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Focus Financial Partners Inc (NASDAQ:FOCS)
Q3 2019 Earnings Call
Nov 7, 2019, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. I would like to welcome everyone to the Focus Financial Partners 2019 Third Quarter Earnings Call. Joining today's call are Rudy 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]

Rusty McGranahan -- General Counsel

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's 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 for some of the factors that may cause its results to differ materially from these statements. And finally, Focus assumes no duty and does not undertake to update any such forward-looking statements.

With that, I'll turn it over to our Founder and CEO, Rudy Adolf, Rudy?

Rudy Adolf -- Founder & Chief Executive Officer

Thanks, Rusty. Good morning everyone and thank you for joining our call. We appreciate your interest in Focus. We delivered excellent results in the third quarter of this year capping a very strong first nine months. For both periods, our business generated year-over-year growth well above our 20% annual targets for revenue and adjusted income per share. We further increased our market share and grow revenues and earnings growth to industry-leading levels. We have an outstanding portfolio of partner firms that excel in client service and retention. With over half of our firms already forming platforms for industry consolidation, our portfolio of partner firms are making solid progress against their strategic initiatives, which are centered on building scale to accelerate revenue growth and ensure high client in principle retention. More of our partner firms are also accelerating their scale and growth through mergers.

We are pleased with how well the subsequent integrations have gone, if this is essential to achieving IRRs in excess of 20%. Based on our September 30th capital structure, we estimate that the portfolio firms that have been with us for at least two years has delivered a weighted average levered IRR of more than 25% since inception if same firms continue to sustain a weighted average revenue cable of more than 13%, reflecting a combination of solid growth from mergers into organic sources. Our scale of over 200 billion inclined assets enables us to provide value to our partner firms across all elements of their businesses. We're engaged with them on a number of strategic hires, particularly next-generation advisory and senior management talent.

We also work in the more than 20 operational and technology enhancements, defining new marketing and business development initiatives for over 20 firms and expanding our cash credit programs through focused line solutions. Additionally, we are placing an emphasis on enhanced business intelligence and sharing of best practices. We have closed 34 deals year-to-date taking advantage of an active M&A market. Although the environment is increasingly competitive, we remain highly selective and maintain strong pricing discipline, being year-to-date multiples in the mid to high single digit range, these deals, in aggregate, of generating earning accretion of over 20%.

We're pursuing a targeted strategy that positions us to capitalize on industry consolidation through M&A and to grow our market share by enhancing the services of partner firms offer their clients. We're increasing our reach to highly attractive new partner firms who has the business profile to become leading platforms in the future. Through mergers, we are substantially accelerating the speed at which our partner firms can scale. We're also taking advantage of focus scale and expertise to help our partner firms evolve via client service offerings. As leaders in the industry, our firm's ability to continually enhance the quality of the client experience the offer is an important competitive differentiator. Taken together, we believe that these elements will drive shareholder value creation well into the future.

This year, six new partner friends joint focus, expanding our track record of acquiring excellent firms and expanding our position in this much, high gross consolidating industry. The three largest transactions, Williams Jones, Escala and AGS added an estimated over $90 million in total revenues and $29.4 million in acquired these earnings on an annualized basis.

Prior to joining focus, and therefore prior to benefiting from our value added services, they generated an average three year revenue CAGR from non M&A related organic sources of more than 10%. These terms are clear market leaders, enhancing our presence in New York and Florida, with ultra high net worth artists and entertainers and in the highly attractive Australian market. While these acquisitions temporarily increased our net leverage ratio by approximately half a term to further diversify our portfolio and our cash flow and enhance our competitive positioning. We expected these firms will evolve into large platforms, adding new talent and clients. In the commensurate $29.4 million increasing pressures, we believe that their higher net leverage ratio did not result in the material increase in our risk profile by these new partner firms increased the value of our partnership.

Let me provide you with a little background on the unique characteristics of each one. William Jones or WJA is an elite Fiduciary Wealth Manager with approximately 8 billion in client assets and over 30 years of experience serving high net worth in ultra high network private clients in the Greater New York City area, one of the largest Wealth Management market in the U.S.

WJA has a long tenured management team, sophisticated investment expertise and robust infrastructure, making it an attractive platform for advisors and teams as well as future major candidates. WJA has a well defined growth strategy centered on expanding further in New York and in South Florida. Escala is one of the best recognized Wealth Management Firms in Australia. There's over 3 billion in client assets and offices in Melbourne, Sydney and Perth. Australia is one of the largest wealth management markets outside the U.S. and is undergoing a similar secular shift to the fiduciary advice model. There are only a few Australian fiduciary wealth managers and the reach Escala has Harris in the high network and ultra high network space, which make it an exceptional anchor investment. Escala is planning to expand its national presence and establish a footprint in selected Asian markets.

