The “secret sauce” of Harbourfront Wealth smells strongly of horsecrap.
A large American private equity firm made a “9-figure equity investment” in a fast-growing Vancouver-based wealth manager last week. The transaction was completed at an apparent valuation that raised many eyebrows on Bay Street. I despise it when that happens.
Harbourfront Wealth, a $6 billion manager of mostly retail money, announced a financing with Audax. According to reports, the transaction increased the parent company’s enterprise value to $425 million. Not bad for a company that was founded in 2013. According to regulatory filings that predated this financing, Founder Danny Popescu owned more than 50%, possibly as much as 72% of the company.
“Aren’t you going to find a way to screw up this deal”, you enquire? First and foremost, don’t blame the rain on the weatherman. Second, watch your language. The $425m EV compares to a $4 billion AUA and a $2 billion AUM. That implies an EV/AUM+A of 7%, which is extremely high.
Even for an outright acquisition by a strategic buyer, this has not been seen in Canada. The average over the past 10 years has been around 1.3%. Wellington West was acquired by National Bank for 2.9% of its assets – that’s the best it gets. Richardson GMP was purchased for 1.6% in 2020.
Harbourfront founder and CEO Mr. 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’m not sure how much weight to give that, given that he told another publication only in May that his five-year EV target was $2 billion. Harbourfront also claims that its “business formula” is disrupting the independent investment dealer space.
However, in one case, it managed to lose client money in a fairly conventional manner. A private debt fund-of-funds managed by Harbourfront’s brain trust contained approximately $100 million (or 20% of assets) in Bridging Finance funds. And, get this: as of December 31st, 2021, several months after most everyone was aware of the magnitude of the losses in Bridging, that fund had not reduced its holdings in Bridging. And the fund’s auditors, the venerable KPMG, appear to be okay with it! If you want to read that story, make sure you subscribe with the “Private debt funds” topic selected.
Harbourfront claims to have “possibly the strongest profit margins” in the industry. Some of this comes at the expense of clients’ interests. For example, one private debt fund I reviewed charged as much as 2.38% in management fees, plus 20% in performance fees, not to mention the fees of the underlying funds. And there could be other fee considerations I’m missing because I’m not an expert on how advisors work.
All of this for income products that, in my opinion, are lucky to deliver 8% annualised over a cycle. That 8% would almost certainly be taxed as income. How much is left over for the client? That, by the way, is the product in which Bridging Finance invested.
In recruiting materials, Harbourfront brags about being a pioneer in “retail friendly private securities” and that “every Harbourfront client can access these investments regardless of accreditation, with no dealer-imposed caps on portfolio weighting.” That, by the way, is not a violation of “accredited investor” laws. Someone with a net worth of $5,000 in Canada is considered an accredited investor if their account is managed by a registered advisor with discretionary authority. And, while Harbourfront does have retail clients, there is no minimum account size.
Given all of this, I had no choice but to dive deep into the company, and I regret to inform you that I have now emerged covered in horsecrap. I’m starting with founder Mr. Popescu and a rating of 80 Kevin O’Leary units. This is a scale I devised to quantify activities that I find repulsive. So Kevin O’Leary has 100 KOL units. Bernie Madoff would have a thousand KOL units. Pol Pot’s value would be 7 trillion billion KOL units. Warren Buffett would be somewhere around 2 KOL units – no one is perfect.
The official biography of Danny Popescu, CFP, CIM, FMA, FCSI begins as follows:
Mr. Popescu and his partners sold their investment firm to a bank-owned investment dealer for $333 million CAD in November 2011. After becoming bored, he decided to do it again and established the Harbourfront Group of Companies.
Doesn’t this make him sound like a baller? That was my first impression as well, until I started digging. Here are some statistics:
- First and foremost, I’m curious: did the “investment firm” he left have a name? It did! Charlie Spiring established Wellington West in 1993. Mr. Popescu joined in January 2008, nearly 15 years later. That was 3.5 years before National Bank bought the company. He came from Investors Group, where he also worked as a financial advisor.
- Danny Popescu appears to have had a book of approximately $235 million at the time of the sale. Compare that to a firm that had $10.6 billion in AUA at the time of sale, as well as a solid investment bank operation that had completed 235 financings in the two years preceding the sale.
- The company’s annual revenue was close to $200 million, which was roughly the size of Danny’s entire book.
- The word “bored” in his bio’s first line makes you think he spent his days playing golf and counting his millions. In fact, DannyPopescu was a National Bank advisor between the sale and the establishment of Harbourfront.
- In 2008, the year Danny Popescu joined Wellington West, National Bank purchased a 12.5% stake in his new employer. Wellington was valued at $287 million in that transaction. And so in the approximate 3 years Danny was at Wellington, its valuation grew on the order of 16%.
- Revenue growth was comparable. Wellington West actually lost money in its last full year before being acquired – it was a difficult time for boutique dealers in Canada. Do you honestly believe that these circumstances would have resulted in a windfall payoff for someone with Danny’s brief tenure?
