Focus Financial exercises ‘option’ to buy breakaway-broker firm

Focus Financial Partners, which recently completed a $50 million recapitalization to meet debt obligations and revive its business of buying interests in wealth management firms, has agreed to acquire LLBH Group Private Wealth Management as a full partner firm.

Focus Financial Partners, which recently completed a $50 million recapitalization to meet debt obligations and revive its business of buying interests in wealth management firms, has agreed to acquire LLBH Group Private Wealth Management as a full partner firm.
LLBH, founded in October 2008 by four Merrill Lynch & Co. Inc. brokers based in Westport, Conn., received seed capital from Focus last year as the initial member of the firm’s Connections program. Under the program, Focus gives new advisory firms as much as $500,000, helps them with operational issues and agrees to revisit the arrangement within 13 months, according to brokers who have discussed the program with Focus officials.
In Wall Street lingo, Focus purchases a call option to buy breakaway-broker startups that prove that they can successfully operate as independent wealth managers. Transactions occur after 13 months to provide favorable capital gains tax treatment to the startup firm.
LLBH is thus far the only firm in the Connections program. However, Focus soon is expected to announce a Connections option to buy a West Coast brokerage team currently affiliated with Sanford C. Bernstein & Co. LLC, a unit of AllianceBernstein Holding LP, according to two people briefed on the transaction.
Jim Pratt-Heaney, one of LLBH’s partners, said in an interview this year that his group was launched with about $700 million of client assets under management. LLBH allocates much of its money through separately managed accounts, according to some former colleagues of the partners.
LLBH’s integration as Focus’s 18th “partner,” which was confirmed by three people close to the firms, comes as the roll-up firm is being sued by one of its initial partner firms for alleged breach of contract, and to get access to its books and records.
LLBH partners and spokespeople for Focus did not return calls for comment on the LLBH or Bernstein deals, or on the lawsuit.
The suit was filed in Delaware’s Chancery Court last month by Progressive Financial Strategies LLC, the parent of Focus partner StrategicPoint Investment Advisors. StrategicPoint was one of the “founding partners” that joined Focus in January 2006. It manages about $502 million, according to RIA Database, and is one of the smaller but more profitable firms in the Focus stable, said David Brochu, president and chief executive of Progressive Financial.
Progressive alleges that Focus refuses to provide it with information on the value of equity units it holds in the latter company to help assess whether partners have been improperly diluted as a result of selling shares at low values to investors, new partners and management. And it complains that Schedule K tax forms provided by Focus list his interests in each partnership firm as “various.”
“What I own has been purposely kept from me,” Mr. Brochu said.
Focus, founded by former American Express Co. banking consultants in 2004, typically buys 30% to 70% of a firm’s earnings before interest, taxes, depreciation and amortization in exchange for cash and stock in the parent company. It values potential acquisitions at five times the firm’s previous year’s earnings before deducting owners’ compensation.
The company currently owns 17 wealth management and pension plan administration firms, excluding LLBH, that manage more than $30 billion of client assets.
Progressive’s lawsuit seeks access to Focus’ corporate, financial and tax records, alleging that financial statements currently provided by Focus redact all information about every acquisition. “It is therefore impossible for any member to evaluate the acquisition decisions being made by Focus or to know how those acquisitions affect the extent of its ownership interest, the value of its interest or the long-term stability of Focus,” the complaint states. Focus will not even name the auditing firm that certified its financial statements, the complaint adds.
Mr. Brochu said that Focus also may be impairing the value of its franchise — which the company someday hopes to take public — by veering from its original business plan of buying fee-based wealth managers and investment advisers, and instead helping its partners acquire more-commission-oriented brokers. His complaint said that he opted to sell his firm to Focus rather than to National Financial Partners, another roll-up company, in part because the latter’s “heavy reliance on commission-based brokerages.”
Focus’ website says its partners are “all fiduciaries … successful, growth-oriented, independent wealth advisers and benefit consultants serving a client base of affluent, superaffluent individuals and families, mid-market institutional clients and small-business employers.”
Progressive’s suit also states that Focus has failed to help its operating units realize cost savings through integration of platforms.
In an Oct. 16 letter filed with the Delaware court, Focus agreed to let Mr. Brochu review some financial data “relative to the operations and business of the company” at its New York office if he signed a confidentiality agreement and was not accompanied by his lawyers or accountants. Mr. Brochu alleges that such constraints violate his rights under the partnership operating agreement.
Focus last month renegotiated a bank credit line led by Bank of America NA that allows it to extend debt repayments coming due, and announced an infusion of $35 million in preferred stock and debt from Polaris Venture Partners and $15 million from Summit Partners, its original private-equity backer. The firm did not say how much equity it gave to the firms, which have seats on its board.
Focus also announced the acquisition of Joel Isaacson & Co. Inc., a wealth manager and tax consultant with about $1.4 billion in assets and more than 700 clients. The deal was Focus’ first full acquisition since July 2008.