Focus Financial Partners Inc (FOCS) 2021 Q4 法說會逐字稿

Good morning. I would like to welcome everyone to the Focus Financial Partners 2021 Fourth Quarter and Full Year Earnings Call. Joining us today are Ruediger Adolf, Founder and CEO; Jim Shanahan, Chief Financial Officer; Rusty McGranahan, General Counsel; and Tina Madon, Head of Investor Relations and Corporate Communications. (Operator Instructions) As a reminder, this conference is being recorded. Mr. McGranahan, Please go ahead.

Good morning, everyone. Before we begin, let me remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that Focus' results may, of course, differ from these statements. These statements are based on assumptions made by and information currently available to Focus Financial Partners and involve risks and uncertainties that could cause the results of Focus to materially differ from these statements.

Focus has made filings with the SEC, which lists some of the factors that may cause its results to differ materially from these statements, including, without limitation, uncertainties surrounding the COVID-19 pandemic. And finally, Focus assumes no duty and does not undertake to update any such forward-looking statements. With that, I will turn it over to our Founder and CEO, Rudy Adolf. Rudy?

Thanks, Rusty and good morning, everyone, and welcome to our call today. We appreciate your interest in Focus. We had an outstanding year in 2021, and Rajini, Lenny, and I are incredibly proud of the performance that our business delivered, reinforcing our clear leadership in the independent wealth management sector.

We generated excellent financial performance for the year, exceeding our expectations on all measures with revenues and adjusted net income, excluding tax adjustments, reaching new heights. We continue to attract some of the highest quality firms in the industry and we ended 2021 with 84 partner firms in 4 countries.

The quality and scale of our partnership, combined with record M&A activity and new value-added services that further enhance our value proposition were all integral to this outcome. We entered 2022 with excellent momentum, extending the strong pace of activity we experienced last year. We are working on a substantial pipeline in the U.S., Australia, Canada and the U.K. and plan to expand into other countries.

Our December primary equity raise demonstrated our ability to access the equity markets to further support and capitalize on the attractive M&A opportunities that we expect in 2022 and beyond. We delivered excellent results for our shareholders, growing full year revenues by 32.1% year-over-year to nearly $1.8 billion.

Our adjusted net income, excluding tax adjustments per share was $3.36 and tax adjustments per share were $0.56, up 36.6% and 19.1%, respectively. These results reinforce the high-growth nature of our business, which is a function of the value being created by the firms in our partnership. The results also reflect the value of our recurring revenue stream, which drives the stability and predictability of our financial performance regardless of market conditions.

In 2021, in excess of 95% of our revenues were recurring. However, what made 2021 a standard year was the acceleration of our M&A momentum as we capitalized on the industry consolidation opportunity in a disciplined way. We closed a record 38 transactions last year, including 14 partner firms in 24 mergers, inclusive of 8 mergers for Connectus, which expanded its footprint in Australia, Canada, and the U.K.

We continue to add outstanding new partner firms, each an industry leader with a strong business, talented advisers and seasoned management teams and deep, long-standing client relationships. Each added complementary capabilities to our partnership, including geographic reach and an array of wealth and investment management expertise by further diversifying our revenues and cash flow.

As we discussed at our December Investor Day, our core value proposition of entrepreneurship, permanent capital in value-added services is unique in the market and resonates strongly, enabling us to continue attracting many of the highest-performing firms in the industry. As you heard, many of our partner firms say, having Focus as a long-term strategic partner with the resources, intellectual expertise, and scale advantages to help them become stronger businesses, grow faster in continual service their clients better was at the core of the decision to join us.

Every time we add a firm of the caliber of the 14 partners that joined us in 2021, it further validates the attractiveness of our value proposition and our partnership. At our Investor Day, you heard my co-founder, Rajini Kodialam, describe the value that is created by our programmatic approach to M&A. Central to this process is ensuring that we are adding the right firms. This is what drives the consistently high investment returns we are generating.

Our value-added services are also an important differentiator and essential to helping our partner firms enhance the organic growth. My co-founder, Lenny Chang, explains that to stay competitive, RIAs need to add services to position themselves to meet evolving client needs, which vary based on the complexity of their wealth and assets. RIAs concurrently needs to upgrade their business practices as scale has become an increasingly important differentiator.

We enable our partner firms to meet those needs through both our business and client solutions, and we further expanded our value-add offerings last year in important areas such as trust, lending, insurance, and valuation solutions.