- National Bank already owned 18% of the company when it made its bid for the entire company. The actual payout to “partners” was reduced to $273 million as a result. And that $273 million figure includes Wellington West’s $74 million in excess cash on its balance sheet.
While Danny was a “partner,” Charlie Spiring stated that 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 companies understands that such titles are meaningless puffery. There were 31 “senior employees and directors” who collectively owned 60% of the company.
At the risk of rehashing old ground, founder Charlie Spiring has stated elsewhere that his venture created between 50 and 100 millionaires. That’s a lot of pie slices, isn’t it? How much room is there for Danny-come-lately?
If a broker stayed with National Bank for 3 to 5 years, they received a $200k retention package. A single broker is not worth THAT much. Danny actually worked at the bank for two years.
Here’s the opening line again, so you can see how much nonsense it is:
Danny and his partners sold their investment firm to a bank-owned investment dealer for $333 million CAD in November 2011. After becoming bored, he decided to try it again and established the Harbourfront Group of Companies.
Pretty weird that he says November 2011, when the transaction actually closed in July 2011. The real deception comes when he says, “he decided to do it again and founded Harbourfront…”, implying he’s some sort of made man who has previously founded and exited businesses. It’s nonsense. Danny’s bio in his fund prospectus is much less bombastic, owing to the “full, true, and plain disclosure” rule. He simply states that he was a part owner of Wellington West. As a result, I’d take anything Danny says with a grain of salt.
Another perplexing passage from his biography:
Danny Popescu has given over 300 lectures, including joint appearances on CBC’s Dragon’s Den with Kevin O’Leary, industry professionals, and other entrepreneurs.
Why was Kevin O’Leary chosen? Is it because Bernie Madoff was unable to appear? Who in their right mind would associate themselves with Kevin O’Leary? For complete obliviousness, I give this 300 KOL units.
Who is the audience for whom Danny brags? It’s primarily for the advisors he’s looking to hire. An upstart like Harbourfront is competing for scale, so it must lure advisors away from larger firms. The possibility of equity in the business for an advisor recruit is a key part of the allure.
I could not readily find anyone major at Harbourfront who I would regard as a “investing mind”. Now, I would argue that “investment minds” are overpriced these days, but you absolutely need one to avoid falling behind the S&P 500 by more than 2-4%. Most financial advisors are sales-oriented, and Danny Popescu is no exception.
Danny Popescu studied at Brock University, whose official motto is “If you can walk and talk, come study at Brock”. One of the most important assumptions I had to change when adjusting to the “real world” was the meaninglessness of where someone studied. Very smart people, for example, have gone to Guelph. Many successful Montrealers attended Concordia, whose official motto is “The K stands for Quality.”
However, it is one of the hints I considered when attempting to form an overall picture. I’m not sure what he studied or if he graduated; his profile is devoid of information. And spending 8 years at IG doesn’t scream “deep investment intellectual” either.
Danny Popescu may be a very good salesman and talker, which is one type of intelligence. I reviewed one employment lawsuit, which Harbourfront won, in which he refers to an employee as “obviously optimistic” (justifiably in that context, in my opinion). That was amusing to me.
“Part of my success can be attributed to the way I’m wired. My personality could be influenced by genetics or other factors. I’m probably more fortunate than many people in that I’ve been given the ability to do a lot with my brain and my career, and it’s always nice to give back when you have the means and the infrastructure.“- Danny Popescu
In his bio, Danny Popescu refers to himself as a “philanthropist,” which is consistent with his quick use of words. Again, that’s a broad term; I could hand a homeless person a $10 bill and call myself a humanitarian. He mentions The Popescu Family Foundation on his LinkedIn profile, which was active from 2007 to 2019. Between 2007 and 2016, the foundation shows almost no activity, so I’m not sure what the purpose was. According to the records I have for the years 2017 to 2019, the foundation of Mr. “$333m Exit” received $6,650 in donations during those three years. Should I contact the Nobel Committee?
Danny did have one very successful exit this year, selling his West Vancouver mansion for $15 million on his own. In 2011, the property was purchased for $3.5 million and extensively rebuilt. Congratulations on his impeccable timing. I’m curious if he’s upgrading or downgrading for his next home. But I have another question: will the clients one day have mansions as well?
The Harbourfront-Audax transaction includes a significant amount of insider cashing in – $30 million in dividends for existing shareholders. I can’t help but think that this is also quite fortuitous timing. Given Harbourfront’s high allocation to private securities (at least 25%, possibly higher), any market reckoning will almost certainly be delayed.
I’ll leave you with another gem of a quote from Danny Popescu, the master of alternative assets, from a few weeks ago:
Popescu noted that Harbourfront clients experienced only a small portion of the equity market decline because 25% of their portfolios are allocated to private securities, which are negatively correlated with public markets. “Those securities have been growing month after month, despite the fact that public markets have gone in the opposite direction,” he said.
Someone is being “obviously optimistic,” in my opinion.
