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Focus Financial Partners Inc (FOCS) Q2 2019 Earnings Call Transcript

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Focus Financial Partners Inc (NASDAQ: FOCS)
Q2 2019 Earnings Call
Aug 8, 2019, 8:30 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 Second 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].

Now I would like to turn the call to Mr McGranahan, you may begin.

Rusty McGranahan -- General Counsel

Good morning, everyone. Before we get started, 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 an 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. 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?

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Thanks, Rusty. Good morning everyone and thank you for joining our call. We appreciate your interest in Focus. This past months we marked the first anniversary of our IPO. We've been very pleased with the level of investor interest in focus as we continue our evolution as a public company. As part of the development today, I will discuss some expanded disclosures related to the growth, so far partner firms. I'll also, discuss our financial leverage and our current views on the growth of our business which we hope will be helpful to your understanding of our unique model.

Now turning to our results, we had an excellent second quarter, and first half of 2019 characterized by the strong performance of our partner firms, and access to highly attractive opportunities to deploy our capital. For both periods, our business generated year-over-year growth in excess of 30% for revenues and adjusted net income per share, well above our stated in annual targets of 20% for each. This was our 5th quarter reporting as a public company and in each of these quarters, we achieved revenue and adjusted net income per share year-over-year growth in excess of 30%.

Our value proposition continues to resonate with wealth managers and our momentum is excellent. We are a Company with a real combination of high growth, high operating cash flow generation in substantial downside protection of our earnings. We participate in a multi-trillion dollar industry, that is experiencing rapid secular growth in consolidation. We have significant beneficiary and driver of this evolution because we have the advantage of a long-standing track record in excess to inexpensive debt capital as well as industry leading M&A expertise and the benefits of scale.

We believe, we have established a unique position in this market with an enviable partnership of firms. I can't emphasize enough the power of our differentiated model. Our business creates sustainable shareholder value in two ways. The first is the accelerated growth time to scale that our firm has achieved through our M&A expertise and by enhancing the businesses through our value-added services. The second is the growth we obtained through the acquisition of new firms, taking advantage of the large and fragmented market to execute attractive deals.

We estimated that our year-to-date aggregate transactions are accretive in the low-double digits on a proforma adjusted earnings per share basis. On the acquisition side, we are capitalizing on the most attractive parts of the industry. We focus on buying larger, high-quality wealth management firms primarily [Indecipherable] as these firms are the best positioned to become platforms for growth, well above industry averages.

We focus on those serving ultra-high and high net worth clients, because of our ability to add value to the businesses, they are attractive client retention dynamics and the potential for future growth.

Our pipeline is robust but not at the expense of being selective in the firms we acquire. The only pursuit transactions that accretive to deal specific return hurdles or that meet a strategic need. You're not simply aggregating a collection of assets or solving succession planning issues. We are acquiring and partnering with firms who we believe will win the consolidation race, and become national and super regional leaders with revenue platform of $50 million or more. These are firms that would create enduring value well into the future.

We typically pay mid to high single-digit multiples for both new partners and merchants. This is in exchange for allowing our firms to operate independently post acquisition and to take advantage of our intellectual capital, M&A expertise and industry network. That continued operational independence never turning entrepreneurs into employees and the ongoing freedom to growing their own vision are exceptionally important to the firms we acquire. Once we acquire partner firm, we create value by enhancing its business and positioning it for accelerated growth. Speed to scale is a critical element of that. Through our value-added services, we position our firms with the infrastructure and scale to grow through M&A.

We make sure they have the appropriate technology infrastructure, depth of talent, incentive structures and other elements to build the scale needed to support high growth. We then help with sourcing and structuring merger opportunities and ensuring that those merchants are integrated effectively. On average and over time, growth via mergers has more than doubled our partners' revenue growth rates compared to what they could achieve with our mergers. Our from stone stop growing of the anarchically once they start to engage in M&A but if the pipeline for merger prospects were too slow, our firms have the ability to expand their businesses some more traditional means. However partner firms who rely on M&A versus traditional asset gathering have transformed their business is by accelerating their growth. Growth via mergers enables our firms to efficiently monetize large pools of client assets and client leads as well as add exceptional advisor talent on an accelerated basis rather in building their businesses a client or advice at the time. This is it powerful value proposition.

Let me put some numbers to the statement which you will find we kept in our earning supplement on page eight. We have outlined the aggregate revenue CAGRS of the 46 partner firms that have been with us for two years or more is of June 30th so that we have a minimum of one full year of growth [Indecipherable] we then divided the firms between those who have completed mergers and those that have not since joining us. We believe that this approach represents an accurate picture of growth because it includes the largest number of firms over the longest period and thus is less subject to business or market driven distortion. We look at revenues rather than assets under management because our non-correlated revenues which represent nearly one-third of our overall revenues are not asset based.