Last week, we announced our partnership with CAIS to provide a customized alternative investment platform to all of our partner firms. This platform will allow our partners to seamlessly access a range of alternative investment strategies on behalf of their clients.

The unique scale and reach of our partnership gives us insights that we can leverage to the benefit of all of our partners, and we have the profitability to continually enhance our value-added services in the areas that will help our partners the most.

We structured our Investor Day to answer the key investor questions in each of these areas, and the feedback we have gotten has been excellent. In particular, the disclosures we provided on our long-term organic growth rates, excluding mergers, were well received. As of September 30, 2021, for firms that have been with us for at least 2 years, our partnership generated since inception organic growth rate of 9.6%, excluding mergers, and our portfolio of U.S. RIAs, 11.2% on a weighted average basis.

Our update on the size and stability of our investment returns was also viewed very positively with 91% of such firms generating levered IRRs in excess of 20% compared with 86% in our 2019 Investor Day. Most importantly, investors were impressed by the quality and depth of our partnership as demonstrated by many partners who joined us for the panel discussions.

We have made substantial progress in the evolution of our business with the COVID crisis reinforcing the stability and resiliency of our business model, and we increased our 2025 financial targets to reflect this. Our growth trajectory continues to accelerate, and we are executing the session within the independent wealth management sector.

Perhaps the most important takeaway is that we are consistently delivering 20-plus percent annual growth, supported by strong organic revenue growth and outstanding execution, investment discipline, and nimbleness. I can't emphasize this point strongly enough. Although we end up in a multitrillion dollar global industry that is experiencing a transformational shift driven by succession and the need for scale.

At our Investor Day, we highlighted that despite the increase in merger activity in the last several years, consolidation in this industry is just beginning, representing an opportunity that will spend many years that we updated our 2025 financial targets, including revenues of approximately $4 billion, adjusted EBITDA of $1.1 billion and adjusted EBITDA margin of 28%, supported by a future partnership of approximately 125 firms.

To reach this target in about 4 years, Jim?

Good morning, everyone. In Q4 and for the 2021 full year, our business performed exceptionally well. Our growth and financial performance were very strong as our partner firms delivered excellent results.

We closed 38 transactions, a new record for our M&A activity and continued our international expansion leading it to 20%. This outperformance primarily reflects approximately $20 million in performance fees associated with alternative investment funds managed by some of our partner firms, which will not repeat in Q1.

Our Q4 adjusted EBITDA was $129 million, up 42.2% compared to the prior year period, and our adjusted EBITDA margin was 24.6%, in line with our approximate 25% outlook. The performance fees I just mentioned contributed approximately $7 million in adjusted EBITDA, reflecting the strong growth and profitability of our business. Our Q4 adjusted net income excluding tax adjustments per share was $0.94, increasing 30.6% from the prior year period. Our tax adjustments per share were $0.16, 33.3% higher year-over-year.

On a full year basis, our revenues were approximately $1.8 billion, 32.1% higher than the prior year, driven by our organic revenue growth rate of 24%. Our full year adjusted EBITDA was $451.3 million, 40.3% higher than the prior year, and our adjusted EBITDA margin was 25.1%, 1.5 percentage points higher, reflecting the addition of new partner firms and operating leverage.

Full year adjusted net income, excluding tax adjustments per share was $3.36 reflecting year-over-year growth of 36.6% and our tax adjustments per share were $0.56, up 19.1% for the same period. As of December 31, our gross unamortized tax shield was over $2.5 billion, the details of which are in our earnings supplement. Almost every acquisition we make increases the value of this tax shield, which grew by approximately $800 million in the last year alone.

We had a record year in 2021 for M&A activity, underscoring the attractiveness of our value proposition and the scale benefits we offer our partner firms globally. As Rudy noted, we closed on 14 new partner firms and 24 mergers, including 8 mergers for Connectus for a total of 38 transactions. In Q4, we closed on 22 transactions, including 9 partner firms.

The 9 new partner firms contributed approximately $16.8 million of revenue and $5.6 million of adjusted EBITDA with adjusted EBITDA margin of 33.4% in Q4 2021. On a full quarter basis, these firms are estimated to contribute $37 million and $12.4 million in revenue and adjusted EBITDA, respectively.

In December, in connection with 2 partner firm acquisitions, we issued approximately 440,000 shares as part of the consideration paid. Approximately 59,000 of these were Class A shares and the remaining 381,000 were LLC units with an equivalent amount of Class B shares.

