Two years ago, it might have been easy to write off CI Financial Corp. as a wayward carpetbagger schlepping down from Canada to try and horn in on the bustling U.S. wealth management industry. But that is no longer the case.
With 30 U.S. acquisitions already under its belt, Toronto-based CI has not only emerged as one of the most prolific buyers of registered investment advisers, but as of Jan. 1, its U.S. business operations represent the largest and fastest-growing segment of the $304 billion financial conglomerate. CI’s U.S. footprint, which was at zero in 2019, is now at $119.8 billion.
CI also has a $114.1 billion asset management division in Canada, and a $63.8 billion Canadian wealth management division.
In 2020, during its first year in the U.S. market, while amassing more than $20 billion worth of wealth management assets, CI dually listed its shares on the New York Stock Exchange to help facilitate transactions. And in September of last year, it opened a U.S. headquarters in Miami, which is already slated to double in size.
“We’re only in the first inning, and we want to be the leading high-net-worth and ultra-high-net-worth wealth management platform in the U.S., period,” said Kurt MacAlpine, the 40-year-old chief executive who started notching RIA deals within three months of being hired in September 2019.
MacAlpine, who brought with him experience working in the U.S. as executive vice president and head of global distribution at WisdomTree Asset Management and as a partner and leader of the North American asset management practice at McKinsey & Co., likely sealed the deal with his dual U.S.-Canadian citizenship.
“Kurt was perfect for what we needed: He’s young and comes from a digital background,” said William Holland, non-executive chairman of the board, who has been with CI for 32 years and served as CEO from 1998 to 2010.
“We had to start preparing our business to be around forever.”
William Holland, non-executive chairman, CI Financial
“We knew that what was working in 2014 wasn’t working in 2019, and the timing was imperative,” Holland said. “If we didn’t hire Kurt and didn’t do what he’s done we would be in far worse shape. The big thing that happened early is having someone come in from outside and question why we were still doing things the way we were 10 years ago.”
Holland’s reference to 2014 relates to the decision by the Bank of Nova Scotia to sell its 38% stake in CI, which forced a wake-up call.
“It was a huge tipping point because we had to start preparing our business to be around forever,” Holland said. “That was way too many shares to hit the market at a period of time when asset managers in Canada were way out of favor.”
As Holland tells it, part of the appeal of MacAlpine was the way he seized upon the opportunity to establish a wealth management foothold in the U.S.
For his part, MacAlpine said that from the start, the board’s marching orders have been clear about the mandate for growth through acquisitions.
To fully appreciate where CI is now and where the company is heading, you have to understand the Canadian wealth management space and the tight spot CI’s leadership felt the company was in just a few years ago, when share buybacks seemed like the only way to drive up the stock price.
Even as a well-established Toronto-based company with a history dating to 1965, CI was a relatively unknown and underestimated entity in the U. S. in early 2020, when much of the world was focused on the early days of a global pandemic.
At that time, U.S. aggregators, many of which were already backed by deep-pocketed private equity investors, were well into the trend of driving record-level consolidation among registered investment advisers. So when CI Private Wealth, as the U.S. operations are known, announced a couple of acquisitions of U.S. RIAs in rapid succession, it was largely overlooked as a curious anomaly.
“History is littered with Canadian companies thinking they can go to the U.S. and do what they do in Canada,” said John Aiken, who covers CI as an analyst at Barclays.
Like most of the analysts following CI at the time, Aiken had a negative rating on the company, which was viewed as struggling to compete in Canada’s wealth management infrastructure, which is dominated by banks and operates almost like a government utility.
Even as one of the largest publicly traded financial services companies in Canada, CI’s market share is at just 7%, down from 10% a decade ago.
“Through a host of macro events, the growth of CI had slowed considerably,” Aiken said. “We didn’t think asset managers were going to zero, but the growth outlook was not that great.”
But while CI’s Canadian operations were being viewed by both analysts and investors as stuck in a rut, the company’s board had been in full scramble mode to deploy a plan aimed at boosting what CI executives and board members saw as a wildly undervalued stock price.
There might be no stronger cheerleader for CI’s potential than board chair Holland, who bought 750,000 shares of CI stock in 2021, ranking him as Canada’s largest insider buyer of public company stock.
“I was probably the biggest insider buyer in 2020, also,” he said. “It’s the cheapest stock that I know of, and I think there’s a long-term opportunity here that is staggering.”
Holland’s insider perspective of how CI leadership was working to appease shareholders paints a picture of a company poised for big changes but missing the key piece in a leader like MacAlpine to deploy resources and execute the mission.
Holland recalls stepping aside as CEO in 2010 “to start a transition that took longer than it should have.”
After Holland, CI went through two more CEOs who were promoted from inside the company. Put bluntly, to investors, the company looked and acted outdated.
“We realized years ago that 20% of our employees were over age 55 and had been with the company for 20 years plus,” Holland said. “We were getting pressure from shareholders to basically transition the business. The board decided we would hire an outside CEO and have a generational transition. Today, 45 of the 50 top executives from five years ago are gone.”
Back to the present, where CI’s stock price is up nearly 50% over the past 12 months as investors have started to recognize the benefits of scale in the U.S. wealth management industry, insiders and analysts say the market still doesn’t fully get CI Financial.