So revenues are the most relevant measure. Using this framework, nearly 60% of the 46 firms have completed mergers. As of June 30th, this group delivered a weighted average revenue CAGR of over 15% including market since joining Focus and have been with us where weighted average period of seven years. We're using weighted averages to adjust for the size of our firms. The remaining 40% of the 46 firms, if not yet completed the merger. They have delivered a weighted average revenue CAGR of 7% including markets since joining Focus and have been with us for a weighted average period of four years. The entire portfolio of 46 firms has delivered a weighted average revenue CAGR of over 13% since joining Focus. The other important dynamic at play that influences these growth rates is scale as our firm scale their businesses, they are revenue growth rates accelerate. We have an excellent portfolio firms relative to the industry and we continue to build on that but being highly selective in the additional firms that we acquire. Our most recent new partner firm Williams Jones is a good example.

Year-to-date through August date we have closed 30 transactions, including 6 direct acquisitions and 24 mergers. In aggregate, we have already exceeded our 2018 full-year deal volume and our second half transactional momentum remains strong. We are the largest acquirer in the market and believe we have a competitive advantage because of our unique model. We have significant runway ahead of us for further expanding our business and we are well positioned to pursue the opportunities that we see.

Before turning the call over to Jim, I want to take a moment to address our acquisition strategy and its impact on leverage. As we appreciate that our comments on issuing equity together with our recent term loan upsizing may have resulted in some questions. Our IPO further raised our visibility and credibility within the wealth management industry leading to a far greater number of opportunities than the initially anticipated. This includes some of the larger deals in our history, including [Indecipherable] and Williams Jones we are capitalizing on these transactions because we believe they are important additions to our business. They represent substantial future growth potential and diversification benefits for our portfolio of partner firms in turn creating attractive incremental value for our shareholders.

Given these unprecedented opportunities, we believe that the benefits of pursuing them outweigh the drawbacks of increasing our leverage above [Indecipherable]. We are comfortable with this higher leverage because of the structure of our model including the preference we take on the earnings of each from the acquire., our high level of fee-based and recurring revenues and the fact that one of our largest expenses management fees which are variable and tied to the performance of our firms. However, we are not acquiring simply for the sake of accelerated growth. We invest the operating cash flow that we generate into the growth of our business but to the extent there are less attractive opportunities in the market, we will use that cash flow to delever. We have always operated our business this way.

We recently raised capital under our term loan to give us the flexibility to continue to capitalize on compelling acquisitions but we remain highly opportunistic and selective. As such, we don't plan to issue equity in the near term unless it is in connection with specific transactions that would be accretive to our adjusted net income per share. We will continue to pursue an acquisition strategy that is based on generating growth and value over the long term.

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

James Shanahan -- Chief Financial Officer

Thanks Rudi and good morning everyone. First a quick reminder on the format of our financial presentation. The financial statements and other GAAP disclosures contained in our press release include the results of Focus Financial Partners Inc, which is the public company and those of Focus Financial Partners LLC, of which focus Financial Partners Inc. became the management member and owner of the majority of the outstanding membership interest on July 30th, 2018. In connection with our IPO.

We had an excellent second quarter and first half of 2019. Our business is generating growth well above our stated annual targets of 20% for revenues and adjusted net income or ANI per share. Supported in the quarter by 18% year-over-year organic revenue growth.

Our revenues increased 30.3% year-over-year and our ANI per share grew 37.5%. This is our fifth quarter reporting as a public company and in each of these quarters, we have achieved year-over-year revenue and ANI per share growth in excess of 30%.

Now a quick recap of the quarter which highlighted our strong growth and momentum. Total revenues for Q2 2019 were $301.5 million, an increase of 70.1 million or 30.3% over the prior year quarter. Approximately 28.6 million of this growth resulted from eight new partner from acquisitions that closed during the 12 months ended June 30th.

Wealth management fees were the primary driver of that revenue growth. Our fee-based and recurring revenues remains in excess of 95% of our total revenues. As such an important differentiator of our business is that we earned virtually all of our revenues from fee-based and recurring sources. Our firms serve ultra high and high net worth clients with holistic wealth management service driven rather than benchmark driven models. They use a full suite of services that go well beyond just investment advice because of the complexity of these interactions, they present much secure client relationships that is typical for the wealth management industry as a whole.

Approximately 70% of our revenues for Q2 were correlated to the financial markets, both equity and fixed income, of which 70% were generated from advanced billings. The remaining 30% of our revenues came from sources not correlated with the markets. These allocations highlight a second important differentiator of our business which to the embedded hedges in our revenue stream that limit our exposure to the markets. Our non-correlated revenues service a hedge against market volatility as through the varied methodologies and timing of the billing practices is used by our firms.