Altman, Greenfield & Selvaggi or AGS is one of the largest multifamily office in business management focused firms in the U.S., catering to the ultra high networks and high network clients nationally. AGS gives us critical mass in this space and will be a source of meaningful organic growth. We are already using our scale, expertise and purchasing power to enhance AGS's operations and technology architecture. We expected AGS offering, particularly in multifamily office services will be utilized by many of our partner firms as they build on the services they provide to their own clients.

We had into year-end with no shortage of high quality transactions and our momentum remains strong. While Q4 is typically seasonally slower, we anticipate that activity for both direct deals and mergers we continue to be healthy throughout 2020. As we begin to focus on the coming year, I want to address how we are thinking about the balance between growth and leverage. M&A driven sources of course remains centric to taking advantage of the continued industry consolidation. We will remain at the forefront of capitalizing on this trend. Organic growth will also continue to be important to how we achieve our overall growth objectives.

We believe stick 20% revenue in adjusted net income per share growth rates are the appropriate annual targets for our business, although, our quarterly rates could vary above or below these targets. Assuming constant markets, we anticipate that our net leverage ratio will remain essentially unchanged at 4.3 times from Q3 to Q4. We intent to deliver gradually starting in 2020, as we execute against a solid pipeline and satisfied earn-out associated with the transactions, we have to close in the past and plan to operate with a net leverage ratio between 3.5 times and 4.5 times. We're comfortable that this range gives us the flexibility to pursue larger strategic transactions, while also accelerating the growth of our existing partners firms or mergers and investing to drive organic growth.

While we don't plan to issue equity in the near term, we will consider using equity as consideration for larger accretive transactions, where disruptor makes sense. Based on our cash flow characteristics, we expect to achieve at 20% revenue and adjusted net income per share growth goals by remaining within our net leverage ratio guidance.

We are implementing several initiatives that will take advantage of our scale, in turn, enhancing our operating leverage, but also increasing our cash flow available for capital allocation. We will talk about our growth strategy and these initiatives in more detail at our Investor Day on November 20. But as I mentioned previously, our goal is to enable our partner firms to accelerate their growth through mergers, while also increasing their growth and offering additional services which complement their existing planning and investment capabilities. One example of this is our FCS cash and credit offerings. The response to these programs has been overwhelmingly positive, with a significant number of our partners firms taking advantage of those offerings for their clients. Our team is currently working on approximately $400 million in financing transactions, and has placed over $125 million in FDIC insured high yield deposits.

Given the attractiveness in diversification of our client base, interest from a consortium of banks and service providers is high. We don't use our balance sheet to support FCS, but rather rely on this consortium to provide the capital. At this point, access to the program for any bank or service provider that passes our due diligence standards, it's through network subscription agreements. While this revenue contribution will likely be modest for the coming year, we anticipated our partner firms will directly benefit from new client assets and high client retention. Before turning the discussion over to Jim, I want to take a moment to acknowledge that improving our disclosures remains a high priority. We have made a number of additional disclosures this quarter to facilitate and better understanding of the true growth potential and high differentiated nature of our business.

With that, let me now turn over the call to Jim. Jim?

Jim Shanahan -- Chief Financial Officer

Good morning, everyone. We generated excellent results in the third quarter, and first nine months of this year. For Q3, our revenues grew 34.3% and our adjusted income per share grew 34.8% over the prior year quarter, well above our stated annual targets of 20% for both. Our organic revenue growth rate was 22.4% for Q3, and for the year to-date period was 13.8%.Year-to-date through November 7, we closed 34 transactions. Our results reflect our ongoing investment in wealth management businesses that create a strategic competitive advantage for Focus, and our partner firms.

As Rudy commented on the benefits to our business of the large new partner from acquisitions we've completed, I wanted to briefly touch on the mergers our partner firms are executing to capitalize on industry consolidation, and scale their businesses.

Over time firms that take advantage of mergers have more than doubled their revenue growth rates as compared to those that only rely on client by client acquisition and market appreciation. Mergers enable efficient access to large pools of client assets, new spheres of influence, distribution channels and exceptional advisor talent. These benefits when combined with the value add services we provide help our firms build the scale that they wouldn't be able to do on their own, and positions them to be platforms that will lead the industry in the future. As noted on page 13 of the earnings supplement, our partner firms have attractive revenue growth profiles both with and without mergers. The 49 partner firms that have been with Focus for two years or more as of September 30 have generated a weighted average revenue CAGR of 13.5% and a median CAGR of 9%.

