CI Financial says it still plans to spin out its U.S. wealth management business and offer up at least 20% in an initial public offering sometime next year. During a quarterly earnings call on Thursday, CEO Kurt MacAlpine said CI will file an S-1 with the U.S. Securities and Exchange Commission this month but that markets will ultimately determine the IPO date.
Already established as one of the largest independent asset managers in Canada, CI has bet big on the U.S. registered investment advisory space over the last few years. The corporation has taken on considerable debt under MacAlpine and paid lofty premiums to acquire dozens of U.S. firms at a time when multiples were at record highs. Those acquisitions, including multi-billion-dollar firms in key U.S. markets, currently represent approximately 44% of total assets under management across all CI segments.
As of the latest quarterly report, CI now manages around $112 billion in client assets in the U.S., compared with $55 billion under its Canadian wealth management unit and $85 billion under its core capital management business.
The firm’s acquisition spree has contributed to its total debt of $3 billion, or about four times the adjusted EBITDA and twice the stated target.
CI’s stock lost half its value early in 2022 and was downgraded by S&P Global Ratings in April. On Thursday, leadership sought to reassure investors that depressed prices don’t reflect the company’s true value and said that currency dispersion is “distorting the overall leverage” reflected in the report. Morningstar pegged the stock at a 36% discount this week.
Even so, MacAlpine and CFO Amit Muni reiterated intentions to use the proceeds from the IPO to pay down debt, which will be kept entirely off the U.S. balance sheet. The U.S. business will go public debt-free, save various earnout obligations owed to acquired U.S. firms over a longer time frame. At the same time, the Canadian company will delist from American markets, cease all M&A activity and focus on an underway effort to bring custody in-house for its Canadian concerns.
“While the Canadian and U.S. businesses will be initially consolidated for accounting purposes, we will think about them and manage them as separate entities,” said MacAlpine. “The Canadian business will not fund any future U.S. acquisitions and will not be pursuing meaningful M&A opportunities going forward.”
“Our plan,” he said, “is to deploy the cash flows generated by the Canadian asset and wealth management business to further deleverage and to effectively privatize our [Canadian] business.”
CI doesn’t anticipate paying dividends on the U.S. stock, he added. While the RIA space continues growing at an attractive rate, revenues will be reinvested in continued inorganic growth.
Two major acquisitions completed in October—an Eaton Vance liftout and Inverness Counsel in New York—added another $13.4 billion and brought the U.S. segment’s overall AUM to $125 billion, but CI admits it has slowed its acquisitive roll over the last year in response to shifting market conditions.
“Things have contracted a lot,” said MacAlpine. “People that were selling businesses in 2020 and 2021 are rethinking those decisions. . . I think, going forward, M&A is going to be more moderated from an industry perspective anyway.”
“And then,” he said, “the majority of M&A tends to be sub-$1 billion firms, which are less M&A and more recruiting of assets.”
MacAlpine said CI is still deploying the bulk of resources to growing its U.S. wealth management business because “it comes with much better economics.”
“And you've seen that obviously reflected in our flows both from an improvement standpoint,” he said, “But also, how we're doing relative to everybody else in the industry.
Regarding the impending IPO, MacAlpine said the timetable will ultimately depend on market conditions.
“Look, it's a different IPO market this year than last year, but we have seen some glimpses of success—particularly from companies that have kind of spun out or been separated,” he said.
“Corebridge came out of AIG; Porsche came out of Volkswagen; Mobileye came out of Intel; and I believe Brookfield is still on track for the separation of their businesses as well. So, while our S-1 is under the review process, we'll be fully ready to go, and when the market conditions present themselves, we'll take advantage of that."
In the third quarter, CI posted net income of approximately $11 million, per international financial reporting standards, sharply down from $117 million in the previous quarter and $33 million one year earlier. Adjusted net income, excluding non-operating expenses, showed a less drastic decline, from $111 million in the second quarter to $102 million in the third quarter. Over the same period, expenses increased nearly 37% by IFRS standards and by less than a percent after adjustment.
Overall, CI net revenues dropped more than 9% from the last quarter, from $424 million to approximately $384 million, but by less than a percentage point from the $387 million posted in the third quarter 2021, per IFRS. EBITDA was down nearly 8% year over year on an adjusted basis to $178 million, and a little over 5% sequentially.