Additionally, ultra-high net worth and high net worth clients tend to be conservative investors from whom capital preservation is more important than beating a benchmark, which serves as a further hedge particularly against equity market volatility.

As I mentioned earlier, our Q2 organic revenue growth was 18% year-over-year on a substantially larger revenue base. This rate was positively impacted by the merger activity of our firms. We have completed 27 mergers since July 1, 2018, the largest of which was Loren Ward into Buckingham which within of itself. Contributed $12.8 million of revenue in Q2, 2019. Over the last ten quarters, our average quarterly organic revenue growth rate was 13.4%. Based on our visibility due to the advanced billing by our firms, we expect another strong quarter of organic revenue growth in Q3 with a year-over-year growth rate in excess of 15%. While our organic growth rate can vary quarter-to-quarter based on the timing of when we complete transactions, the levels we are achieving both quarterly and on a trailing basis demonstrates the sustainability of our business.

Our adjusted EBITDA was $63 million for the quarter increasing 21.3% year-over-year. Annual acquired based earnings for our two new partner firms Scala and SoundView which closed at the beginning of the quarter was approximately 6.7 million. These firms contributed approximately 1.9 million of adjusted EBITDA and $7.3 million in revenue for Q2, 2019.

Our M&A velocity, continue to be strong in the second quarter and which we added the two new partner firms I just mentioned and closed nine mergers. On August 1, we closed the acquisition of William Jones, which we estimate will contribute approximately 42 million in annual revenues and 16.5 million in acquired based earnings or approximately $7 million in revenue and $2.7 million in EBITDA in Q3.

Year-to-date through August 8, acquired based earnings for the six partner firms we closed were $35.1 million. We also closed 24 mergers of which nine were in the second quarter and six to date in the third quarter. We don't anticipate any additional new partner from closings in Q3. The 24 mergers, we completed were done on behalf of 14 partner firms and half of these firms were executing in their first merger.

Our adjusted EBITDA margin for the quarter was 20.9% in line with our 21% EBITDA margin guidance. While we are in this period of rapid growth our adjusted EBITDA margin will continue to be influenced by the percentage of EBITDA we acquire. Accordingly, we cannot provide full year guidance but we estimate that our EBITDA margin will be approximately 21% in Q3. Management fees which is one of our largest operating expenses increased sequentially by $22.2 million and also as a percentage of revenues due to the growth of the business and the associated impact on the contractual management fee calculations. Management fees can vary based on the percentage acquired and mix a new partner from 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 1.6% of revenue for the first half of 2019 which is a good proxy for the normalized expense. Our GAAP net income was $3.1 million in the quarter compared to a net loss of $7.7 million in the second quarter of 2018. Our adjusted net income was $41.2 million, 42.1% higher than the prior year quarter, reflecting the acquisition activity completed over the past-year as well as strong organic revenue growth and the net reduction in interest expense primarily related to the repayment of our $207 million second lien term loan in July 2018.

ANI per share was $0.55, 37.5% higher year-over-year. As a reminder, the share count for our ANI per share calculations is impacted by our quarter-end share price which is used to calculate common unit equivalence for the incentive units outstanding at the Focus LLC level. We didn't issue any equity in connection with our Q2 acquisitions and we don't anticipate doing so for our Q3 acquisition activity.

Lastly, while we operate in a capex like business model, our capital expenditures were slightly elevated in Q2 primarily due to the relocation of our New York headquarters in late July. We look forward to hosting our first ever Investor Day on November 20 in our new location.

Now turning to other balance sheet items. We ended the quarter with approximately $1.1 billion in debt outstanding under our credit facilities and net leverage ratio of 4.05 times. At the end of July, we closed on an incremental 350 million of borrowings on our existence term loan and pay down our revolver balance to reset our dry powder for M&A activity. The offer was oversubscribed and we closed that 99.75 demonstrating the strong demand for our debt. As already discussed the visibility created by our IPO led to unprecedented opportunities we've seen over the last year. As a result, our top and bottom line growth have each spend in excess of 30% for the last five quarters. To sustain growth at these levels requires a higher leverage level than what is required to meet our 2020 targets. While we carefully and prudently manage our use of leverage, we're comfortable with a higher level than we initially anticipated because of our high level of fee-based and recurring revenues, our variable expense Space and our preference, which will provide meaningful downside protection in the event of market volatility. In aggregate, these factors would limit the high adverse effect of a market decline on our EBITDA and therefore our leverage. For example, at our Q2 market correlated revenues declined by 10%. Our Q2 reported net leverage would have only increased by 0.1 times, at our Q2 market correlated revenues declined by 20%, our Q2 reported net leverage would have only increased by 0.2 times. Except for management fees which are tied to the profitability of our partner firms these analysis hold all other revenues and expenses constant.