“I don’t think anyone really knows where CI is going with this,” said John Eubanks, director at the investment banking firm Park Sutton Advisors, which has been involved in some of CI’s deals.
Eubanks gives CI credit for aggressively going after big chunks of the RIA market, but he said the growth in the U.S. has become so lopsided it could force the Canadian parent to spin off the U.S. business.
“Based on what they’ve done so far and the landscape and what’s happening with other [aggregators], it would not be surprising if they spun out [the U.S. business] as a separate entity,” he said.
From a shareholder perspective, which is the original driver behind CI’s move into the U.S. market, a U.S. spinoff would certainly address the disconnect between investors in Canada that don’t understand the RIA market and investors in the U.S. that don’t understand the Canadian wealth management business.
“A problem CI has is now going into two markets with two different strategies and investor bases that don’t understand the other strategies,” said Barclays’ Aiken.
MacAlpine isn’t tipping his hand just yet about any kind of breakup of CI Financial, but his frustration over the way the company is valued is clear.
“If you look at the multiples by which wealth managers trade in the U.S. and the multiples we trade at, there’s a disconnect; I call it a criminal disconnect,” he said.
Holland said investors in Canada “are missing it because they just think we can’t be competitive with Canadian banks.”
“I can’t imagine a business profile that’s much better than this,” he added. “This is just a cash-generating machine, yet analysts are so down on Canadian asset managers. We have no [capital expenditure] and we have no accounts receivable department.”
MacAlpine said the tide is slowly turning, but it remains to be seen if it will turn quickly enough for the board of directors.
“A couple of years ago, 100% of our equity investors, bondholders and employees were Canadian,” he said. “The story is new. The RIA market doesn’t even exist in Canada. We’re focusing on a foreign story for Canadian investors, and all the analysts covering our stock are Canadian.”
Whether CI spins off the U.S. business or employs some other means of distinguishing the Canadian and U.S. operations, it’s clear MacAlpine sees no end to his push into the RIA market. And on that note, he can sound both defensive and bold, being familiar with the grumblings from executives at competing aggregators suggesting CI’s fast and furious style is skewing supply and demand fundamentals.
Most of the executives at competing aggregators contacted for this story declined to comment. But, even if U.S aggregators are a tad ruffled by MacAlpine’s style, there’s respect for the level of success CI has achieved in such a short time.
“My hat’s off to [MacAlpine], and I commend them for making some very high-quality acquisitions,” said Rush Benton, senior director of strategic growth at Captrust Financial Advisors, a $600 billion aggregator that’s made 56 acquisitions since 2006.
Benton cited the CI model of buying but not rebranding as an approach that appeals to some owners.
“They’re buying firms today with the goal of combining them later,” he said. “If I’m an owner that is a little less interested in being integrated, maybe that model works for me.”
Whatever the sales pitch looks like, it’s clearly gaining momentum, as witnessed by the increasing size and pace of the deals.
CI closed out 2021 with announced acquisitions of $6 billion RegentAtlantic, $23 billion Segall Bryant & Hamill, and $7.5 billion Gofen & Glossberg.
MacAlpine said CI is well past the days of cold calling to make deals and noted that the pace of inquiries led to 185 nondisclosure agreements in 2021.
“I wasn’t in this space two years ago, and I don’t worry about the criticism, but my job is a lot easier today than it was two years ago,” he said. “Other firms can have their opinions, but we’re very comfortable with what we’re paying.”
Regarding CI’s growth strategy, MacAlpine makes no apologies for the pace of acquisitions and even takes a swipe at aggregators relying on private equity funds to try and keep up.
“If you take CI out of the equation, the vast majority of buyers are temporary capital from PE-backed aggregators,” he said. “When there’s a market stress point, a lot of those businesses have seven to eight times leverage, and that won’t end well. Our model is permanent capital.”
As far as what CI is paying for RIAs, those details are not broken down on earnings reports because they are deemed nonmaterial transactions in the context of the company’s total balance sheet. These are cash and equity deals, and as CI’s balance sheet grows, along with the size of its RIA acquisitions, the details are not expected to get any clearer.
“We’ve seen a very successful acquisition strategy in terms of number and size of deals, but it’s difficult to determine the financial success” of the deals, said Aiken. “It begs the question, is there some sort of integration risk and are there any bad acquisitions?”
MacAlpine doesn’t deny that bad deals could happen, but he said part of his process helps guard against that.
“If someone needs to sell, there’s zero chance we’re buying,” he said. “You need to align with what we want to build strategically. Every firm we announce goes into it knowing the people at CI because we force them to meet people and finally, we have a total financial alignment.”
While all of CI’s RIA deals have included a blend of cash and equity, a new partnership program launched in January converts the equity into a pooled partnership designed to drive the RIAs toward cooperative goals for growth and success.
Aiken describes the private partnership model as “textbook MBA organizational structure.”
“They are carving out a private entity within the larger public organization,” he said. “As a business owner, I’m now facing the same risks and growth [as the rest of the partners] but can also benefit from the synergies.”
MacAlpine describes the partnership structure as the latest evolution of CI’s U.S. growth strategy, which is being expanded to include trust services, bill payments and family office services.
One thing that won’t change is the focus on independent financial advisers, “because of the fiduciary standard versus the suitability standard,” MacAlpine said.
“The other problem with brokerages is how they make money,” he added. “We only get paid fees on advisory assets. I believe in value for money.”
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