As we have highlighted on prior calls for attractive transactions, we have the unique ability to use our public shares or LLC equity capital as part of our acquisition consideration. These share issuances, as well as our December equity offering, will increase our Q1 weighted average adjusted shares outstanding by approximately 3 million shares.

As Rudy highlighted, and we have discussed at our Investor Day, our M&A momentum heading into 2022 is very strong. Industry M&A activity continues to increase and the opportunity to sell internationally is also growing. While our M&A closings in Q1 will be lower given the substantial number of deals we completed in late Q4, our pipeline for 2022 is substantial, and we anticipate that it will expand further, particularly as a number of our partner firms that use mergers to accelerate their growth increases.

Connectus also has a robust pipeline and will expand its global footprint in 2022. In anticipation of growing levels of M&A activity, we raised $161.9 million to our primary equity issuance in December, net of offering expenses and a synthetic secondary. This capital will provide us with additional working capital flexibility to efficiently capture M&A opportunities globally.

Now, for a few comments on our Q4 expenses and cash flow. Management fees were $146 million or 27.9% of our Q4 revenue, in line with our prior quarter. As a reminder, management fees are our second largest operating expense because they are tied to the profitability of our partner firms and therefore, highly variable, they limit the effect of revenue volatility or increases in operating expenses on our adjusted EBITDA.

Our noncash equity compensation expense was 1.3% of our Q4 revenues, in line with our expectation, and we expect this expense will be approximately 1.2% of estimated Q1 revenues. As of December 31, our LTM cash flow available for capital allocation was $319.9 million, a year-over-year increase of 59.6%, reflecting the strong sustained growth and financial performance of our partnership as well as the addition of 14 partner firms and 24 mergers during the Q4 LTM period. We paid cash earn-out obligations of $27.5 million, which was within our Q4 estimate. And in Q1, we estimate that we will pay cash earnouts of approximately $35 million.

Now, let me turn to our Q1 P&L expectations. We estimate that our Q1 revenues will be in the range of $510 million to $520 million. We anticipate that our organic revenue growth rate will be in the range of 16% to 19%. We estimate that our Q1 adjusted EBITDA margin will be approximately 25%. Our outlook for both revenue and our organic revenue growth rate exclude the approximate $20 million in year-end performance fee revenues for Q4, which will not recur in Q1.

Additionally, due to the seasonal impact of our non-correlated revenues, we estimate revenues will be lower by approximately $10 million in Q1 relative to Q4. With the recent backdrop of unsettled equity market conditions and the heightened volatility, it is important to note that the diversity of our revenues, with approximately 23% of our Q4 revenues not correlated to the financial markets, limits the effects of market volatility on our revenue stream.

Additionally, our partner firms client portfolios are actively managed and allocated across investment classes, which helps limit their exposure to equity market turbulence. These characteristics, together with the highly variable nature of our expenses and our earnings preference limit downside risks to our revenues and profitability. The most recent example of this dynamic was our financial performance in 2020 at the height of the COVID uncertainty.

Now, for a few comments on our balance sheet. We entered Q4 with approximately $2.4 billion of debt outstanding, inclusive of the $150 million we tapped in December under the delayed draw feature of our $800 million term loan. We ended the year with a net leverage ratio of 3.85x lower than anticipated due to the incremental adjusted EBITDA we generated in Q4 and our equity raise.

Assuming that markets stay constant at current levels, we anticipate that our Q1 net leverage ratio will be between 3.75x and 4x. We remain committed to our net leverage ratio range of 3.5x to 4.5x, which we believe is the most appropriate range given the highly acquisitive nature of our business.

Our borrowing costs remained low in 2021 as we've been a beneficiary of the low interest rate environment. While we expect that our interest expense will increase this year as the Fed begins raising rates, $850 million or approximately 35% of our borrowings are swapped to a fixed rate of approximately 2.6%, inclusive of the 200 basis point spread. Additionally, while not hedged, $796.4 million of our borrowings have incurred the carry cost of a 50 basis point LIBOR floor.

In 2021, we closed acquisitions with consideration in excess of $1 billion, significantly higher than our annual deployment in the past years. As of year-end, we had over $900 million of firepower between cash on hand and our $650 million undrawn revolver in anticipation of another exceptionally strong year for M&A activity globally.