Our Q2 2019 compensation costs were approximately $106 million and SG&A expenses was approximately $60 million. In the event of a prolonged downturn, our partner firms would adjust their cost basis accordingly. Equally important is that, if we see less attractive M&A opportunities, we would instead use our operating cash flow to repay debt and delever. This is incur control to why we say that our 2020 growth targets are averages over time. The growth of our business is not solely dependent on acquisitions. The performance of our portfolio is a key driver of our long-term growth, the multiplier effect of the growth of our firms is evident in the revenue CAGRs Rudy shared with you earlier, especially for those firms to accelerate their growth through M&A.

We remain focused on allocating our capital efficiently. While we routinely evaluate our sources of capital as our business and market conditions evolve, we continue to carefully evaluate the deals, we do to ensure that we have the right balance between leverage and growth.

Now I'll turn the call back to Rudy for his concluding remarks. Rudy?

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Thanks, Jim. In closing, we are proud of the growth and value our business is generating. Our success is driven by the fact that, at its core Focus role in this industry first benefits are partners clients by ensuring continuity of high quality advice. Second benefits our partners in mix generation advisors by protecting and enhancing their business models and culture and third is highly attractive from a shareholder perspective. As such, we are excited about the future of our business and believe that we are well positioned to deliver superior shareholder value over the long term.

I would like to thank our employees and partners for their hard work and dedication this quarter. Our business would not be where it is today without you.

With that, we'll now open the call for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions]. And our first question is from the line of Mike Carrier with Bank of America.

Mike Carrier -- Bank of America -- Analyst

Hi, good morning and thanks for taking the questions. Maybe first question, Jim, just on the balance sheet and leverage just given the level of activity that you guys have seen on the M&A front, given that you're slightly over that 4 times level, first Is there any timing items that may impact that meaning deals that have been announced either that you expect the EBITDA to flow through going forward? And then if we continue to be in an environment where the M&A opportunities remain as attractive as they have been this year, is there any level that you guys are uncomfortable in terms of in terms of running at?

James Shanahan -- Chief Financial Officer

Yes. So thanks for the question, Mike. So yes, in Q3 we closed some mergers there in the supplement that we've provided, we also closed in August the William Jones transaction which was $16.5 million of acquired based earnings. Just touch on a couple of points, our guidance was growing 20% revenue in ANI per share based on the profitability of the business and the excellent opportunities that we've seen since the IPO we've been growing 30% revenue and 30% ANI and certainly over the last five quarters based on public reporting.

Yes, we're over 4 times we're very prudent and how we look at our transactions to ensure that they are accretive. We look at great deals like William Jones which is just closed on August 1. We continue to evaluate the leverage. We made structural at all on the leverage to include these accretive deals which are in the best interests of our shareholders in the long term. And obviously we generate a lot of operating cash flow as you can see in the financials, we included a slide in 2018. It was over 105 million on an LTM basis $124 million and those cash flows help us support the M&A pipeline as well as if they're not accretive deals in the pipeline, then we would use the cash flow to help us delever.

Mike Carrier -- Bank of America -- Analyst

Okay, that's helpful. And then maybe just on given like the level of deal activity both on the acquisition side, on the merger side, you guys mentioned like the number of deals being up I think about 20% year-over-year, but any other color in terms of like the types of deals like earnings contribution. I mean, any even mix in terms of like the ownership? Just do we have some context on the type of deals that you guys are seeing in the market?

James Shanahan -- Chief Financial Officer

Right. So we just in terms of new partner firms I just went through Scala a great firm probably and SoundView on the closed in Q2, these firms at 6.7 and acquired base earnings, they contribute about $7.3 million in revenue in Q2 and 1.9 in EBITDA. William Jones is a large transaction we just closed this current quarter, we gave guidance on that, will contribute about $7 million of revenue and 2.7 of EBITDA this quarter and on a estimated full basis $42 million of revenue in 16.5 of acquired based earnings. Year-to-date, the six new partners that we close contributed $35.1 million in base earnings

Rusty McGranahan -- General Counsel

Mike Moore from a qualitative perspective, we basically executing on the various strategy that we started with and quite frankly we ourselves, we're surprised by our ability to grow way above guidance since the IPO. And you've seen the numbers and these are absolutely quality firms that fit into our portfolio and it all comes down to and I mentioned it in my remarks, due to the essence of our value proposition because there is a certain type of firms it get attracted by the independence and entrepreneurship that get attracted by the our ability to add value to them over time and of course the ongoing access to capital and we couldn't be more pleased with the pipeline which has been unfolding so far this year and quite frankly we feel very good about the rest of the year and early days but how we will be entering next year.

