Bill and Kurt were right. Everyone else on Bay Street was wrong.
That’s the big take-away from Monday’s groundbreaking $4.7-billion bid for CI Financial Corp. CIX-T by Abu Dhabi-based Mubadala Capital. A sovereign wealth fund with a mandate to invest anywhere in the world is choosing to endorse a CI growth strategy most investors hated.
The $32-a-share takeover is vindication, pure and sweet, for a debt-fuelled U.S. expansion plan hatched four years ago by CI chair and former chief executive officer Bill Holland and successor Kurt MacAlpine.
Can Mubadala make money by doubling down on CI’s strategy, as the fund manager promises to do? That’s a question that splits the Street. Public market investors who never really supported Bill and Kurt’s approach would tell you this investment will end in tears for the Abu Dhabi fund.
However, Mubadala is the latest in a series of deep-pocketed private-equity funds to embrace CI’s vision of the future of U.S. wealth management. Mr. MacAlpine is sticking around to run the business and continue making U.S. acquisitions, backed by US$302-billion of firepower at parent Mubadala Investment Co.
If the sovereign wealth fund has it right, CI will be another Canadian champion making money for a foreign owner.
In fund management circles, Mr. Holland is a larger-than-life character. He joined CI in 1989 and built a leading domestic platform through a series of takeovers. While numerous rivals cashed out by either selling to the banks or foreign fund managers, Mr. Holland opted to remain independent.
The choice was not Mr. Holland’s alone. Bank of Nova Scotia BNS-T held a stake in CI for six years and was considered its natural buyer, but chose instead to acquire DundeeWealth. Scotiabank unloaded the bulk of its CI holding in 2014 at $30.60 per share.
Opinion: Who dares to bring bad news to the men who run CI Financial?
By 2019, the challenge facing Mr. Holland and CI was where to find new clients. Growth at home grew increasingly difficult in a sector dominated by the banks and lower-cost competitors such as exchange traded funds.
Enter Mr. MacAlpine, a former McKinsey consultant recruited to CI with a plan to roll up teams of U.S. registered investment advisers, known as RIAs, often by outbidding larger American rivals. RIAs oversee the savings of wealthy families, and demographics dictate these are great advisers to employ, for firms that acquire their books of business at the right price.
As CI expanded, the relative newcomer to the RIA sector consistently faced concerns it was overpaying. Focus Financial Partners Inc., said companies such as CI were spending like “drunken sailors” to win deals.
Turns out the drunken sailors knew exactly what they were doing.
CI borrowed $3.8-billion and sold $1.7-billion of preferred shares to build a U.S. wealth management business with $251-billion of client assets. Public investors and most analysts fixated on debt levels, and the cost of servicing the preferred shares. Their concerns drove CI’s stock price down to almost $12 as recently as October, 2023.
Private-equity funds, which build businesses by borrowing, took a different view. Over the past 18 months, Mubadala Capital’s U.S. peers decided the consolidating RIA industry represented one of the great bargains in financial services.
In February, 2023, private-equity fund Clayton, Dubilier & Rice LLC acquired Focus Financial, CI’s major rival, in a takeover with a US$7-billion enterprise value – equity plus debt. In February, private-equity giant TPG Capital bought a stake in RIA consolidator Creative Planning that reportedly valued the platform at US$15-billion.
Mubadala’s acquisition of CI puts a $12.1-billion enterprise value on a Toronto-based company with global ambitions. On Monday, CI’s senior executives signalled they plan to keep a significant amount of their personal wealth committed to the RIA consolidation strategy.
Mr. MacAlpine, who owns roughly $40-million of CI stock, can roll his stake into the acquired company, according to a press release. Mr. Holland spent $72-million over the past four years buying CI shares, mostly in public markets, adding to the stake he built over more than three decades. He stands to roughly double his money on the investment. The takeover values Mr. Holland’s total CI holding at $382-million, and he can swap up to 25 per cent of this for a position in the Mubadala-owned business.
Bill and Kurt remain true believers.