As always, we are stringent about only pursuing acquisitions that meet our return criteria and are a good fit for our partnership. As you have heard through the partner panel discussions in our December Investor Day, we acquire entrepreneurial value-creative firms with substantial growth potential. These are the firms that are best positioned to benefit from our scale advantages, value-add resources, and permanent growth capital.

In closing, we delivered another strong quarter in Q4 and an excellent year in 2021. These results reflect not only our ability to capitalize on the large and growing market opportunity, but also our consistent financial discipline as our business has grown. Our partner firms delivered another year of exceptional financial performance last year. Our value proposition resonated strongly supported by a well-designed portfolio of business and client solutions.

We continue to be careful stewards of our capital, investing in firms that are leaders with attractive growth profiles. These are hallmarks of the way in which we manage and grow our business, which we believe will generate substantial value for our shareholders in the years to come.

We believe that our growth trajectory is one of the most compelling in the financial service sector. reinforced by our new 2025 growth targets, approximately $4 billion in revenue, $1.1 billion in adjusted EBITDA and a 28% adjusted EBITDA margin.

We are optimistic about our strategy for growth and our financial outlook, and we believe that we are uniquely positioned to capitalize on the secular dynamics shaping our industry. With that, let me turn the call over to the operator for Q&A. Operator?

(Operator Instructions) Our first question comes from the line of Craig Siegenthaler with Bank of America.

We were interested in the CIS partnership announcement last week. And I also remember from [Tony Aviati's] presentation from the Investor Day that his partner firm, SCS also provides also to some of your affiliates. So is SCS going to work with CIS going forward? Or is CIS going to be sort of the dominant provider of alts more from the center of focus? Like how is that going to work?

Yes. Craig. And by the way, excellent question because we've got my co-founder, Rajini, on the phone and she'll add to what I'm saying. But Craig, the alternatives are an increasingly important element of wealth management for highly adverse and ultra-high net worth clients.

And we have quite a number of partner firms that, quite frankly, are excellent in managing complex alternative strategies. So what we did with CAIS was basically create a proprietary platform, will basically carry all of our managers, including SCS. They are very sophisticated, probably one of the largest alternative programs in this industry, but also other partner firms, whether it's [Suncor], whether it's (inaudible), or other partners.

We have the ability to add their highly sophisticated strategies to this platform and then solely at the choice of our partner firms, other partner firms, they can basically tap into these capabilities, if and when they see a good fit and quite frankly, when there's capacity and there's strategies. Rajini, you want to add something?

Thanks, Rudy. So Craig, for us, CAIS is a fintech platform that's doing 3 things. First of all, it's curated. It's not just the after-shelf platform completely curated for the Focus partnership. And our firms, such as SCS and others, like Rudy mentioned, are on the platform, both as providers as well as all of our other firms can access the platform to avail of, it could be SCS, it could be another Focus partner firm, it could be a third-party.

We think the CAIS platform that is curated for Focus, the beauty of it is it is customized for each Focus partner firm. So when Colony logs in their experience, the funds they see, are completely different than what happens when a [Verdeaux] logs in or an SCS logs in. So that's the beauty of Focus. It's truly open architecture. Each firm decides how they want to access it, who they want to add on to it.

But the most important aspect of this is it's also comprehensive. I'm sure you've heard it, also are an increasing addition into the asset management mix. But one of the issues with leveraging all of the RE space is it's not very efficient for the advisers. It's a cumbersome process, and that is something that we have tried to streamline here. We're starting with access, education, third-party due diligence, connectivity to reporting providers, connectivity to custodians, and a collaborative community around the Focus partnership, which truly the 3 Cs, be curated, customized within each partner, and the comprehensive nature.

This is an extension of our value-added services, and it's a beautiful straddle. On one hand, focused client solutions because it helps our partners expand their client value proposition (inaudible). On the other hand, it is all about focused business solutions because it provides tremendous adviser efficiency. So it's a straddle.

Got it. And just for my follow-up, Jim, I heard your prepared comments on the expanded new deal pipeline. And to me, this sort of translates into expected more deals, more capital deployed, earnings accretion in 2022 than we've seen kind of in recent years, even though you've had some really good recent years. Is my interpretation of that correct? Maybe you could just refine that comment a little bit.