Mike Carrier -- Bank of America -- Analyst

Okay, thanks a lot.

Operator

Thank you. Our next question is from Alex Blostein with Goldman Sachs.

Alex Blostein -- Analyst

Great. Hi, good morning everybody. How are you? So back to the deal dynamics, it really clearly sounds like the pipeline is very strong. We have see that from you guys over the last several quarters now, leverage keeps coming up, I know you're saying you're comfortable staying above for and you guys gave us some helpful stats in the slide deck with respect to market sensitivity but I guess is 4 plus is kind of the new 3 to 4? It just seems like given the pipeline it's to execute on that you guys are going to need to continue to remain a little more levered than what we've talked about in the past and how are you guys thinking about alternative funding source this and increase the deal momentum continues. So kind of maybe help us walk through that dynamic?

Rusty McGranahan -- General Counsel

Yes Alex, as Jim just mentioned we're very comfortable where we are. And of course, the reason we disclosed in page 12 of the supplement sensitivity to different market scenarios here particularly as it relates to the 0.1-0.2 dynamics that we show on the page here. We feel that we are in a good spot. And in a very much sustainable spot. Clearly, we generate a lot of cash flow and we have two ways to this deployed into next level of transactions or into delevering and what we are seeing now is basically the success of the business model. When we grow at 30% and more as we have demonstrated now since the IPO, what it is, is it's the momentum that gives us more opportunity to deploy capital or by staying what we believe is still a prudent and well managed leverage ratio but yes, it is higher than the 3 to 4 that we originally anticipated. Assuming that we have a 20% growth rate only.

Alex Blostein -- Analyst

Only and I guess just thoughts around any alternative funding sources to delever since it doesn't sound like you guys are willing to kind of slow down the pace of M&A?

Rusty McGranahan -- General Counsel

Yes, well, we obviously see it's a function of the opportunity that we seen in various transactions. Having said that, we don't have current imminent plans here to issue equity. As we explained last time, we own only issuing equity in the context of specific set of transaction or transactions where we have a clear understanding that this is accretive ultimately from a shareholder perspective. So unless we see this type of opportunities here we are going to stay where we are today, but of course, if we see some of these type of transactions we would be willing to tap into the equity markets assuring that this is still accretive from a shareholder perspective.

Alex Blostein -- Analyst

Got it, thanks. And then, just another question around maybe an update on Buckingham and Loring Ward and kind of how that integration is going, maybe give us a sense of kind of the where they are with respect to synergies you outlined in prior calls, kind of how do you expect the accretion from that transaction to evolve through the rest of the year? Thanks.

Rusty McGranahan -- General Counsel

Yes so Loring Ward is very much on target with the numbers that we disclosed in terms of 50 million in revenues and they are working with the over 300 RIAs. So it's tracking along as expected. We are not expecting to see any more charges because the level one synergies has been accomplished in terms of your headcount changes and others here which we have seen in earlier earnings announcements. But it's, of course early days, there is much more opportunity in terms of migrating the portfolio over into the core of Buckingham business and there are clearly more opportunities on the integration side. So we are pleased with where it is today, but much more work ahead but everything is consistent with our prior guidance here on this subject.

Alex Blostein -- Analyst

Great, thank you.

Operator

Thank you. And our next question is from Chris Shutler with William Blair.

Andrew Nicholas -- William Blair & Company -- Analyst

Hi, good morning. This is actually Andrew Nicholas on for Chris. To the first two quarters of the year, I think you completed 18 tuck-in deals which is more than any full year prior. And then I think you've already added in our six through halfway through the third quarter here. So I was just hoping if you could talk about the pacing of tuck-in deals, specifically what about the current environment is so conducive to those types of deals and it's that's something you expect to continue that type of pace through the remainder of this year and into next?

Rusty McGranahan -- General Counsel

Yes, it's obviously very difficult to predict the actual closing on a quarterly basis of deals that they can move around and consistent with the past year Q4, we will probably see much less activity than throughout the year, 30 deals year-to-date versus 25 deals full year last year is of course a tremendous accomplishment and we like the mix here, because these mergers as we explain, they are a big part of our value-added two partners. These are very attractive deals typically. And it's very much at the core of what we have seen, why the activity so high? Because, first we have simply more platform, here we have more firms that are now ready to do merger transactions and you have the infrastructure and capabilities and events through our various value added programs to the necessary to be really qualified to do mergers. Second, the market is very, very attractive and it comes back to, as I mentioned before, to the power of our value proposition where our model, we firmly believe and the results are demonstrating. It is simply superior to the monolithic one size fits all models that are really seem to be dominating some parts of this industry. And so we feel very good about the rest of the year and we feel it's just -- every time we do a deal, every time we do a deal, it's a reaffirmation of our value proposition and that obviously is very powerful step in our evolution.