Breaking this down further, the 20 firms that have not yet completed a merger have grown their revenue at a weighted average CAGR of approximately 7% since inception, reflect in their organic growth, including the effect of market appreciation. For the 29 firms that have completed a merger this revenue CAGR more than doubles to approximately 15%. The compounding effect of this incremental growth is substantial over time.

Now turning to further details of the quarter. Total revenues for Q3 2019 were 316.6 million, 34.3% higher than the prior quarter. Approximately 25.7 million of this growth resulted from six new partner firm acquisitions that closed during 2019. We closed Williams Jones on August 1, which contributed approximately 7.4 million to Q3 revenues. On a full quarter basis, we expect this contribution to be approximately 11 million. Wealth management fees continue to be the primary driver of our revenue growth. Our fee based and recurring revenues remains in excess of 95% of our total revenues, which remains an important differentiator for our business. Approximately 73% of our revenues for Q3 were correlated to the financial markets, both equity and fixed income, of which 70% were generated from advanced billings. The remaining 27% of our revenues came from sources not correlated to the markets, primarily from a partner firms that provide family office type services. These firms have consistent strong growth profiles independent of market cycles.

As I mentioned earlier, our Q3 organic revenue growth rate was 22.4%. This rate was positively impacted by the merger activity of our firms during the last 12 months, including Loring Ward, which contributed 12.8 million in Q3 with seven additional firms to execute in their first merger during this period. Given the intrinsically volatile nature of this number is important to look at the trend over the last two years. For this period, our average quarterly organic revenue growth percentage was approximately 15% demonstrating strong same store sales growth

Of our 63 partner firms, over half have completed one or more mergers, accelerating their revenue growth in the process. Based on our visibility due to the advance billing by many of our firms, we anticipate organic revenue growth will exceed 15% in the fourth quarter, while organic revenue growth can vary quarter-to-quarter, based on a timing of mergers are completed. The levels we are achieving on a trailing basis demonstrate the attractiveness of our model. As in prior years Q4 revenues are expected to be impacted by approximately 5 million though the seasonality, a certain tax and other services which tend to be lower in the first and fourth quarters of each year.

Our adjusted EBITDA was 69.4 million for the quarter increasing in 30.7% year-over-year. Annual acquired base earnings for William Jones is 16.5 million. Williams Jones contribute approximately $2.9 million of adjusted EBITDA in Q3, full quarter basis is expected to be over $4 million.

Year-to-date through November 7th, acquired base earnings for the six partner firms we closed is $35.1 million. We also close 28 mergers of which six were in the third quarter and four to-date in the fourth quarter. We don't anticipate any new partner firm closings in Q4 given typical seasonality. The mergers we completed year-to-date were done on behalf of 16 partner firms and eight of these firms were executing their first merger.

Our adjusted EBITDA margin for the quarter was 21.9%, more favorable than our 21% adjusted EBITDA margin in Q2 reflecting lower SG&A cost, which are approximately 18.5% of Q3 revenues. We estimate that our adjusted EBITDA margin will be approximately 21.5% in Q4, reflecting the seasonality of the business. Management fees, which is one of our largest operating expenses increased sequentially by $1.9 million, which reflects the Williams Jones closing.

Management fees can vary based on a percentage acquired in the mix of new partner firm, acquisitions and mergers, and by the number of people that are part of the management company of each partner firm. Our non-cash equity compensation expense was approximately 1.5% of revenue for the first nine months to 2019, which remains a good proxy for the normalized expense.

Our adjusted net income was $45.6 million, 33.7% higher than the prior year quarter, and ANI per share was $0.62, a 34.8% increase for the same period reflects an acquisition momentum over the past year. As a reminder, the share count for ANI per share calculation is impacted by our quarter end share price which is used to calculate common unit equivalents for the incentive unit outstanding at the Focus LLC level. We didn't issue any equity in connection on our Q3 acquisitions, nor will be in connection with the mergers in Q4.

This quarter, we have disclosed our LTM cash flow available for capital allocation to help investors better understand the cash flow dynamics of our business. We use LTM to normalize quarterly working capital changes. This metric includes our adjusted free cash flow, plus the portion of the earn out payments included in our operating cash flow activities. See page 21 of our earnings supplement for the details. For the LTM period ended September 30th, 2019, we generated $127 million in cash flow available for capital allocation, a 38% increase year-over-year, reflecting our strong fundamentals and capex-light business model.