Yes, Craig, thanks for your question. So we -- our projections for this year '22, we said we'd grow top line over 20% in terms of revenue and our adjusted EBITDA as well. We don't have guidance on capital deployment because, as you know, M&A is kind of hard to predict. We had a very strong Q4. At the very end of the year, we closed about 22 transactions in Q4. Q1 will be a little lighter. But there's quite a number of LOIs and transactions that we're in the middle of due diligence right now and the future is bright here for activity in '22.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

It's Ryan on for Alex. So maybe just firstly, a philosophical question for Rudy. You're targeting 20% revenue and EBITDA growth this year. The stock is trading in the low teens, both on NTMP and EBD EBITDA and it's down about 20% over just the last few months.

At the same time, you're thinking about issuing stock for deals and sort of in the regular course of business. I was just wondering how you're thinking about the trade-offs between investing in this really strong growth pipeline that you see ahead of you and potentially neutralizing the effects of dilution maybe through repurchase.

Yes. Thanks, Ryan. Well, first and foremost, obviously, we are managing the business, not the share price. And what is probably most important is when we deploy capital, as we have demonstrated in our Investor Day, the returns are very, very attractive. We have a weighted average levered IRR in excess of 25% with, again, very conservative math. And we are very opportunistic if we use capital in the transaction or not use capital -- I mean, equity in a transaction, quite frankly, it has a lot to do with also the needs and interest of partners.

But ultimately, when you generate this level of returns and quite frankly, we have close to flawless track record of doing that. We continue to believe that by far, the best deployment of capital is to just keep on growing the business and ultimately get us to our 2025 targets that $4 billion in revenues, $1.1 billion in adjusted EBITDA and the 28% margin, that's the trajectory we are on. That's the right way to deploy our capital. And as Jim said before, there's just tremendous opportunities ahead of us.

Got it. Okay. That makes sense. And maybe if you could give us an update on [Bariless]. I think we're approaching about a year since the initiative started. So I was just wondering what's the opportunity set like in the family office space and potentially how are you thinking about tapping into both Europe and Asia through that platform?

Yes. So of course, [Bariless] is just the start of a very small joint venture. It's a little bit different than the rest of what we are doing. They have assembled a strong team there. They are kind of in the ultra-ultra high net worth segment. And it follows different -- somewhat different dynamics. It's kind of more about deals and deal linkages. So no, Bariless would not be the foundation of our, if you want, entry into Asian markets. We use our core model, and that's where the opportunity is.

And quite frankly, in any of the markets that we are operating. At one point, you will see holding company transactions. You will see traditional merger transactions. And then, of course, you will see Connectus transactions. That's the essence of our business model, and that's really where the emphasis is in the greater scheme of things here. Bariless obviously very, very small still at this point.

Our next question comes from the line of Owen Lau with Oppenheimer & Company.

Could you please give us an update on international expansion? How should we think about contribution and acquisitions outside of the United States in 2022?

Owen, thanks for the question. So I stated at the Investor Day today, only 5.8% here, that's the numbers of Q4 of our revenues are in international. Still, your run rate is now over $100 million. And we kind of want to get it to 20%, 25% over time, where we will then get the real benefits of the diversification. I'm actually doing this call from Europe right now. And it's just there are a number of very attractive markets.

But of course, step number one is just doing more in our existing markets, Canada, and Australia, and the U.K. and then gradually expand into a number of additional markets. What makes it so attractive is our model and our value proposition, entrepreneurship, value-added services, and permanent capital is very unique in the U.S. I don't think anybody can credibly claim a similar value proposition.

But in these international markets, it's simply unheard of. And there is consolidation, there's regulatory change there. A whole number of dynamics where markets are moving more towards a fiduciary model, the way we would call it in the U.S. And this always creates tremendous opportunities because ultimately, we know more about fiduciary wealth management on our scale than just about anybody else in the world. That's a major competitive advantage.

Got it. That's helpful. And then on another update, could you please also provide a little bit more color on your value-added services, maybe in particular on cash and credit program and trust solutions.

Yes. Yes, absolutely. And Jim will give you some of the more recent numbers. But it's -- I guess sometimes you have to be lucky or -- but reality is the feedback, the engagement that we are currently seeing from our partner firms is absolutely tremendous, starting on cash and credit.

And quite frankly, it is -- which is a surprise to me, is really becoming a -- if you want, a customer client acquisition instrument. Very often I hear about partner firms ultimately using a change in the balance sheet of the client and really an optimization you are using our -- these capabilities is actually really, really powerful. And so we are very clear there.

