Last week, there was news about a fast-growing Vancouver-based wealth manager getting a “9-figure equity investment” from a large American private equity firm. The deal was done at an apparent valuation that caused many eyebrows on Bay Street to cock. I hate when that happens.
Harbourfront Wealth, a manager of about $6 billion in mostly retail money, announced a financing with Audax. The deal resulted in Harbourfront's parent company reaching $425m in enterprise value, it is claimed. Not bad for a firm founded in 2013. Founder Danny Popescu owned more than 50%, maybe as much as 72% of the firm according to regulatory filings that pre-date this financing.
You ask: “You’re probably going to find a way to s*** on this deal, aren’t you?” Listen, first, don’t blame the weatherman for the rain. Second, watch your language. The $425m EV is against AUA of $4b and AUM of $2b. That implies an EV/AUM+A of 7% - which is off-the-charts. This hasn’t been seen in Canada even for an outright acquisition by a strategic buyer. The average over the past 10 years has been around 1.3%. Wellington West got acquired by National Bank at 2.9% of assets - that’s as good as it gets. Richardson GMP was acquired in 2020 for 1.6%.
Harbourfront founder and CEO Danny Popescu pushes the envelope further, telling highly gullible blog The Globe, that he’s aiming for $15b in assets in 5 years, resulting in a valuation of $1.5b - implying a 10% metric. I don’t know how much credence to put into that, considering that he was telling another publication only in May that his 5 year target was $2b in EV. Harbourfront also claims that its “business formula is disrupting the independent investment dealer space”. But in one instance we found, it has managed to lose client money in a pretty conventional way. A private debt fund-of-fund managed by Harbourfront’s brain trust had about $100m (or 20% of assets) in Bridging Finance funds. And get this: as of December 31st, 2021, several months after most everyone knew the magnitude of the losses there, that fund still has not marked down its holdings in Bridging. And the fund’s auditors, the venerable KPMG, seems fine with that! If you want to read that story, make sure you have selected the "Private debt funds" topic when you subscribe.
Harbourfront boasts that it has “perhaps the strongest profit margins” in the industry. Some of this comes at the expense of the interest of clients. For example, one private debt fund of fund I have reviewed charges as high as 2.38% management fees, plus 20% performance fees and then there are the fees of the underlying funds to consider. And there may be other fee considerations I am overlooking, I am not an expert on how advisors work. And all that for income products, that in my view, would be lucky to deliver 8% annualized over a cycle. That 8% would likely be taxed as income. How much does that leave for the client? That, by the way, is the product that invested in Bridging Finance.
Harbourfront boasts in literature intended for recruiting advisors about being a pioneer in “retail friendly private securities” and that “every Harbourfront client can access these investments regardless of their accreditation, with no dealer-imposed caps on portfolio weighting.” By the way, that is no circumvention of “accredited investor” laws. In Canada, someone with a $5k net worth is considered an accredited investor as long as their account is managed by a registered advisor with discretionary authority. And Harbourfront definitely has retail clients, in theory, it has no minimum account size.
Given all this, I had to take a deep dive into the company and I regret to inform you that I have now re-emerged covered in horsecrap. I am initiating on founder Danny Popescu with a rating of 80 Kevin O’Leary units. This is a scale I invented to quantify activities I deem distasteful. So Kevin O’Leary would be at 100 KOL units. Bernie Madoff would be at 1k KOL units. Pol Pot would be at 7 trillion billion KOL units. Warren Buffett would be at something like 2 KOL units - no one is perfectly saintly.
This is how Danny Popescu, CFP, CIM, FMA, FCSI’s official bio opens:
In November 2011, Danny and his partners sold their investment firm to a bank owned investment dealer for $333 million CAD. Bored thereafter, he decided to do it again and founded the Harbourfront Group of Companies…
This makes him sound like a baller, doesn’t it? That’s the impression I got as well, until I started digging. Here are some facts:
- Firstly, I have to wonder: did this “investment firm” he exited have a name? It did! It was Wellington West - founded in 1993 by Charlie Spiring. Danny joined nearly 15 years later, in January 2008. That's 3.5 years before the firm was sold to National Bank. He joined from Investors Group, where he was also a financial advisor.
- Danny appears to have had a book of about $235m around the time of the sale. Contrast that with a firm that had $10.6B AUA at the time of sale in addition to a solid investment bank operation that had done 235 financings in the 2 years leading up to the sale. The firm had annual revenues approaching $200m - not far from the size of Danny’s entire book.
- The “bored” part of his bio’s opening line leads you to think that he had nothing to do but playing golf and counting his millions. In actual fact, between the sale and right up to Harbourfront’s founding, Danny was an advisor with National Bank.
- In 2008, which is the year Danny joined Wellington West, National Bank bought a first stake of 12.5% in his new employer. That transaction valued Wellington at $287m. And so in the approximate 3 years Danny was at Wellington, its valuation grew on the order of 16%. Revenue growth was of the same order. Wellington West actually posted a loss in its last full year prior to acquisition - it was a tough time for boutique dealers in Canada. Do you really think these circumstances would have resulted in a windfall payoff for someone with Danny’s short tenure?