Our cash flow generation continue to increase substantially supported by the growth in our adjusted EBITDA over the last year. We have used our cash flow primarily to make acquisitions and to satisfy earn out obligations. In Q4, we expect to pay approximately $3 million in earn out obligations. Additionally, we will pay the final $12.5 million purchase price installment to Loring Ward in Q4. Now turning to other balance sheet items. We ended the quarter with approximately $1.28 billion in debt outstanding under our credit facilities and a net leverage ratio of 4.27 times. Our net leverage ratio increased from 4.05 times in Q2 to 4.27 times in Q3 to the acquisition of William Jones, which we believe adds significant shareholder value over time. We are comfortable with this level of net leverage in part because of the downside earnings protection we have with the preference we acquire in each transaction we do.

Since January 2017, we have generated cumulative net partner firm acquired based earnings of $117 million. While we also have a preference for the other transactions we've completed, the last two years and most relevant because the partner firms acquired during this period are typically closer to their target earnings, which provides more immediate protection against market volatility. This coverage combined with the low interest rates we are paying and the limited duration risk on our debt, given the remaining approximate five-year maturity on the term loan is considerable downside earnings and cash flow protection in the event of a market correction.

Please see page 20 of the earnings supplement which provides a sensitivity analysis on the net leverage ratio impact of a material equity market correction. We will continue to manage our capital resources carefully while maintaining sufficient flexibility to invest in the growth of our business. In summary, we've had another excellent quarter and first nine months of 2019. Our results reflect our ongoing investment in Wealth Management businesses that create a strategic competitive advantage for Focus and our partner firms. We will continue to position our partner firms to achieve scale and deliver enduring value well into the future. We will remain focused on managing our capital resources carefully to ensure a strong balance sheet to maintain sufficient flexibility to invest in the growth of our firm.

I'll now turn the call over to the operator for Q&A. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Owen Lau with Oppenheimer Company. Your line is now open.

Owen Lau -- Oppenheimer -- Analyst

Good morning and thank you for taking my questions. So first of all, thank you for the additional disclosure for the leverage target. And you talk about the gradual delivering in 2020, would you give a start delivering at the beginning of 2020. Any more color on the timing would be great. And then on slide 18, you mentioned that you focused three large firms had a three-year average revenue CAGR of over 10%. How to tie this back to slide 13, lots of good work there. So for firms at this size, what does it take to accelerate the already very strong organic growth like what you did for other firms? Thank you?

Jim Shanahan -- Chief Financial Officer

Yeah. So thanks Owen and let me take the second question first, and then I'll respond to the first question. One of our distinct competitive advantages is we are able to attract very high quality firms, a track record of doing this over a long period of time, which of course explains what we disclosed the first time. This call is 25% IRRs that we've achieving across the portfolio. These three firms and the reason we are highlighting them, they had really the biggest impact as our three largest transactions on the slightly elevated leverage ratio that that we have. And we believe they re be used. We deployed capital in outstanding opportunities. In fact, I would make the same decision again and again, because the growth trajectory of these firms just before joining Focus is excellent.

Now when you look this, so page 18 in context of page 13, what you basically see that the average portfolios when firms joined with 13.5%. The higher number versus in excess of 10%, that we are disclosing for these three firms quite frankly has a lot to do with the value-added programs that firms ultimately can participate in the moment they are joining Focus. As you can see, once firms come in and have gone through the various programs that we have, basically double their growth rates after. And it's not just M&A, it is many other factors. We mentioned the marketing programs. We are mentioning some of the other value added programs that we have that in combination to help firms dramatically increase the growth rates after they join Focus.

Owen Lau -- Oppenheimer -- Analyst

That's good and how about leverage, would you be able to?

Jim Shanahan -- Chief Financial Officer

Yeah. We reported 4.27 times this quarter Owen and the range we provided is a 3.5 to 4.5 x, this is sort of the range to help us achieve our goal with 20% revenue and 20% ANI per share growth. We're confident in these measures. We've added supplemental disclosures on slide 21 to sort of show our cash flow that were generated and what the uses are. And obviously, these have attractive growth rates and free cash flow EBITDA conversion rates. As you know, this cash flow which help us deliver and helps us acquire into the future and still remain in these leverage ranges and achieve our objectives of revenue with 20% in ANI per share of 20%. And obviously, we have a strong pipeline. And when you kind of put all these together, we will start to delever within this range over time.

Rudy Adolf -- Founder & Chief Executive Officer

It's very hard to characterize it on the quarter-by-quarter basis, because of course, it has all to do with when we actually close specific transactions. But we are comfortable that we can reach our financial objectives, while at the same time gradually deleveraging as we explained.

Owen Lau -- Oppenheimer -- Analyst

That's great. Thank you very much.

Operator

Thank you. Our next question comes from Chris Schuttler with William Blair. Your line is now open.

