Moderator: Richard Clarke, Hannam & Partners Expert: John Chapman, Catalyst Partners
Headlines:
- Pricing has gone ‘bonkers’ for UK wealth managers
- Larger financial planning business are selling for double the price of 12 months ago, reflecting the immense level of competitive bidder interest from deep pocketed acquirers
- The high prices are leading some to speculate that there is too much dry powder in the private equity community with trade buyers paying away too much of the synergy potential they hope to realise through integration
Context:
Why is US Private Equity so keen on buying Wealth Management and Financial planning businesses?
Most US PE are keen to deploy at least £75-100m of equity capital so the small deals are only viable for them once they have acquired a platform business for a buy and build strategy.
The key investment attractions are:
- The market for retail wealth management is c. £1.9 trillion with growth of 8% per annum;
- Since RDR the professionalism of the industry has improved and there has been an enhanced focus on client profitability,
- The compliance issues which have dogged the industry for many years seem to be more under control with DBTs being the latest legacy liability issue which is largely sorted or quantified;
- The market remains highly fragmented and the smallest firms have reasons to sell given high prices. If they continue to go it alone, they may struggle to maintain profitability as compliance, PI insurance and technology costs rise and the war for talent heats up with little succession planning in place;
- There is scope for vertical integration with more use of model portfolio services, broader DFM and platforms;
- There is scope to raise adviser productivity, client engagement and wider operational efficiency through using technology which is more affordable for scale business;
- The recurring nature of the revenue stream, the cash flow positive nature of the business model, decent profit margins and the longevity of client relationships are very attractive to PE vs, other industries they may invest in; and
- The exit opportunities and valuations look attractive even if the traditional 3–5-year hold needs to be extended to 8 years+ as was the case for Towry (Palamon sale to Permira), Succession (Inflexion sale to Aviva) and Ascot Lloyd (Oaktree sale to Nordic Capital).
In the US wealth managers can cost over 20 times EBITDA. Some of the larger deals now being done in the UK are at 15-20 times EBITDA but smaller deals are priced by consolidators at 5-10 times EBITDA.
Are private equity houses the right owners of wealth managers? PE houses don’t have a deep understanding of the sector. They tend to invest with a 3–5-year exit horizon but clients have 30 years+ relationships with their adviser/relationship manager and don’t want that to be disrupted by short-term thinking from owners with little strategic vision for how the firm might develop over the next few decades.
That said PE investors have no desire to lose high-quality fee-paying clients as that would damage their exit value
There may be a market opportunity for consolidators which want to focus on the mass affluent segment to acquire books of such client portfolios especially if the latter are not considered core by some of the larger firms looking to maximise adviser productivity and profit.
Key Takeaways
- Investors and potential vendors need to be careful that currently levels of valuation can be justified if current inflationary pressures and talk of possible recession in the wider economy depress inorganic growth, decrease revenue linked to assets under management and lead to margin compression
- Existing consolidators need to differentiate their offering to potential vendors as well as pay higher multiples given the intense level of competition from existing and new entrants for high quality businesses to be acquired
- This will include getting vendors comfortable that potential acquirers will be the best home for their client and are a good cultural fit.
