Expert: Andy Peterkin, Farrer & Co and John Chapman, Owen James Group
Moderator: Simon Lough
Key message
The financial adviser industry has been a hotbed of M&A activity over the last couple of years with large consolidators making numerous and sizeable acquisitions. A drive to achieve scale coupled with regulatory pressures will continue to shape the IFA market in the short-term although consolidators need to ensure they handle the integration process for each acquisition carefully.
Headlines
- M&A activity has increased at a rapid pace this year with Towry’s £600 million deal for Tilney Bestinvest setting the tone for the industry
- Firms are seeking to increase their scale through inorganic growth to capitalise on regulatory change and cost synergies
- Acquirers need to conduct due diligence of target firms to ensure the integration process goes smoothly
- The wave of consolidation will continue into next year and looks set to shape the market for years to come
Key themes
The session’s discussions were framed in the context of the recent burst of M&A activity within the financial adviser industry. Consolidators have been increasingly active over the last 2 years with Towry’s £600 million deal for Tilney Bestinvest setting the tone for another round of acquisitions.
Fellow PE-backed consolidator Bellpenny has also been on a spending spree, racking up 32 small acquisitions over the last 3 years and is now seeking bigger targets. Elsewhere, Standard Life’s financial planning arm 1825 has sought to achieve scale quickly through the purchase of several advisory firms across the UK this year.
Delegates recognised that there are two competing rationales behind the strategic thinking of consolidators. The desire to acquire assets under influence at a fast pace has been the main motivation for firms such as 1825 who need to build scale through inorganic growth as a means to establish themselves in the industry. Alternatively, larger consolidators including Towry have used strategic M&A deals as a way of capturing synergies, albeit after being backed by a wall of PE money.
However, there was extensive discussion around the success rate and the common pitfalls that beguile many mergers. One delegate cited academic research from a Harvard Business Review report that put the failure rate for M&A deals at “between 70 percent and 90 percent”. Delegates around the table shared their own experiences with most delegates agreeing that the failure rate was about accurate for the wealth management industry. The price of recent acquisitions was called into question as delegates cited the fact that many acquirers overestimate potential synergies. The principle that a layer of cost around investment management is removed under a merger has proven to be a common misconception as firms struggle to move advisers onto new systems.
Integration of the target into the acquiring firm is always the most difficult component of a successful deal. Delegates referenced the 1825’s attempted acquisition of Almary Green which fell through between exchange and completion as advisers did not want to move to a restricted proposition. However, the expert noted that the careful structure of the contract including a break clause protected the acquirer, 1825, from a potentially disastrous deal.
Delegates noted that the target firm assumes most of the risk in an M&A scenario, particularly under common payment terms which are made in half shares and half cash. Payment terms can also be further delayed until the successful completion of between 12-24 months of the post-acquisition period.
Final discussion centred on future M&A activity within the industry with the consensus believing that the pace of acquisitions will increase further in the next year. Although the quantity of large IFAs is fast diminishing, delegates believe that regulatory pressure in the market is forcing advisers to “be acquired or disappear”. Furthermore, large advisers will continue to hunt acquisitions as organic growth continues to stagnate in the short term. Interestingly, the expert noted that just 11 out of 100 of the top IFAs in 2010 are still going in the same form at end-2016.
Conclusions
The wave of M&A in the wealth management industry is set to continue next year as large consolidators seek to capture more assets and capitalise on potential cost savings. Consolidators should not underestimate the difficulties of the integration process and ensure they do proper due diligence before any numbers are discussed.