Chris Shutler -- William Blair

Hi, guys. Good morning. Rudy, could you talk about the competitive environment for deals you mentioned a bit in the prepared remarks, both at the partner level and for mergers. I know you're staying disciplined on price. I mean, you're clearly seeing a ton of volume out there, but just curious have there been cases, how often are there cases where your outfits or assets that you'd like to have?

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. Hi, Chris. So the competitive environment has definitely intensified, but still has the opportunity. The industry is doing more deals every quarter every year, then in prior years. And quite frankly, we have no shortage of opportunities. And when you look at this three deals that we are highlighting in this earnings announcement and any of the other deals, I would put them against just about any other asset that's in this industry. What makes us so competitive is ultimately the core value proposition that we have.

Then ultimately you run a successful well established RIA and you want to protect your culture. You want to run it in an independent way. You don't want to be part of some large monolithic entity or quite frankly, you want to have access to a long track record of value added programs, and you want access to capital. Focus is the only game in town. There's nobody else who has this value proposition, private equity, which is probably what you have -- what you're thinking of right now. They have significant increased your presence in this industry. But they are temporary capital.

So, particularly when you're operating in the ultra-high net worth space, you have to go to your clients and you ask for the approval and ultimately say, OK, can you please sign your client agreement. And by the way, in three or four years, I will be coming back, because private equity from X is going to sell me again, they will be in control of this transaction of me anymore and we'll see what will happen, very difficult to do in the high net worth and ultra high net worth space.

Similarly, intra industry consolidations and there are some usually don't have the access to capital that we have and most certainly, nobody at least claim is even close to having the track record of value added programs that we have, and the ability to multiply the growth of partner firms when they joined. So we feel very good about the market dynamics, we feel very good that we have a very sustainable positioning here in the M&A space. And obviously, as we are demonstrating, we are still paying mid to high single-digits which we believe is a clear indication of the power of our value proposition.

Chris Shutler -- William Blair

Okay, thanks. And then on the detail that you gave around the three firms that's helpful. Appreciate that. So you say over 10%, three year revenue CAGR, on average. Can you give me a sense of how much variation there wasn't there. And were each of them over 10% or what's the range?

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. So the firm's quite frankly have quite comparable growth rates. But they come in when you look over the three year timeframe. None of them were in the M&A game during that period of time. So in other words, this is simply their core business growth they of course did not have access to any of our value added programs. So we firmly believe it, yes, your leverage rate up by point five x because of the execution of these three firms, but at the same time, you have the deployed capital extremely well.

And I think importantly, we don't even believe that the risk profile of the business increased because, yes, leverage went up a little. But our preference the acquired base earnings went up by, $29.4 million, which basically gives us an excellent downside protection which of course is essentially in our business model. So we think we deployed capital extremely well into these three fast growing attractive platforms.

Chris Shutler -- William Blair

And then, lastly, just Rudy you mentioned in the prepared remarks, placing an increased emphasis on business intelligence and share best practices, can you maybe dive into those a little bit more.

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. So, we'll be talking more at the Investor Day but it is little sneak preview. Yeah with 63 part of firms over 200 billion in client assets. We have in inside into the industry that just nobody else has. And we have been investing for a while now, into a concerted effort to ultimately use this data for the advantage of our partners. So, we are rolling out a new MIS that basically provides excellent benchmarking information in terms of financials, in terms of risk metrics, in terms of portfolio allocations across partner firms that, yeah nobody else in this industry can do. And we believe that scale, our unique scale leads to better information that ultimately leads to competitive advantages. So it's just one of a number of examples that we will be discussing at the Investor Day. It speaks to how our scale is a clear, competitive advantage you to add value to our partners.

Chris Shutler -- William Blair

All right, thanks a lot.

Operator

Thank you. Our next question comes from Dan Perlin with RBC Capital Markets. Your line is now open.

Dan Perlin -- RBC -- Analyst

Thanks. Good morning. And good quarter, I wanted to just talk a little bit more about the interplay between leverage and growth for you guys. Where do you talk about flexing up a half turn to take advantage of these bigger deals? We certainly appreciate that. And you've taken the range up 3.5 to 4.5 turns. The question I guess, I really have is under the old kind of algorithm, I was thinking it was three to four times leverage get to 20 plus percent growth. You've been running it 30 plus percent growth since going public. Is there anything to kind of read into that that you're going to have to maintain slightly higher leverage in order to maintain 20%? Or should we should we just consider that a conservative benchmark and you can actually still run above that, at these leverage rates. Thanks.