Andrew Nicholas -- William Blair & Company -- Analyst

Great, thank you. That's helpful and then changing gears a little bit last quarter you talked about the rollout of your focus client solutions offering just hoping you could provide an update on how that's going and what kind of traction you are seeing among your partner firms?

Rusty McGranahan -- General Counsel

Yes, absolutely. So when we announced that FCS launched, we were very clear that it will not have meaningful financial impact on 2019 but in future years, it is going to be a contributor to our organic growth, we actually really like where we are. At this point, we are working, the team is working on literally 50 transactions involving 20 of our partner firms and so in very meaningful transaction. So clearly day initial uptick interest most importantly simply a value-added to our clients who are partners clients seems to be very well received.

We are signing up banks, the interest from the banking side is also very high because here what we can offer these things when they join our FCS network, it's ultimately did get access. It's very attractive economics to a quality in diversification of client base that quite frankly, they just couldn't get any other way. So, it's great for our clients, it's good for our partners and it provides a very attractive channel for thinking institutions who are working with us on this program. So, so far so good.

Andrew Nicholas -- William Blair & Company -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Kyle Voigt with KBW.

Kyle Voigt -- KBW. -- Analyst

Hi, good morning. Maybe a couple of,-- a couple of follow-ups. The first is just on on equity consideration that you said you would use equity, you wouldn't use equity near term unless it was accretive to earnings. I guess just to clarify that with the deal have to be immediately accretive to earnings or accretive year one year two? How you're thinking about that and and secondarily at your current stock price, would the deals that you've executed over the past quarter or two, would those have been accretive that you use only equity consideration. Just trying to get a sense of using equity is kind of a viable option at your current share price.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Yes. so our first on the, on equity, our equity philosophy. As we've said in the IPO our deals will be primarily all cash and we have consistently applied this.And yes there is a very good reason for us to use equity. And we have used equity in the low-end transaction as an example. But I think that's the only example where we used equity recently. From an economics perspective if it all goes basically into the formula and of course we fixed during the current multiples that we're trading at but keep in mind that we would run it against the performa of the first year to basically assess the accretion of the transaction. We usually pay mid to high single digits which of course is an important source of our value-added and then as we have explained in the past when you look through what we acquire the multiple state we pay, the tax shield and of the overall economics of the transactions, these are very attractive still based on where we are trading today.

Kyle Voigt -- KBW. -- Analyst

Okay, thanks. And just, just a follow-up. I know there's been a couple of questions on this already, but I'm going to just try a different way, but just on your ability to delever quickly and you have strong recurring revenues I think investors understand that, but I guess going forward, how should investors think about kind of an absolute max on where you're willing to take leverage before you'd want to hit the pause button on acquisition activity or switched to equity consideration for new acquisitions, I think, is it 5 times or 4.5, is there any clarity you can provide there?

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Yes. So, to your first point, this business is extremely cash generative, you'll see it on page 12.15 supplement our cash, cash flow generation in the last 12 months Q2 is somewhere $24 million and so that's something we either deployed back into the next level of transactions where we used to delever, we announced in the last earnings here that we will be above Q4. We are very comfortably above 4 and given the quality of the revenue and the dynamics that we are explaining in the supplement on page 12, we don't have an absolute number that we are running the business again. As I said, we are comfortable where we are today but we make these trade off decisions between growth, this 30% plus that we have delivered since the IPO and leverage on then there to give on the transaction-by-transaction basis and I think we're in a very good spot where we are now.

Kyle Voigt -- KBW. -- Analyst

And just in terms of 3Q. In terms of the deals that we have been announced or you expect to actually close in 3Q, any guidance as to where that leverage could go in the third quarter specifically.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

We don't provide specific revenue guidance. You see it on page 9 of the supplement, we have done already 9 transactions for Q3. One of them the direct transaction Williams Jones deal we are very proud of and we think is going to be a fantastic addition to the team. But now we are not providing any specific guidance to the deleverage in Q3 but as I said we are very comfortable with where we are today.

Kyle Voigt -- KBW. -- Analyst

Okay,And then last from me and I'll hop back in the queue is just on the competitive dynamics in the industry, are you finding more competition for these deals more recently or the acquisition prices moving higher, nudging higher at all just you kind of talk about the competitive dynamics for the deals that you're closing. Thank you.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

The competitive environment for what we do quite frankly continues to be pretty much unchanged in any material way and this goes to our value proposition. We firmly believe if you're running a successful ROA and you want to keep your culture, you want to keep doing the run the business the way you do as an entrepreneur for many years but you see true value in the value added programs the Focus has a long track record now of deploying on behalf of our partners and you see access to our capital is a very attractive component. Quite frankly we firmly believe we are the only game in town. There is nobody else that who basically can offer this value proposition, you can get swallowed up by some mega institution, you can join in monolithic platform, we are basically the culture and the way of doing business disappears, you may get private equity involved which really ultimately mean significant loss of control in particular, a private equity per definition is temporary capital versus Focus being a permanent capital. So in other words, this thing will be on the block again, which would be clean the ultra high net worth basis market is very unattractive. So if this is what you value as a prospect, your focus is unique and we don't really see much competition around this. So we continue to be, as we said in the IPO mid to high single-digit form the firms that we acquire almost independent of size and basically is just a reaffirmation that was real proposition I described, it's very, very attractive in the marketplace.

