CI Financial’s big U.S. bet is shrouded in mystery

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The investor relations page on CI Financial Corp.’s website promises, “Everything you need to know about how CI is performing.”

Well, maybe not.

The long-time Bay Street mutual fund company is making a bold and expensive foray into the U.S. wealth management industry under its young new CEO Kurt MacAlpine. When Mr. MacAlpine took over in 2019, its asset management division, which manages its Canadian mutual funds, was three times the size of its wealth management business. Now, the latter division is larger. Since the beginning of 2020, it has acquired 19 U.S. registered investment advisers, spending well over $1-billion in the process.

At least, we suppose that’s the cost of the strategy, as of now. While CI Financial trumpets the assets it is acquiring and profits the firms generate, its disclosures on deal-spending are buried in securities filings, lagging the other announcements. A comprehensive picture of the assets flows at its burgeoning U.S. business is absent, and it’s not clear that it’s forthcoming. CI also won’t make any estimates of the synergies it will get from the deals.

All that makes it difficult to get a clear picture on whether it’s in the midst of a shrewd acquisition program – or a wild spending spree. And it may help explain why investors aren’t giving CI credit for what Mr. MacAlpine says is a plan to build the leading private wealth platform in the entire United States. “I think we have a criminally undervalued stock price relative to the quality of the business that we have and the strategic initiatives that we have under way,” he said in May during the company’s quarterly earnings call.

CI doesn’t reveal a purchase price for each single transaction – understandable, since it doesn’t want to give examples of how much it’s paying to other U.S. wealth management companies it might target, and the owners of the selling firms probably don’t want folks to know the size of their cash-out.

But when it comes time to give numbers for the U.S. wealth management business as a whole, CI is falling short.

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CI’s investor presentations highlight the assets under management for each firm and the total EBITDA, or earnings before interest, taxes and depreciation and amortization, it has acquired in the most recent tallying of deals. One must root around the company’s securities filings to see outlays in the footnote on purchase price accounting, or in the statement of cash flows for the cheques written in the past quarter. And those numbers don’t coincide with the EBITDA presentations, because they refer to different batches of deals.

The 2020 annual report gave us the most current number: For 10 U.S. firms, plus one Canadian acquisition, CI Financial spent $537.4-million in cash, plus $35.4-million in stock, plus another estimated $318.3-million in “contingent payments” that are future expenses based on how profitable the acquired firms are. That’s a total of $891-million for firms with collective assets under management of about US$26-billion at the time of acquisition, according to my read of CI’s news releases. On a dollars-per-assets basis – which is one way to evaluate these deals from the outside – that suggests CI is paying rich multiples.

Murray Oxby, the company’s vice-president of communications, says, “The assertion that CI has provided insufficient disclosure is incorrect.” He says the company disclosed that the firms acquired in 2020 were operating at a 40-per-cent EBTIDA profit margin and generated growth in new-client assets of 9 per cent.

“While we don’t disclose acquisition multiples for competitive purposes, investors can use our financial statements and other disclosures to estimate an aggregate acquisition multiple for all the deals we completed,” he says.

To do it, he says, take the first-quarter wealth management EBITDA total, annualize it, and compare it the 2019 EBITDA, before the acquisitions occurred. Since “nearly all” of the increase is from acquisitions, the disclosed guaranteed payments – not counting the contingent payments – imply they’re paying roughly 7.5 times EBITDA, he says.

I am not the only one seeking more from CI: The analysts who cover the company have been struggling to match up deal prices with acquired profits and come to judgments on the economics of the new U.S. wealth management division.

In the first-quarter call, RBC Dominion Securities Inc. analyst Geoffrey Kwan asked Mr. MacAlpine for “anything you can provide to help answer at least some of these questions.” When Mr. MacAlpine replied that, “You can triangulate it – we’ve been very clear on a quarter-by-quarter basis,” Mr. Kwan pointed out that CI’s EBITDA disclosure “doesn’t always match up” with the purchase prices in the financial statements.

James Shanahan, an analyst with Edward D. Jones & Co. LP in St. Louis, said in an interview that he’d like to see CI track the wealth management division’s changes in assets for various reasons – market appreciation, growth from existing clients bringing in more assets, and what was added to the division via acquisition. “Then, we could fairly evaluate the performance of the acquired advisory firms over time.”

It may not be everything you need to know about how CI is performing, but it would be a lot better than what we have now.

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