On the trust side, basically, it's still earlier days here, we just launched it. But just yesterday, I talked with multi-hundreds of millions of dollar clients that ultimately where our trust capability was a real game changer for our -- for the particular partner firm that is going to work with him. That is ultimately a true tool of just adding to the sophistication of our partners, but also it's leveraging our unique scale. We simply have more purchasing power excess capabilities in this area than just about anybody else in this industry. And this is ultimately a strength that we are using that ultimately we can help with the growth of our partner firms.

Our next question comes from the line of Kyle Voight with KBW.

This is Matt Moon actually on for Kyle. I just had one on the adjusted EBITDA margin there. I know you didn't change the out-year targets and the trajectory remains positive overall, both year-on-year and unchanged for the longer-term story, but I was just curious on the assumptions underlying the expense base for this year and maybe how the impacts of inflation, overall P&E and mix of acquisition types between Connectus and the core model and any other factors might be playing a role for this year? And anything else you want to highlight there?

Yes. Thanks, Matt. So obviously, we've put out a detailed Q1 guidance. If you think about what's happened over the last 2 quarters, a lot of people have started to travel. The costs have started to come back in the P&L. There was a slight uptick in the SG&A costs from Q3 to Q4. So that's the run rate of the business. But we do our budgets with all of our partner firms in terms of compensation and so forth, that's embedded in our Q1 and our guidance as well.

As you know, we generally buy between 40% to 60% of the economics and cash flows with respect to partner firms. So we've made assumptions in those ranges for 2022. And that's the output with the operating leverage of the business about targeting 25.5% this year, which is up versus about 25% for calendar year '21 and heading towards our ultimate focus 2025 goal of adjusted EBITDA margin of 28%.

So we like what we see and where we are and things like the CAIS question earlier, all those types of initiatives and value adds that we provide our partner firms will help the margin over time and get us towards our long-term goal.

Matt, maybe the second part of your question was related to inflation. And quite frankly, inflation is a very important discussion topic with our clients and obviously, a very important consideration in the dynamic portfolio construction that our partners are using.

But if there's one thing, Matt, we have seen again and begin in our industry, ultimately kinds of uncertainty increase the need for advice. And many parts of our partners have seen extraordinary growth in times like these. And as you have seen with the excellent performance that we had in 2021. And by the way, and I'm very proud of this, those people who looked at the Q2 2020 earnings, where we basically predicted the very pattern that you're experiencing, which is basically just tremendous growth in this industry and, of course, also for us coming out of the crisis.

I recently polled a number of our largest partner firms and just ask them how do you think about inflation, what's going to be the impact. And quite frankly, as much, of course, it's very important from a client and asset allocation and asset management perspective. But from a business perspective, there's a single firm that has any material concerns about the impact on -- of inflation on our economics.

Got it. Great. And then just as a follow-up, maybe more of a cleanup question. You cited $20 million in performance fees already in the quarter 2. Some of the alternative platforms that some of your partner firms are on. So it sounds as though the revenue growth guidance does not include these performance fees for 1Q and the full year. But just wondering if this is something we should expect is some sort of true-up in the fourth quarter? Or is this on an ongoing basis should, I guess, assuming and hopefully for you guys, if the alternatives perform well. But I was just curious on the mechanics here in the accounting.

Yes. So Matt, we do not include performance fees and projections because generally, they're based on year-end performance, and it's impossible to estimate those type of things. Even when we were sitting here in November providing the Q4 guidance, there was still uncertainty. So that's why the $20 million kind of came above the top end of our guidance, but impossible for us to estimate these for '22, and we do not include them in guidance until they are realized.

Yes. But thanks to the question before in CAIS. Quite frankly, many of our partners are just excellent in managing these type of strategies. And of course, there's a value that they and us are getting for it. But what we really see is, particularly in these complex times, there are just a number of strategies that just do extraordinarily well despite what's happening out in the market right now.

Our next question comes from the line of Michael Young with Truist Securities.

I wanted to start with -- you guys had a really strong year in terms of partner firm acquisitions in 2021 with 14, strongest you guys have had. So as we look forward to 2022, should we expect more acquisitions kind of more into the downstream bucket? Just given Investor Day, it seems like every partner firm that was presenting wanted to do more downstream M&A. So should we expect that mix to shift this year?