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. So the 3.5 to 4.5 of course, it's simply a statement effect I mean when you look at our Q3 and our guidance for Q4 leverage. And our model allows us to meet this 20% growth targets here by operating within this range. Yeah, you're correct that our growth of course massively exceeded our 20% guidance since the IPO. And we are now showing in, in our disclosures here and where we deployed this capital which we believe we deployed extremely well. But yes, we firmly believe that within the leverage guidance we will be able to operate with the same 2020 that we indicated it at the IPO, most of the IPO now you'll be never provided above 20% guidance. Yeah, in reality is of course we've actually exceeded it. But we feel very comfortable that within the new guidance, we can meet our financial objectives. But at the same time, you're started delivering process in the first quarter of next year.

Dan Perlin -- RBC -- Analyst

Great, can you also just touch base on the international expansion? I mean, I know the acquisitions that you recently done kind of support the kind of Australia play. In the past you've talked about the UK and Canada, but I'm just trying to make sure, I frame it's a relatively small piece of business today. But it sounds like there could be some additional resources that are committed to those markets. Thanks.

Rudy Adolf -- Founder & Chief Executive Officer

Yeah, yeah. So today, you're correct. Yes, 4.4% of our revenue base is international. Having said that, we see these international markets and really Australia and Canada, first and foremost is very attractive growth, diversifiers in for us for many years to come.

We usually test our valor, test our toast with some smaller activities in these markets until we have a firm grasp and deep understanding of the dynamics. And then we scale up. And Escala, the Prime Quadrant, we announced earlier this year are examples of scaling up.

And quite frankly, with both of these firms, these are ultra high network firms, you know, we believe some of the very best in these markets. And it's really the power of our value proposition where we could offer something to these entrepreneurs that simply was not available in Australia or Canada. So we feel very good about the future prospects, you know, for these firms in these markets.

You know, as I explained before, what we offer in the states is highly differentiated versus just about anybody else. In so many ways in these markets, it's almost unheard of. They are our type of business model, which quite frankly attracts your very, very high quality firms.

So, but we will -- at the core, of course, always be a U.S, business, first and foremost. We really like the growth potential in the economics of investing in these markets and we see there many opportunities are going forward.

Dan Perlin -- RBC -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Mike Carrier with Bank of America. Your line is now open.

Mike Carrier -- Bank of America -- Analyst

Hi, this is Dean Stephen on for Mike Carrier. Just a question on the client solution offering. I know you guys mentioned modest revenue contribution from the program in the coming year. But wondering if you could just expand a little bit on what kind of interest you're seeing from both banks and clients and what kind of revenue contribution that program can maybe generate longer term. Thank you.

Rudy Adolf -- Founder & Chief Executive Officer

Yes, yes hi, Dean. So this is a very important example of how our scale enables us to create solutions that are very unique and very powerful for our partners. And first and foremost, we're doing this because it enhances our ability to support our partners with solutions they simply couldn't find anywhere else. Yeah, I mentioned before, you know, we're working on the disposables just launched but on 400 million in financing transactions, 125 million in FDIC insured deposits, which is just a small start for us.

And what first and foremost it does and we have seen this now live. Yeah, it helps our partners have a larger share of wallet of the total balance sheet of these clients. You know, there are other solutions like FX solutions and other things that we are launching that are quite frankly extremely attractive for this ultra high network client base that we have. So the economic benefit first is going to be simply a bigger share of wallet more advisory, and therefore more revenues and profitability for our partners.

Second, and we'll talk more about this is the Investor Day. Our dispense, we are not using our own balance sheet, but we have a group of things that you will be disclosing in due course. There are participants in this program, they are paying a platform fee. And this platform fees is designed to first just cover the costs of the program, we had to hire a number of professional bankers who run the program.

So it covers our expenses and over time, yes, it will be a meaningful contributor to our economics. But if it was purely breaking for the holding company, we would still do it because the number one benefit of larger share of balance sheet in better service offering to clients, in an in itself justified justify this program many times over.

Now, one thing to stress here is -- so this is a network of at least 10 to 15 banks that is coming together. And this network only works when you're relevant, you know, so, in other words, you need to operate at very significant scale to be relevant to this, if you want open architecture of banking solutions that we are introducing here, which ultimately speaks to only a player at our scale can put such a network together of banks who ultimately compete for this business for the best solution for their clients, while at the same time being relevant and attractive as a partner to these participating banks. So, we think it's a very attractive program more to discuss it Investor Day, but it's a very meaningful value added to our partners and deadlines.

Mike Carrier -- Bank of America -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Patrick O'Shaughnessy with Raymond James. Your line is now open.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Hey, good morning. So, obviously, so much about your stories about the deployment of capital for acquisitions. To that end, do you think that return on invested capital is a reasonable way for external investors to view your business and the effectiveness of your acquisition strategy?

