I’m officially bored with talk about advice firm takeovers. Every day I feel like there’s some new consolidator launching or a deal being struck. Unfortunately, there are good reasons to believe we’ll be enduring such stories for a while yet.
Given the pace of acquisitions over the past few years, some have predicted a significant slowdown in buyouts. Planners who want to sell up will have already. Those with money to spend will have already bought them. Or so the argument goes.
But I beg to differ.
One investment banker tells me that while deals in other sectors had slumped since the pandemic, wealth management was still one bright spot for his business. Another acquisitions consultant told me mid-last year, when broader M&A and listings were in the depth of their rut, that they were still busy. They would say that, of course. Yet there are good reasons to believe they are telling the truth. Every entry demands an exit. Most buyout shops don’t have a time horizon of more than five years. The first wave of private equity backers have reached a point where they now want to cash out on their gains.
Take US private equity firm FTV Capital, which bought into True Potential in 2016. Five years later and Cinven rides in to take a majority stake. Reports last year suggested Cinven is now eyeing its own disposal. The likes of Wren Sterling, which had a couple of billion in management until an injection from Lightyear Capital in 2021, has taken on hundreds of millions through acquisitions since. There was no shortage of interest before it opted for private equity investment either; a person familiar with the situation tells me at least four bidders were circling Wren Sterling at the time.
If it’s good enough for accountants…
As more big names in professional services show their willingness to put their ownership into the hands of private capital after Grant Thornton and Baker Tilly sold up – private equity houses could soon own a third of the top accounting firms in the US, with least four groups in the midst of sale talks, according to the Financial Times – the general buzz will make others towards the top end of the wealth market sit up and take note too.
Since everyone started seriously talking about this a handful of years ago, the pendulum has only shifted further towards consolidation. The Consumer Duty does make life a touch harder, in particular for small and mid-size advisers. The spending needed to keep up to date with technology has grown. Advisers now have to worry much more about issues like cybersecurity and operational risk. Academies are great at bringing new blood into the profession, but they can’t magic up planners experienced enough to take over a retiring adviser’s book overnight.
Yes, average valuations have dipped from 4x recurring income two years ago to 3.3x now, according to Gunner & Co. But this is more of a reflection of quite how hot markets were running during the pandemic, rather than a fundamental contraction in appetite for takeovers.
Yes, the Financial Conduct Authority is paying more attention to issues like ongoing servicing, which speaks to how clients are integrated in the wake of consolidation. But that is not enough in itself to put off potential acquirers; the model must keep building scale to pay off the cost of previous deals, or it collapses in on itself. Interest rates are on the way back down, reducing acquirers’ debt burdens. Macroeconomic conditions are stabilising. Stock markets are less volatile than when geopolitical crises burst into the open. That’s all good news for those thinking about pulling the trigger on a purchase or a sale.
Commoditisation
The commoditisation of fund offerings has forced wealth managers, some with significant advice propositions, to come together too — see Raymond James’s purchase of Charles Stanley, Rathbones’ tie-up with Investec Wealth & Investment and Royal Bank of Canada’s deal for Brewin Dolphin. Where the biggest lead, others will surely follow. All of the evidence shows the UK wealth space is still highly fragmented, but also growing. A March report by Global Data found “single adviser firms still dominate the market”. The number of UK advisers rose from 27,501 in 2020 to 27,839 in 2021 to 28,227 in 2022, according to the FCA and 89% are employed in firms with five or fewer advisers.
“The composition of the market is changing slowly but surely owing to ready sellers and willing buyers,” Global Data said. “The average number of advisers per firm is rising, indicating a shift towards medium-sized and large outfits.” Even if we think other surveys showing 50% of IFAs are looking to sell up by 2026 are, say, double a realistic amount, that’s still a lot of potential vendors out there. So don’t be surprised if the tedium continues. I certainly won’t be.
Image by Ussama Azam on Unsplash
