What does national IFA’s flotation mean for sector?

As they pass the first guy yells, “Hey, you know anything about parachutes?” to which the second guy responds, “Nah. You know anything about gas barbecues?”.

I’ve heard that joke about fourteen times, so it’s no surprise that it came to mind when I saw that national IFA firm Perspective is looking to float on the London Stock Exchange’s Alternative Investment Market in an effort to raise £28m.

The reason I thought of that old joke is this: Perspective is pushing to list on AIM while in July last year another national IFA firm, Lighthouse Financial Advice, announced plans to do exactly the opposite, citing lack of investor interest in advice firms in the lead up to the Retail Distribution Review.

In fact, the shareholder revolt that saw the plans quashed ultimately cost former chairman David Hickey his job; he stepped down in September last year.

It seems to me that maybe these two firms should talk as they pass, just like the two doomed gentlemen in my dad’s corny joke. (That is not, of course, to suggest these companies are similarly doomed).

Perspective managing director Damian Keeling told me the reasons for the move are threefold. Primarily, the hoped-for £28m of capital raised will finance further acquisitions.

Perspective has been talking a lot about how many acquisitions are in the pipeline and Mr Keeling told me that although the first half of the year has been relatively quiet, they intend to accelerate the process and already have several firms lined up ready to sell.

Mr Keeling said the listing on AIM will allow the company to offer share options to senior staff, which he says will encourage them to stay with the firm. The company will also use the money to restructure its debt, paying down bank loans and retiring some corporate bonds.

All these plans sound great, but particularly in terms of funding a continuing acquisition programme they rely on investor sentiment being favourable to advice firms. The elephant in the room remains: why did Lighthouse try to de-list?

At the time, Lighthouse’s directors told me de-listing would be the best thing for the firm due to simple investor reluctance to support adviser firms in the changing climate - and even after shareholders put the kibosh on those plans Mr Hickey stood by his argument and said the vote would make his life harder.

That was last year, prior to implementation. Both Lighthouse and Perspective seem solid enough firms that are reporting increases in clients post-RDR.

Therefore, with Perspective looking to list observers might speculate that investors are happy with firms who have adapted their business to thrive in the post-RDR environment and are prepared to shell out for shares in an acquisitive adviser company.

In other words: this could be a sign of sentiment shifting and investors beginning to look favourably upon the sector again.

That would be welcome, but doesn’t seem to stand up to scrutiny. A quick check of Lighthouse’s share prices on AIM show a steady decline from 9.75p on 26 January 2011 down to 3.5p on 4 July 2013. Considering they are one of only four firms now listed, this would not suggest there is demand from investors for these businesses.

Moreover, in the unquoted space companies are not exactly backing advice at the moment. Aegon, for example, recently got rid of its adviser arm Positive Solutions, saying it was no longer core to the company’s strategy.

So has investor sentiment really turned around, or is Perspective looking to list for other reasons?

Rumours abounded late last year that the company was looking to sell, with reports coming to light of an auction by KPMG, which Perspective did not deny.

Taking these rumours with the reported loss of almost £2m for the year to December 2011, could it be that the company simply needs money?

Perhaps the good news story of investors flocking to pour money into growing new model advisory businesses is a tad premature. I’d be interested to hear your views.