If you’ve been following corporate Canada over the past decade, that line no doubt strikes fear in your heart, as it conjures up memories of one of the country’s worst corporate face-plants.
Mr. MacAlpine is using what’s known in consulting circles as a roll-up strategy to consolidate the fragmented sector of U.S. registered investment advisers (RIA).
Since Toronto-based CI recruited the former head of McKinsey’s North American asset management practice four years ago, he’s been buying up entrepreneur-owned firms that manage money for wealthy clients. CI has paid premium prices for many of these businesses, and borrowed to fund its acquisitions.
Back in 2015, another former McKinsey partner-turned-CEO, Mike Pearson, used much the same debt-fuelled roll-up strategy to briefly turn Valeant Pharmaceuticals into the most valuable company in Canada. Valeant then fell apart as loans came due and Mr. Pearson’s business model – acquire drug brands, then boost prices – drew the wrath of consumers, insurers and regulators.
Can Mr. MacAlpine succeed where another McKinsey alumnus failed, and redeem the concept of consulting being a springboard into the CEO’s chair? That’s a question that fascinates Bay Street, as CI raises money to pay down debt and continues to grow through acquisition.
The Street’s fixation with CI stems in part from a stock sale in May. The fund manager sold a 20-per-cent stake in its U.S. business for $1.34-billion, ahead of a planned initial public offering for the unit.
Mr. MacAlpine’s spin on the transaction was aggressive, to put it politely. In a news release and analyst call, he said the offering valued the U.S. division at $7.1-billion, or three times the entire company’s market capitalization at the time.
CI’s stock price soared 50 per cent on news of the financing, only to fully retreat the following day. That’s when investors figured out that rather than selling equity in the U.S. unit, CI had sold preferred shares that could, over time, pay 14-per-cent interest, and convert into a significant stake in the U.S. division. Several analysts who initially praised the transaction reversed course, on concerns over the potential cost to existing CI shareholders.
Over the past four months, Mr. MacAlpine continued to roll out the roll-up strategy. CI acquired three RIAs – two in Texas and one in New York – that manage a total of $14.2-billion, along with a Montreal-based, female-founded wealth manager that oversees $1.3-billion. The Canadian parent rebranded its U.S. offspring, formerly known as CI Private Wealth, as Corient. (Did anyone internally notice it rhymes with Valeant?)
After paying down debt with capital from the $1.34-billion financing and other asset sales, CI has stepped up cash payment to its shareholders, boosting its common share dividend by 11 per cent earlier this month, at the same time it announced it bought back $229-million of stock in the most recent quarter.
Since the poorly received preferred share offering in May, CI’s stock price is up by 36 per cent. Over the short term, Mr. MacAlpine’s strategy is working.
Where does CI go from here? History shows the secret to rolling up firms run by entrepreneurs, like the founders of RIAs, is keeping the talent around after the deal is done, and earnouts are fully paid. Mr. MacAlpine needs to prove Corient can retain assets over a full market cycle. That is no simple task: The Street is lined with asset managers who sold one business, then started another.
CI’s fortunes are also going to be driven by market sentiment, and the performance of the company’s fund managers, relative to peers and benchmarks. As analyst Phil Hardie pointed out in a recent report, CI’s stock offers “solid upside” if markets do well, but “outsized downside risk” if stocks tank and investors see their stake in Corient diluted.
Mr. MacAlpine’s strategy at CI, and the case for the consultant as CEO, depend on the market’s bulls beating back the bears.