- By the time National Bank bid for the whole firm, it already owned 18%. That reduced the actual payout to “partners” to $273m. And that $273m figure incorporates Wellington West having $74m in excess cash on its balance sheet.
- While it’s true that Danny was a “partner”, Charlie Spiring has said there were 665 other “partners” at the time of the sale. Danny’s official title was “Senior Vice-President”. Anyone who knows anything about these firms knows such titles are meaningless puffery. There were 31 people described as “senior employees and directors” who collectively owned 60% of the firm.
- Now, at the risk of beating a dead horse, founder Charlie Spiring has said elsewhere that his venture created somewhere between 50 to 100 millionaires. That’s a lot of slices of the pie isn’t it? How much does that leave for Danny-come-lately?
- There was an approximate $200k retention package per broker if they stuck around for 3 to 5 years with National Bank. Any individual broker is not worth THAT much. In actual fact, Danny stayed at the bank for 2 years.
Now here’s that opening line again, so you can appreciate how much horsecrap it is:
In November 2011, Danny and his partners sold their investment firm to a bank owned investment dealer for $333 million CAD. Bored thereafter, he decided to do it again and founded the Harbourfront Group of Companies
Pretty weird that he says November 2011, when the transaction actually closed in July 2011. The real misleading part is where he says: “he decided to do it again and founded Harbourfront…”, implying he’s some sort of made man who has founded and exited before. It’s horsecrap. Danny is much less bombastic in the bio he uses in his fund prospectus - because those have the ol’ “full, true and plain disclosure” rule. There, he simply says he was a part owner of Wellington West. I therefore would take anything Danny says with a grain of salt.
Here’s another line from his bio that’s a head-scratcher:
Danny has delivered over 300 lectures which include joint speaking engagements with Kevin O’Leary from CBC’s Dragon’s Den, industry professionals and other entrepreneurs.
Why Kevin O’Leary? Is it because Bernie Madoff was unavailable? Who in their right mind would associate themselves with Kevin O’Leary? I give this a rating of 300 KOL units for complete obliviousness.
Who’s the audience for whom Danny bigs himself up? It’s primarily for advisors he is hoping to recruit. An upstart like Harbourfront is in a race to build scale, so it must attract advisors away from more established firms. A key part of the lure is the potential of equity an advisor recruit might get in the business.
I could not readily find anyone major at Harbourfront who I would regard as an “investing mind”. Now, I would say “investment minds” are heavily devalued these days, but you absolutely need one to avoid trailing the S&P 500 by more than 2-4%. Most financial advisors are sales-oriented and Danny is right of that mould. Danny studied at Brock University, whose official motto is “If you can walk and talk, come study at Brock”. The meaninglessness of where someone studied is one of the biggest assumptions I had to change in adjusting to the “real world”. For example, very smart people have gone to Guelph. In Montreal, many successful people went to Concordia, whose official motto is “The K stands for Quality.” But it's one hint I considered in trying to form an overall picture. I don’t know what he studied or if he graduated, his profile is silent on that. And then, spending 8 years at IG as he did doesn’t scream “deep investment intellectual” either.
Danny might be a very good salesman and a good talker, which is certainly one form of intelligence. I reviewed one employment lawsuit, which Harbourfront won, where he refers to an employee (justifiably in that context, in my view) as “obliviously optimistic”. I thought that was funny.
I do attribute part of the success to the way I’m wired. My personality might have to do with genetics or whatever. I’m probably more fortunate than a lot of people that I’ve been given this talent to do a lot with my brain and my career, and it’s just nice to give back when you’ve got the means and the infrastructure.
- Danny Popescu
Consistent with his agile use of words, Danny calls himself a “philanthropist” in his bio. Again, that’s a vague word - I could hand a $10 bill to a homeless person and call myself a humanitarian. On his LinkedIn profile, he mentions The Popescu Family Foundation, being active from 2007 to 2019. Between the years 2007 and 2016, the foundation shows virtually no activity, so I don’t even know what the purpose was. The records I have for the years 2017 to 2019 show that the foundation of Mr. “$333m Exit” made $6,650 in donations over those three years. Should I call the Nobel Prize committee?
Danny did have one very successful exit that was all his doing in February of this year, selling his West Vancouver mansion for $15m. The property was bought for $3.5m in 2011 and extensively rebuilt. Congrats for his exquisite timing. I wonder if he’s upgrading or downgrading for his next residence. But I wonder even more: will the clients also have mansions one day? Harbourfront’s transaction with Audax, includes a strong element of insiders cashing in - $30m of dividends for existing shareholders. I can’t help but feel that this might also prove to be quite fortuitous timing. Given Harbourfront's very high allocation to private securities (at least 25%, perhaps even higher), they will likely feel any market reckoning with some lag.
I leave you with another gem of a quote from alternative assets maestro Danny Popescu from a few weeks ago:
Popescu noted that Harbourfront clients also had a small fraction of the decline that equity markets have seen because 25 per cent of their portfolios are allocated to private securities, which are negatively correlated to public markets. “Those securities have been growing every month, despite the fact that public markets have gone the other way,” he said.
I feel someone is being “obliviously optimistic”.