of course.

A huge beneficiary our dynamics are at least as good as what the industry does so uhm no update to 2025 at this point. It's a question of when we see a normal ization. If there is a normalization you out then quite frankly 25 is absolutely doable if not it could it could get pushed out bye bye.

Some years.

Got it that's helpful. My phone up it's I may have missed that but can you. Please give us an update on your cash and credit program and in particular in these high rates high interest rate environment is any high let's say like <unk> savings product that you can offer to your clients. Thank you.

Yeah actually if you have a very successful program that we announced thinking about a year ago, which is a bank sweep program that basic Kelly is F. D. I C insured up to 50 actually up to $100 million.

Actually I don't know what the current rates up but they are very attractive and basic Kelly Yada Sds definitely significant interest you a cash is king right now and being able to provide such as keeled sophisticated sweet program is quite frankly bearberry power.

Full and differentiating because traditionally cash solutions did you can get in the market from there.

From the custodians as it was obviously significantly lower than they both these programs provide so it is one of the services that we are offering and that'll get you the rates I I just don't know the latest D from a credit perspective, you know <unk>.

Yeah of course is is kind of very weak. He is kind of nonexistent, but there was really never the emphasis of of what will dollar credit program was about it was always really sophisticated lending solutions for could be business lending it could be yeah.

Planes yards.

Art collections, you know just complex high end lending.

It is really ultimately lending money to people, who don't really need money. It's much more often decreed into solution and did the committee do solution Yep Vane, your India or an estate planning solution, but when you're in the current market environment is that you're very very powerful you know so it is an important.

Part of the advisory mixed it we can offer to our clients really think it is very differentiating there's nobody reached a level of purchasing power behalf and you'll be quite frankly see see significant growth in this area for for years to come.

Got it thank you Rudy.

And our next question comes from the line of Patrick O'shaughnessy was Raymond James. Please proceed with your question.

Hey, good morning, how committed are you guys to a net debt to EBITDA threshold of 4.5 times.

Well, Jim and I have always been very clear that the belief that this is the right range that for us it's not a covenant issue is we disclose a covenant six and.

Florida, so quite frankly, because significant flexibility in buffet, but we believe in the current market environment in which they visited dynamics that this is derived Rachel I mentioned before a pet that given day.

Attractiveness of the M&A market menu for our transactions, you're really not adding to our leverage so that gives us a significant flexibility.

And really also in lines to interest of our of our future partners and focus in a in a strong away. So that's a very helpful dynamic.

V as close to 345 billion of TTM chest cash generation. So there's just enormous cash. So yeah. We we remain committed now yes. If there was some mess if market correction and suddenly we would we would be loaded ratio yoga.

Of course could happen you know you'll see what we have in our credit disclosure in India Imitrex exhibited this.

H 24, but it would be just momentarily and of course, we'd love to be with miniature accordingly, but strategically fundamentally three and a half four and a half is derived racial dishes heavier running our M&A business, which became control.

And we believe it Lister cash generation that behalf. It allows us to have a very successful M&A year again in in 2003.

Got it appreciate that and then Jim the contingent consideration balance of 189.2 million that saw a 12.6 million increase this quarter from an assumed estimated contingent consideration does that mean that you bought an entity that had its own continued consideration at the <unk>.

Time of the purchase.

That's that's correct.

Okay, great. Thank you very much.

Alright.

And we have reached the end of the question and answer session on now I'm trying to call back back over to Rudy for closing remarks Rudy.

Thank you and closing we are very pleased with how businesses performing and how well a partner firms continue to navigate the difficult market backdrop.

It is in our environment like this when the when the value of what they do really shows you up decisioning them for strong growth and financial performance is smart <unk> recover you know based on the secular tailwinds driving industry consolidation and.

Or not market dependent the industry opportunity to remain substantial and is growing.

V R rear remaining nimble and extremely disciplined in our capital deployment B.

We have a robust pipeline and are taking advantage of the current environment to execute on the transactions that we believe will deliver significant upside in the future.

Oh, a strong fundamentals and high cash flow generation continued to demonstrate the resiliency of our business.

Reflecting the benefits of our revenue diversification variable cost space into our structural earnings preference.

We are confident in our ability to capitalize on this substantial group of future growth opportunity of our business.

Partnership is highly differentiated and would be very difficult to replicate the operate within the growing into industry with very attractive correct restricts together these elements position us to deliver superior value to our shareholders over the long term. Thank you all for your interest.

And this concludes today's conference and you may disconnect connect me alive at this time. Thank you for your participation.

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Mm.

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