Max Verstappen may have clinched his fourth Drivers Championship in Formula 1 last weekend in Las Vegas, but the big winner in F1 this year may be the McLaren team, which leads in the Constructors Championship.  McLaren’s performance undoubtedly contributed to the company’s recent acquisition by CYVN Holdings, an investment firm based in Abu Dhabi.  Surprisingly, the deal comes less than a year after McLaren was acquired by Bahrain’s sovereign wealth fund.

Abu Dhabi has been on a buying spree, announcing this week that their sovereign wealth fund was acquiring CI Financial, taking it private just over a year after a Bain-led consortium invested US$1 billion in the publicly traded investment management firm.  We suspect the terms of the Bain deal formed the predicate to this week’s announcement.  It’s noteworthy that Abu Dhabi was also heavily involved in that recapitalization.

Mubadala Capital is an asset management arm of the Abu Dhabi sovereign wealth fund and has offered to acquire CI Financial for C$32 per share, about a 33% premium to where the stock (CIX.TO) closed last Friday.  CI Financial encompasses a Canadian asset, wealth, and custody platform and a U.S. wealth management platform.  Including debt, the offer values CI at C$12.1 billion, of which consideration for equity totals C$4.7 billion (US$3.4 billion).

These pricing metrics are remarkable in that they’re really not remarkable.

CI reported adjusted EBITDA for the quarter ended September 30, 2024, of C$270 million.  AUM at 9/30 was C$518 billion.  Given market movement since 9/30, we estimate current AUM to be north of C$550 billion and run rate adjusted EBITDA of more than C$1.2 billion.  This would imply the acquisition pricing represents about 2.2% of AUM and about 10x EBITDA.  These pricing metrics are remarkable in that they’re really not remarkable.

The CEO of CI Financial, Kurt MacAlpine, complained in the past about the market undervaluing his stock.  I wonder how he feels about the deal pricing.  MacAlpine and other top executives are reportedly rolling their equity into the new structure.  So, while public shareholders are being asked to accept the offer and sell, management is taking another road.  Hmm…

I have a few thoughts:

• Although the equity consideration represents a 33% premium to the closing price per share before the announcement, on a total consideration basis, the premium is closer to 10%. That’s the math of a highly leveraged company.  Highly leveraged because of CI’s acquisition binge.
• What we don’t know about the multiples is the underlying pricing rationale for Corient (the U.S. Wealth Management subsidiary) versus, say, the Canadian asset management unit. It’s highly possible that the deal valued the wealth management business at a mid-teens multiple and assigned a lower multiple to the asset management business.  But that’s speculation, not analysis.
• The Bain-led consortium invested US$1 billion in a byzantine structure that essentially gave them the greater of 20% of the equity or a 14.5% PIK. The trade press at the time erroneously claimed the investment valued CI’s equity at more than US$5 billion.  As we wrote then, the proof’s in the pudding, and we wondered if several years of PIK would end up handing the whole company to the consortium.  That’s essentially what happened.
• At the time of the US$1 billion investment, CI Financial’s management maintained that beating the PIK rate would be easy for Corient. Since then, very favorable markets have helped, but we note that year-over-year EBITDA (Q3 2023 v Q3 2024) only increased about 24%.  Better than the PIK, but what would have happened in normal markets?
• Looks like Bain and their teammates will be opting to get their PIK return instead of a 20% conversion of equity. Since ADIA is essentially on both sides of this transaction, it’s academic anyway.
• Public markets are still unsupportive of investment management platforms. CI was not without its problems, but it’s nonetheless surprising that a going private transaction in the space could be accomplished so cheaply.  If no other PE shop steps in now to up the ante, well, the market will have spoken.
  

  Without public equity support, leverage is dangerous.

• Without public equity support, leverage is dangerous. Pay too much, lose control of your balance sheet, and you’ll eventually lose control of your company.
• MacAlpine maintained, for better than a year, that CI planned to take the U.S. wealth management business public. We were politely skeptical that the IPO window would ever open for a new RIA play.
• To the extent that other consolidators are thinking about a public exit, this news can’t be encouraging. A senior insider at one of them told me recently he expects multiple-contraction and long-term private ownership, with several PE firms side-by-side in support of larger platforms.  That forecast looks pretty credible to me.

Perhaps most importantly, the deal suggests that scale in the investment management business isn’t the panacea that many would have you believe.  If we could look into the offers made for many of the wealth management firms acquired by CI/Corient, we might not see the multiple arbitrage that is often cited as central to the RIA roll-up thesis.

But, with this recap, CI/Corient lives to fight another day.  McLaren earned its recap with Grand Prix wins and great cars.  CI got there with bravado and borrowing.  Now, Abu Dhabi has stepped up to provide capital to make the best of both organizations.  For that, we can be thankful.