Kurt MacAlpine, CEO of CI Financial, in Toronto on Dec. 20, 2019. In a release, MacAlpine said the company saw positive numbers for its Canadian asset management business, which delivered $1.6-billion in net sales for the fourth quarter, while the overall Canadian industry saw a net $10-billion pulled out of funds by investors.Tijana Martin/The Globe and Mail
CI Financial Corp. CIX-T reported a steep drop in profit in the final quarter of last year as it prepares to launch the initial public offering of its U.S. business, but said investors pumped more money into its Canadian retail funds.
The company reported fourth-quarter earnings on Friday and saw a net loss of $9.5-million for the quarter, a major decline from $124-million in profit for the same quarter in 2021.
Adjusted net income for the quarter – a measure that strips out certain items, including acquisition costs – was $136-million, or 74 cents a share, down from $171-million, or 86 cents, for the fourth quarter in 2021.
CI said in a news release the loss was partly owing to an increase in the future payments to the executives and previous owners of the U.S. wealth management firms it has acquired over the past few years. Every quarter, CI estimates how much it will owe in these payments, based on financial targets such as the firms’ earnings. If the estimate increases, CI books an expense, which was $76.8-million in the fourth quarter.
Chief executive Kurt MacAlpine said in the release that the company saw positive numbers for its Canadian asset management business, which delivered $1.6-billion in net sales for the fourth quarter, while the overall Canadian industry saw a net $10-billion pulled out of funds by investors. A large bulk of CI’s sales were a result of investors flocking to safer investments, particularly the company’s high interest savings exchange-traded fund, which brought in $742-million in assets in December, according to a report by National Bank Financial.
CI’s total assets under management reached $375.8-billion as of Dec. 31, up 11 per cent from September. Part of the boost came from CI completing three more purchases of registered investment advisory (RIA) businesses in the United States at the end of the year, adding about $25-billion in assets.
Over the past three years, the investment giant has been on an acquisition spree, buying more than 30 RIA firms scattered across the U.S. RIAs typically follow an independent business model – meaning they are not part of a larger brokerage, like Canadian advisers, and U.S. advisers have a legal fiduciary obligation to act in the best interests of clients.
Earlier this month, U.S.-based Focus Financial Partners LLC – one of the country’s largest RIA aggregators – announced it is in negotiations to sell itself to private equity firm Clayton, Dubilier & Rice LLC for US$53 per share, or US$4.1-billion in cash. If the deal goes through, Focus Financial will no longer be a publicly traded company.
When asked during an analyst call on Friday whether CI would be open to a similar sale if there were enough interest in its U.S. business, Mr. MacAlpine reiterated that CI is set on launching an IPO of its U.S wealth management business.
“The path that we’re pursuing currently is getting ourselves ready for our IPO,“ Mr. MacAlpine told analysts. “We’re working through the structural changes in the process to do that, and we should be ready once we get through the back end of the approvals.”
Mr. MacAlpine would not specify what percentage of CI’s U.S. arm would be sold in the IPO process. Originally, at the time of the IPO announcement, CI said it would sell “up to 20 per cent.” Last November, CI acknowledged it might sell more to pay off debt. On Friday, Mr. MacAlpine said the company is “flexible” with the percentage.
“... We don’t have a target percentage that we’re looking to sell or a specific number that we’re managing for,” he said on the call. “We’re looking to maximize the value for our Canadian shareholders while allowing CI to retain meaningful ongoing participation in that business.”
One of CI’s key balance sheet metrics got worse in the fourth quarter. Net debt – the company’s borrowings, offset by its cash – compared with its adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization. The measure calculates how many years of profits it will take to pay off the debt; the smaller the ratio, the better.
The ratio rose to 4.2 at Dec. 31, from 4.0 Sept. 30 and 3.1 at the end of 2021. In 2016 and 2017, well before the acquisition of the U.S. advisory firms, CI’s debt-to-EBITDA ratio was below 1-to-1.
Adjusted EBITDA was $242.7-million in the fourth quarter, down from $277.2-million in 2021′s fourth quarter.
Chief financial officer Amit Muni said CI’s debt rose because the company drew on its credit line to close three acquisitions of U.S. wealth-management firms. He told analysts Friday the weighted average maturity of CI’s debt is 11.5 years, “primarily” at an average fixed rate of 4.1 per cent.