June 7, 2010

LPL Financial's IPO: Behind the Numbers

Unique model could be promising; there's some debt and questions, as for all firms, about the effect of regulatory reform

LPL Investment Holdings Inc., registered with the SEC for an initial public offering (IPO), on June 4, nearly five years after the firm sold about 60% of itself to two private equity investors.

Nearly five years ago, when LPL monetized its owners' stakes by selling a majority interest (about 60% at the time) to private equity firms Hellman & Friedman LLC and TPG Capital, the long-term plan was to eventually go public. At that point, the deal valued the firm at $2.5 billion. Since then there have been a series of acquisitions, lifting the number of advisors to about 12,000 financial advisors who are broker/dealer representatives, investment advisors and insurance agents--often, all three. Plus the firm says it provides "support to over 4,000 additional financial advisors who are affiliated and licensed with insurance companies," making it one of the largest distributors of investment and insurance products in the U.S. "Since 2000, we have grown our net revenues at a 15% compound annual growth rate (CAGR)," according to LPL's preliminary prospectus.

Like a wirehouse, the firm's distribution capability is immense, but unlike a wirehouse, the firm does no investment banking, "product manufacturing, underwriting or market making." LPL states that "revenue stems from diverse sources, including commission and advisory fees as well as fees from product manufacturers, recordkeeping and cash sweep balances." With the kind of distribution the firm commands, revenues from manufacturers for product shelf space could be substantial.

The firm's filing looks like it will raise about $600 million. They list debt at $1.4 billion. As of March 31 their debt-to-asset ratio for the quarter was 42%.

The company has moved to secure and lengthen the term of some of its debt to bring down the overall cost of the debt--retiring $550 million in unsecured 10.75% debt due in 2015, and replacing it with a lower, variable rate senior tranche of $550 million due in 2017. "This transaction resulted in the reduction in our overall weighted average cost of interest. In addition, we extended the maturity of $500.0 million of our original term loan tranche to 2015 (the remaining balance of $317.1 million will mature on the original maturity date in 2013) and achieved greater flexibility to pay down our indebtedness in the future without penalty."

The company cautions about the debt in the risk section of the filing: "Our level of indebtedness could increase our vulnerability to general adverse economic and industry conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes."

And in 2009, 55.6% of the firm's revenues from product sales came from variable and fixed annuities. There is the risk that regulatory reform changes could affect the way annuities are sold changing the way the firm's revenues from product sales are generated.

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