Yes, you're right. One of the big reasons why partner firms join us is our track record of supporting them in mergers. And therefore, you are directly benefiting and being beneficiaries and drivers of industry consolidations. So about 3/4 of our partner firms have done deals and will be doing this at one point. So that is an important part of our value proposition.

We are virtually agnostic from an economics perspective. If we deploy capital upstairs or downstairs. Quite frankly, we have a preference whenever it makes sense to do mergers because it's simply -- as I said, the recent partners joined us and it's a huge part of our value-added program.

But of course, for many transactions, it just doesn't make sense, and we don't need to do this. But reality is, yes, last year was simply an extraordinary year from an M&A performance. We deployed more capital than ever before. But when Rajini, Lenny, and I are looking at our current pipeline, it's just really, really strong. And so it's hard to predict. But I believe our M&A, this is going to be another strong, very strong M&A year that we have ahead of us.

And maybe just as a follow-up, with Connectus generating more kind of M&A volume and the potential at least for there to be more mergers by partner firms. I would assume you're getting slightly better economics or just much better economics in kind of those types of deals. So should we expect kind of the returns on these acquisitions to be increasing and maybe moving us closer towards a point of self-capitalized growth with M&A. Any comments on that would be helpful.

Well, as we have shown in Investor Day, the performance of our M&A business is just extraordinarily strong. And it's strong because we are very selective and have simply a good eye, I guess, for partner firms to join us. Then, of course, we got our value-added programs. And we are financing the growth at very attractive terms through us, the $320 million TTM cash flow that we are -- the free cash flow that we are generating, plus, of course, access to the debt markets and selectively to the use of equity.

So I don't think it would be too optimistic to think that you can get even higher returns than what we have created here. I think sustaining at these levels is absolutely terrific. That's what our objective here is. And as I said before, is our pipeline is vast. It's exciting. We are as busy as we can be. And stay tuned, there are a bunch of announcements in the works in the not too far future.

Our next question comes from the line of Matthew Roswell with RBC Capital Markets.

I have a bit of a theoretical question -- it might be a little difficult to tease out, but the organic growth has been running sort of nicely higher over the last couple of quarters. And I was wondering if there's sort of a permanent shift higher in organic growth? Or is it being driven by M&A activity at the partner firms? Or are we still seeing some of the recovery from the pandemic? Hopefully, that question makes sense.

Yes. Yes. No, I understand the question. It makes a lot of sense here. We are less kind of focused on what happens in individual quarters, although, of course, it is a regular disclosure that we provide here. I think the 15.9%, that's the average, is kind of the better number to focus on. There's always going to be some ups or downs. And yes, some of them are based on the merger side.

I think that the true, Matthew, that the true piece to focus on is this new disclosure that we provided during Investor Day, where we basically showed that our U.S. RIAs, U.S. wealth management business, which, of course, is the vast majority of our revenue base, generates an organic growth, excluding mergers of 11.2%. And this is over the cycle. And the most impressive numbers. So there's no M&A in this. If you then add M&A, the same-store growth of our partner firms is 15%.

So this -- we have a very, very strong portfolio of growth-oriented partners. Yes, they grow on their own along the lines of what I just described. And then our mergers, you just can add another almost 50% higher growth from 11% to 15% growth to our partner firms, which is, of course, very, very attractive.

Just to add to that. So obviously, we're coming out of -- as a base year of 2020. So obviously, there's a lot of growth. But as Rudy sort of mentioned, the last 16 quarters has been 15.9% on average, and that sort of syncs with the guidance for Q1 of '16 to 19%. Obviously, our firms, now we have 84 of them. They're more interested in doing accretive tuck-in acquisitions. So that will continue to contribute towards that. But we're more normalizing now towards the 16-quarter average with the guidance in Q1.

Okay. And then I guess as a follow-up to an earlier question. When do you decide to use equity as part of a merger? Is it sort of your choice, the partner firms choice?

Yes. So this speaks to one of the unique features that we have in our business model. And so for holding company deals, if we start there, it's basically very much driven by what are the needs of a prospect of ours. What are they interested in? And are we now a balance sheet cycle? And then whenever it makes sense. We are delighted to add some equity, of course. We like our partners to own some of our equity. That's a good thing.

And we can do this upstairs through the C-corp stock and downstairs though the LLC, which is really, really attractive. And we will continue to do on an ad hoc basis, and it's not a formula, it's a negotiation. For mergers, which we have a third class of equity. And that is when a partner firm merges with another firm, they can use, of course, our cash. Occasionally, our stock, but that's very, very rare.