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. Hi, Pat. We kind of discussed it in the past. We don't really think it's the best way to think about this. We disclose now the IRR, the 25%, which we think is a good measure in some ways, but return on invested capital in the IRR, it doesn't take into account the future growth rates of these businesses. So I think the real power here is, and we are demonstrating this year when you look at page 13, of -- in terms of your growth rates of firms, once they are focus and how they grow, you need to have a very clear assumption about the future growth rates to really ultimately put this into your formula, which we think is to emphasize.

We used IRR but we used it very conservative methodology in the way we calculated the IRR. So, the IRRs that we are demonstrating here, and I think it's explained in the footnote in more detail, is your first -- it's the multiple out. So we are not assuming multiple arbitrage in this formula, which is extremely conservative.

We are using our current cost of capital and current debt equity ratio for these transactions. So, in other words we are really overstating the use of equity in this transaction result in periods. And then we didn't make an assumption about future growth, because we ultimately simply looked at the cash flows that these firms have delivered to us since the start. So under these very conservative assumptions, we'll be creating extraordinarily high IRRs.

A better way, of course, would be or in a more optimistic way, would be to factor in the multiple of the holding company, which, of course, is substantially higher than the multiples that we are deploying in the currency upraises.

And quite frankly, really looking at a much higher use of debt versus what we are using in this formula. So I think just the conservative assumptions, we end up with very attractive IRRs, which was simply reflective to -- with the expertise we have built, and to track record that we have built with the 63 partner firms and of course, all the mergers that we have done on top of it.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Thanks. And then, as you noted earlier, your acquisition strategy is shifted to some extent in the last couple of years from direct partner from acquisitions to mergers executed by your partner firms. Is that just the normal ebb and flow, the M&A cycle and the deals that just kind of come to market, or is that part of a deliberate strategy? And if so is that related to the fact that it tends -- your partner firm mergers tend to be at lower multiples than the direct acquisitions?

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. So it's very much a deliberate strategy. When you look at page 15 of the supplement, you see the total number of transactions here 34, year-to-date, and six partner firms, and three core reasons why we prefer mergers, one, it's an essential part of our value proposition in our partners join us. And, whenever, we have the opportunity to backdoor a new opportunity to one of our partners, it's our preference because it helps them. It helps us. It validates an important part of our value proposition. And yeah, it's our preferred outcome.

Second, mergers are more immediately accretive because of consolidation benefits. Yes, many transactions, here you have all the obvious consolidation benefits that you would expect, which is your office consolidations, overhead, maybes cross-sell, pricing changes or other things here that you would see in a merger, but you wouldn't seen in a holding company transaction. So, yes, the economics are compelling, on the merger side.

Three, it's very much the dynamics of the industry. This is an industry with $17,000 RIAs and most of them are small businesses. And we have this, what I believe, very powerful business model, where we can ultimately find solutions for just about any firm in this industry that is -- that's a good job for their clients that have good economic model and ultimately have built a sustainable business.

So having now 63 partner firms, more than half of them are platforms, meaning are able to do M&A transactions, speaks to the very strengths of our business model and through the uniqueness that we have in this industry. And so, it really speaks to the strength of what we have built here.

So, yes, on balance, yeah, whenever we can do a merger that's our preference versus a holding company deal. But then of course, the flip side, your when you look at the three firms that we highlighted on this earnings call. These, of course, are very robust, large platforms themselves or will be platforms themselves, and would not have been a merger candidates for any of our other partner firms.

Mike Carrier -- Bank of America -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Kyle Voigt with KBW. Your line is now open.

Kyle Voigt -- KBW -- Analyst

Hi. Good morning. Maybe a couple maybe for Jim. I mean, more on the on capex, it looks like that's increased pretty meaningfully over the past few quarters, just wondering what initiative or investment that's related to specifically. And then also, just wondering if you expect this level of investment to persist into next year as well?

Jim Shanahan -- Chief Financial Officer

Yes. Thanks, Kyle. As I mentioned on the last call, we moved our corporate headquarters in New York in July. And so, the capex costs were sort of elevated in the Q2 and Q3 timeframe is as we did that, that build out. And then they'll sort of normalize down to more historic levels, starting in Q4 forward.

Kyle Voigt -- KBW -- Analyst

Got it. It's really helpful.

Jim Shanahan -- Chief Financial Officer

Yeah. Just generally our model is extremely capex light. It was just this one time event, really for corporate headquarters, which is now under a very long term lease.