Kyle Voigt -- KBW. -- Analyst

Thank you.

Operator

Thank you and our next question is from Owen Lau with Oppenheimer.

Owen Lau -- Oppenheimer

Good morning and thank you for taking my questions. So on slide 8, what are the things you can do or are doing to facilitate those 19 firms that have not make they have complete a merger to start making acquisitions to accelerate growth.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Yeah. So thanks for this, for going to pay trade, because this is we believe a very important disclosure that we decided to make ends, but of course it shows is that firms who join us and there is no simple buyers nothing in year does this basically the full universe of 46 firms who were with us for two years -- for more than 2 years and is very attractive. 7% for firms with other merger of 15.4% with mergers. We believe this really speaks to the exceptional quality of our portfolio. It ultimately enables us to create this very, very attractive growth rates. Firms when they join us not for all of them, but for many probably most of them doing mergers is one reason to join Focus. That is where we are highly differentiated in the marketplace and most firms when they join us do not have the ability to do mergers yet. The infrastructure is not scalable enough, the processes are not quite where they need to be, incentive systems need to get adjusted. So there is a lot all of work where our new partners into us roll up sleeves and kind of keep them in a position to be ready to do these transactions. And one firms are qualified, that's when we basically with our partners to develop in M&A strategy for them, and then create an outreach program to ultimately help this execution of the strategy. Usually -I mean, probably my guess it's 2/3 oil firms to join us, generated through the execution of this M&A program, one-thirds are just existing relationships with partners have and that they are ready to consummate once they join us.

So we expect, not all but most of our partner firms ultimately will be in the M&A game. And that is simply a function of this tremendous consolidating forces in this industry 17,000 RIA managing $5 trillion in assets and you're founding owners 60 years plus. So there is just an enormous level of transition into generational transferring the ownership and control of this companies and our partners and Focus is just tremendously well positioned to take advantage of these forces.

James Shanahan -- Chief Financial Officer

Yes, and just supplement that Owen, obviously it's the partners decision to enter the M&A world we can't force that decision obviously but many partners join us to accelerate their growth. As I mentioned earlier, we are very optimist about 24 transaction mergers that we've done year-to-date by 14 firms of were 7 of them, it was our first time doing an M&A transactions. So they had built up the infrastructure worked with us on all the value add and now they are migrating from the merger world to the accelerated growth for out with some merger -- that are very accretive.

Owen Lau -- Oppenheimer

Okay. I think that's very helpful. Then how about comp ratio? So comp ratio was a little bit lower than the same quarter last year and also last quarter but management fees ratio was higher, what was the driver for of that? Is it because you acquire less economics from the partner firms most recently and how should we think about these two line items going forward. Thank you.

James Shanahan -- Chief Financial Officer

Right. So compensation expense went from $97.2 million up to $100 million, so as a percentage and went down 4% obviously when you look from Q1 to Q2 going from approximately $260 million to $301 million, there was a 16% sequential increase in the revenue line. So that was a contributor as well as the 9 mergers. As I said before in the past, it's a functional where people reside as they reside in the operating companies of our partners and they join international company. So as an example in Q2 Scala joined us, they have over 20 partners and they're in the management company. So that's an item where we drive management fees going up but didn't necessarily drive compensation because they're not operating the company.

Owen Lau -- Oppenheimer

Okay, thank you very much.

Operator

Thank you. And our next question is from Dan Perlin with RBC .

Dan Perlin

Thanks, good morning guys. Jim, can you help us, there are a lot of transactions here, you had debt financing. Can you just help us where you stand today in terms of your debt capacity or what your first kind of your drive powder?

James Shanahan -- Chief Financial Officer

Yes, so our term offering was very well received and which is why we upsized it when you look at the, the way you did the transaction closed, it's just tremendous reaffirmation that is very attractive and so we moved it up to 350. Our total capacity now is roughly about close to EUR500 million with the new facility in place.

Dan Perlin

that's 500 million post all these transactions include in August 1st?

James Shanahan -- Chief Financial Officer

Right.