But they can also use their stock in man co., in the management company, which creates a very tight alignment between these new firms that join our partners in our merger. Of course, first and foremost, this is the decision of our partners, how they want to use their equity.

But all of this is just a highly collaborative, not very formulaic joint initiative whenever the holding company and the partner firm basically works on the merger. And this nimbleness and flexibility that we have up and down this kind of classes of consideration is a real advantage in this. I think absolutely unique to our business model.

Our next question comes from the line of Patrick O'Shaughnessy with Raymond James.

Apologies to beat a dead horse a little bit here, but another question on potential use of equity. If you guys were to deploy as much or more capital towards acquisitions in 2022 as you did in 2021, would you expect that to require additional equity financing? Or do you think you can manage that all through debt financing and cash flow?

Well, we are generating a lot of cash, obviously, that's the $320 million that I mentioned before. And Jim went through our current firepower of almost $1 billion. So we got a lot of flexibility. And we will use equity, as I just said on the prior question, when we think it makes sense and not just for financial reasons, but for strategic reasons or if it is of an important interest from our partners or rather prospects when they join us.

So think of it more of a strategic tool and negotiation tool, and that's really the primary driver. As we demonstrated in Q4, it was one overnight trade, and we could raise almost quite $200 million and the market received it very well. So it's good to have this flexibility. But if Jim and I have one job, it is being good stewards of the capital of Focus, invest our cash flows to the highest return opportunities, and be very careful and prudent in the way how we use the mix of consideration ultimately to optimize shareholder value.

Yes. Obviously, Patrick, this past year, we grew top line 32% and EBITDA 40%, but the objective for 2022 guidance is 20% plus revenue growth and adjusted EBITDA. So whenever you have accretive transactions that we're going to disproportionately grow well beyond that, then you have to evaluate all capital alternatives. But as Rudy mentioned, we have access to a $650 million revolver over $300 million of cash at year-end. And the one thing I really appreciate is the growing cash flow, which was $320 million, our LTM cash flow available for capital allocation. That continues to grow, especially as we continue to structure our transactions in a tax-efficient way where our tax shield now is over $2 billion -- $2.5 billion on an amortized basis.

I think this is kind of underappreciated by the market, I think. So Jim just said it, we are generating $320 million in free cash flow available for capital allocation. And we are converting now 71% of our EBITDA into this free cash flow. And this number is up 59.6% versus prior year. This cash generative capability is just a tremendous advantage. And obviously, we'll use it in the most prudent way we can.

Great. Appreciate that detail. And then your contingent consideration balance grew from $170 million at the end of 2020 to $350 million at the end of 2021. I appreciate the first quarter guidance that you guys already provided. But for the entirety of the year, would you expect that the cash flow related to continued consideration is going to be substantially higher in 2022 than 2021 just as that balance has built?

Well, first of all, the firms performed better, and therefore, the balance increases. Obviously, we did 38 transactions this year, our highest in our history, and that comes with incremental earn-out consideration, which is generally over a 6-year period. So that's not just earmarked for our calendar year 2022.

We love to pay earn-outs. Earn-outs ultimately mean we did a terrific transaction. We use relatively high thresholds for partners to ultimately make these earn-outs. So it's really a reflection of the health and quite frankly, the organic growth and the strength of the organic growth of our partner firms why we see this increase in this number.

Ladies and gentlemen, that concludes our Question-and-Answer Session. I'll turn the floor back to Mr. Adolf for final comments.

Yes. Thank you all. I would like to express my deep appreciation for our partner firms for their outstanding financial performance, industry leadership, and client focus in 2021. I'd also like to thank our holding company employees for a tremendous year in expanding our partnership and enhancing the value-added services, intellectual expertise, and other resources, we are able to provide to our partners. We very much appreciate your hard work, persistence, creativity, and enthusiasm.

In closing, we demonstrated the substantial growth and earnings potential of our business last year. I want to reiterate the importance of our unique value proposition, our scale, and the diversity of our partnership. These are enduring competitive advantages that support our new 2025 target of approximately $4 billion in revenue, $1.1 billion in adjusted EBITDA, and adjusted EBITDA margin of 28%.

We have entered 2022 with terrific momentum, which, when combined with the strong fundamentals of our business, we believe, will enable us to continue driving superior growth in performance, in turn creating substantial shareholder value. Thank you all for your interest.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.