CI began its flurry of U.S. acquisitions at the end of 2019, when chief executive officer Kurt MacAlpine revealed a new strategy to build a U.S. wealth management company.Tijana Martin/The Globe and Mail
After CI Financial Corp. CIX-T for the first time surpassed $500-billion in assets under management in its monthly reporting, investors seem to be setting aside worries from earlier this year about how the company is paying for its audacious U.S. acquisition strategy.
On Monday, CI, Canada’s largest independent asset manager, reported total assets of $511.3-billion as of July 31, up from $430.3-billion the year prior. Part of that growth is being fuelled through a burst of acquisitions made by the company’s Miami-based U.S. subsidiary, Corient Holdings Inc., which manages nearly $250-billion of CI’s assets through Corient Private Wealth LLC.
Investors, seemingly concerned about CI’s debt profile, had pushed the company’s shares down 12 per cent in a single day in May when it reported first-quarter earnings. CI stock has now fully recovered, and its $16.62 closing price Monday is within spitting distance of its 52-week high of $17.64, reached in March.
However, CI stock remains well below its recent peak of more than $30, set in November, 2021.
CI began its flurry of U.S. acquisitions at the end of 2019, when chief executive officer Kurt MacAlpine revealed a new strategy to build a U.S. wealth management company. Since then, the U.S. business has acquired more than 40 registered investment advisers, or RIAs.
Most recently, Corient added another $8.2-billion with the purchase of two more RIAs: Florida-based Emerald Multi-Family Office and North Carolina-based Byron Financial LLC. The announcement of the RIA deals – which was first made during the company’s second-quarter results earlier this month – follows two other RIA acquisitions completed in May, which added $5.6-billion in assets.
In addition to the U.S. arm, CI’s total assets also consist of $98.2-billion in the Canadian wealth-management business, $133.3-billion in its asset-management arm and $30.3-billion in Canadian custody assets.
The U.S. strategy – which brought CI’s debt to as much as $4.2-billion at the end of 2022 – has concerned shareholders, analysts and debt-ratings agencies that have issued downgrades to the company. While CI’s long-term debt is down to $3.1-billion as of June 30, analysts have questioned whether the company is making enough progress and whether its current share-buyback program is a good use of cash.
“As it relates to capital allocation, I’d say the easiest way to think of this, we’re just maintaining a very dynamic approach,” Mr. MacAlpine said in the company’s earnings call earlier this month. Citing $9.9-million in share buybacks, the acquisitions, paying off past deal liabilities and a debt buyback, he said CI “was able to fund all of those priorities while keeping the aggregate leverage flat.”
CI has only paid a portion of its deal costs upfront, with cash. Many of the deals come with payment commitments to the RIA owners known as deferred or “earn-out” payments. If the profits at the acquired businesses later meet or exceed certain targets, CI pays the previous owners of the firms more money.
The company now estimates those “contingent considerations” at $162.4-million, part of a total $385.4-million in acquisition-related liabilities as of June 30. The total deal liabilities are down significantly from $486.6-million at March 31 and $493.4-million at the end of 2023.
In recent financials, CI says it spent $168.1-million in cash in the first six months of 2024 to settle acquisition liabilities, and classifies $338.8-million of the $385.4-million of acquisition liabilities as “current” – meaning it comes due by June 30, 2025.
The company’s chief financial officer, Amit Muni, told analysts during the earnings call that the contingent considerations “will be fully paid off by early next year.” He told analysts that CI will update all its acquisition-liability data each quarter “so you can track how we’re using the respective cash flows of the businesses to pay down this obligation deployed to other strategic priorities.”
CI spent $145.9-million on U.S. wealth-management acquisitions in the first six months of 2024. Of that, $107.8-million was cash, with the remaining deal prices coming from stock and estimated future payouts. That compares with $567.8-million CI spent on U.S. wealth-management acquisitions in 2023, with $148.6-million of that being cash.
One new pivot is the company’s debt separation between the Canadian parent and the U.S. subsidiary. Up until recently, all debt was assigned to the former. Mr. MacAlpine said during an earnings call that the debt has now been “fully assigned” to each of CI’s “respective businesses.”
“The reason we’ve started to separate the debt is that debt that’s assigned to Corient in a separation of the businesses will ultimately travel with Corient,” he said. “Whether that be an IPO, whether that’s via another form of exit, the debt is intended to ultimately travel.”
What the industry should see over time, Mr. MacAlpine added, is CI’s share of the debt declining, while Corient’s share, assuming U.S. acquisitions continue to occur, will grow in “whatever portion is assigned to Corient,” and the debt will “ultimately travel with the business.”