Kyle Voigt -- KBW -- Analyst

Understood. And then also just a question on, I guess, the slide for uses of capital into next year. There's going to be cash earn-outs of 60-plus-million, which seems like a very high number relative to what you've seen over kind of the last 12 months or the last couple years. Just wondering, kind of, what's causing that? Is it just -- is it a timing issue? Is it going to continue to increase on a go forward basis, just given the deals that you've completed, maybe three years prior and that continuing to build? Just wondering, can you give some more clarity there?

Jim Shanahan -- Chief Financial Officer

Yeah. Let me maybe respond first. So, we love to pay these, because they ultimately mean the businesses that we are investing in are doing exactly what we expected them to, as these earn-outs are based on performance criteria that these firms need to make. So it's -- quite frankly, it's first and foremost a reflection of the terrific deal velocity that we have over the last number of years.

And, this can be client retention criteria, it can be gross criteria. Usually our earn-out structure, as we explained this over a six year period, most cases there's a first three-year and then there's a second three-year period. And it, quite frankly, speaks simply to the high quality of partner firms, that we are bringing into the partnership.

So there will always be a deferral mechanism. Do you rather want to pay 6x here for a transaction or 4x plus 1x plus 1x linked to certain performance criteria. It's one of the many techniques that we are using, which really aligns here the interest of our partners with the interest of the holding company. And, you know, so -- we like to pay this because it means we are doing excellent deals.

Rudy Adolf -- Founder & Chief Executive Officer

Yeah. And I think, you know, from a numeric perspective, Kyle, you know, you can go to note 7 of the financial which is, is a GAAP Monte Carlo concept, present value of all the earn outs, which at 9/30 was 159.7 million. But that's based on a lot of assumptions over a very long time cycle. So to, you know, enhance the visibility, you know, we have this new disclosure, on the cash flow available for capital allocation. And well, it's hard to have a crystal ball beyond, you know, a year. We wanted to give some disclosure clearly, you know, sort of for the next 12 months where somebody uses of cash will be used. And obviously, we have this 60 plus million earn out obligation. And then some other installments, the final one on Loring Ward and some term loan amortization.

Kyle Voigt -- KBW -- Analyst

All right. Thank you. And then just on that new metrics that you are providing in that cash flow metric. Just a question on the cash flow statement, I guess, that we're for looking at kind of changes in working capital, you know, year-to-date. I think it's negative 15 million or so I think last year it was, you know, negative 32 million or something like that. I was wondering why it seems like it's been a persistent theme for a number of years. There's just a, there's some working capital changes that are drawing down some cash, is that just due to billing methodology or could just provide some clarity there?

Rudy Adolf -- Founder & Chief Executive Officer

Yeah, thanks. So, you know, firms that sort of bill in arrears, you build up your receivables so that would be a drain on working capital. It's not a negative for the business, then you have that change, you know, quarter over quarter. You know, the management fees that we pay, you know, we pay them out on a monthly basis, then there's a hold back that gets paid out generally in Q2 of each year. Then, you know, if you think about bonuses across the partnership, people generally get paid year end bonuses in Q4. So it's those type of things that can trigger working capital changes on a quarter to quarter basis. So therefore, to normalize for that we did a disclosure of last 12 months as of 9/30. So you can kind of cut through these quarterly fluctuations.

Kyle Voigt -- KBW -- Analyst

Got it. Okay. Thank you.

Operator

Thank you. I'm not showing any further questions at this time. I now turn the call back to Rudy for his concluding remarks.

Rudy Adolf -- Founder & Chief Executive Officer

So thank you all for your interest. And in closing, I cannot emphasize here enough the power of our differentiated model. We continue to extend our track record, as we demonstrated in this quarter. We increased our market share and drive revenue and earnings growth at industry leading levels. We have build an excellent portfolio of firms as evidenced by the three firms we did it, we spent more time on this call. And we believe that network of similar size and scale and quality simply cannot be replicated.

Since our IPO we have demonstrated extraordinary growth in all key dimensions exceeding all the guidances that we provided. And, importantly, every time a new partner joins Focus it adds expertise and scale to our group. But also, it's a validation, you know of our business model that we firmly believe is boarding well for a strong future.

So thank you for your interest and we look forward to speaking with you again at our Investor Day in November 20.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Rusty McGranahan -- General Counsel

Rudy Adolf -- Founder & Chief Executive Officer

Jim Shanahan -- Chief Financial Officer

Owen Lau -- Oppenheimer -- Analyst

Chris Shutler -- William Blair

Dan Perlin -- RBC -- Analyst

Mike Carrier -- Bank of America -- Analyst

Patrick O'Shaughnessy -- Raymond James -- Analyst

Kyle Voigt -- KBW -- Analyst

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