LPL Financial Services, one of the country's largest independent brokerage firms, has filed for an IPO to raise as much as $600 million. The lead underwriters on the deal include Goldman Sachs (GS) and Morgan Stanley (MS).
Five years ago, LPL Financial took advantage of the private equity boom and sold a majority stake to Hellman & Friedman and TPG Capital. But realizing the future growth opportunities, the founders and employees retained a 40% interest.
Now LPL is getting ready for the next phase. With the IPO proceeds, LPL plans to pay down its $1.4 billion debt load. Also, there will be sales of shares from existing holders (the amounts have yet to be disclosed).
A Powerful Business Model
LPL got its start in 1989 with the merger of two small brokerage firms, Linsco and Private Ledger. The company's vision was unique and powerful: to provide financial advisors with a way to set up an independent operation, such as through product support, administration, technologies, compliance services and investment research. Because of the economies of scale, LPL could also offer larger commission payouts. The rates are often 80% to 90%, instead of the typical 30% to 50%.
All in all, LPL's powerful business model has resulted in strong growth. For example, the company's advisor base has gone from 3,569 in 2000 to 12,026 for this year. This amounts to a compound annual growth rate of 14%. In fact, LPL has increased its annual adjusted EBITDA for the past nine years, with only two years of revenue declines (2001 and 2009, which were during particularly tough periods). It helps that the company has a diverse and recurring revenue stream. Furthermore, the cost structure is highly variable and the capital costs are fairly low.
Growth Likely to Continue
LPL is likely to continue to grow for the long haul. In the first quarter, the company posted a 16% increase in revenues to $743.4 million, with net income up 73%.
However, the recent market volatility could mute things over the new few quarters, which could make it harder for a public offering. At the same time, other major private-equity deals will be hitting the market during the second half of this year, including HCA, Toys "R" Us, NXP Semiconductors and Nielsen Holdings. In other words, the LPL offering will certainly face some headwinds.
Introduction to Value Investing
Are you the next Warren Buffett?View Course »