Dan Perlin

Okay. And then the other question I have around capacity Rudy is really your management team's capacity, you've you've clearly run much faster on these deals, year-to-date that clearly draws a lot of your team's attention to these partners, and so I'm just wondering how do you feel about your team's capacity in order to sustain running at 30% plus growth rates?

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Yes. So of course very important question. In focus always has been a heavily recruiting organization and we are constantly bringing in new talent, particularly on the M&A and relationship management side. We have created a whole new layer of talent that joined us -- they started to join us in the last 12 months which are Vice President, managing directors who are running the regions. Quite frankly, by two co-founders Virginia and Blania , they are very deeply involved with your constant talent acquisition and then bringing these exceptional people into our organization and training them and bringing them up to get the standards that we have at Focus. In many ways, our regional structure into pyramid org structures within these regions, we make our model tremendously scalable. As long as we are constantly on this talent recruiting path and we constantly used a very high standards that we are applying, quite frankly this organization is extremely scalable. But this is a core competence, recruiting on boarding talent is a core competence that we need to sustain in the 20% growth rates and most certainly the 30% plus growth rates that we have demonstrated since the IPO.

Dan Perlin

Great, The 3rd quarter call out for organic growth greater than 15%, you just posted 18 which is incredibly strong number. I'm just wondering is there any reason kind all else equal, when we look at the timing of these deals kind of all rolling in, the mergers as opposed to partner firms that that's not sustainable to also carry into the 4th quarter or is there something else that would require that level of organic growth to be supported in the 4th quarter.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Yes and let me point you to the supplement where we kind of showing the the quarterly organic growth numbers. It's on page 7. So Intrinsically this quarterly organic growth numbers of course are relatively volatile and 18%, of course not sustainable over a period of long period of time that wouldn't, I think more important is the, I mean, if you look at the trailing 10 quarters, did we are showing here, it was we are low double-digits 13.4%. In the IPO process and subsequently we always guided toward 20% overall growth and roughly half plus-minus would be coming from the same store.

So it's much as I thought the investor community totally overreacted when it was only 7.7 in the first quarter. We also not saying that they should over reacts to the 18%. Our guidance of plus-minus 10% holds, we are very comfortable with this and we thought by explaining or by providing a guidance into the third quarter with 15% here. We give you enough of the tools to kind of model it. But overall, of course, we believe is a tremendous numbers. We are very proud of the in average and over time organic same-store growth to be generating?

James Shanahan -- Chief Financial Officer

Yes, and it's just [Speech Overlap] methodologies gives us a lot of visibility as well as the fee-based recurring revenue. So that's why we provided the guidance in excess of 15% for Q3, which is, -- which is strong in relation to the 10-quarter average, so we disclosed on the slide of 13.4%. But we're not providing guidance into Q4 at this point.

Dan Perlin

Understood. I just one quick one and I'll jump. The EBITDA margin guidance here also roughly 21%. Can you just remind me the year in your kind of degradation in margin, what was the, just kind of reconciling items to give me to that? Thanks.

James Shanahan -- Chief Financial Officer

Right. So remember, the primary driver of the EBITDA margin is a percentage acquired, we've done a lot of transaction activity and based on the current status of the firms who have about 63 partner firms today. They have a very different range of economic splits which is generally in the 40% to 60%, and based on the baseline of the business today we're forecasts in Q3 to be 21% as well.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

We did 21%, it is very consistent risk, kind of what we see, over the cycle. But again, we need to keep in mind this is an organization that's going 20%- 30% a year and during this ---- excellent growth stage, you're basically, it's really the M&A activity that the first and foremost influences this margin from an EBITDA perspective. So the 20 plus minus 21 we'll hire a little lower, it's a very good way to think about this business for a very good period of time.

James Shanahan -- Chief Financial Officer

Yes, I think the focus should be on the revenue and adjusted net income per share. The current run rate of the business, which is based on the current portfolio of partner firms today as opposed to looking back in time.

Dan Perlin

Understood. Thank you.

Operator

Thank you. And I'm not showing any further questions in the queue, I would like to turn the call back to Rudy Adolf for his final remarks.

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

Yes. So again, thank you everybody for listening in. Thank you for your interest in Focus. We firmly believe that we are again demonstrating the enormous growth and earnings power that this business has and I'm very much looking forward to seeing you all on our next quarterly call. Bye, Bye.

Operator

[Operator Closing Remarks].

Duration: 63 minutes

Call participants:

Rusty McGranahan -- General Counsel

Ruediger Adolf -- Founder, Chief Executive Officer and Chairman

James Shanahan -- Chief Financial Officer

Mike Carrier -- Bank of America -- Analyst

Alex Blostein -- Analyst

Andrew Nicholas -- William Blair & Company -- Analyst

Kyle Voigt -- KBW. -- Analyst

Owen Lau -- Oppenheimer

Dan Perlin

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