The UK wealth management market has been tipped to remain fragmented even as another year of frantic dealmaking begins in earnest.
As smaller advisory firms are scooped up by consolidators, the discretionary management (DFM) space has become the focal point for a series of higher-profile deals, typified by Tilney Bestinvest’s £600m deal for Towry last week.
While consolidation is expected to continue, however, analysts have cautioned against the idea that recent buys leave no space for smaller players.
“The addressable market for these businesses is around £1.1trn-plus, implying that every £11bn in assets under management equals a market share of around 1 per cent,” said David McCann, an analyst at Numis.
“[This shows] that even the largest businesses still have pretty small market shares, and implies a very large tail of small businesses.”
Both Tilney Bestinvest and Towry were busy scooping up businesses for some time prior to last week’s announcement. The speed and scope of this process is illustrated by Towry’s group structure: the firm is currently comprised of 59 separate holding companies.
The £600m combination marks a new level of deal, however, and follows in the footsteps of major DFM acquisitions such as Old Mutual’s deal for Quilter Cheviot, St James’s Place snapping up Rowan Dartington, and Swiss group LGT’s purchase of a majority stake in Vestra Wealth.
Kevin Pakenham, founder of advisory boutique Pakenham Partners, said an increase in dealmaking was in part due to larger firms’ inability to grow organically.
“For larger players, the issue is how they win clients in order to continue to grow. [Client] turnover is not that great. Therefore deals are a shortcut to growth.”
On the other hand, Mr Pakenham said, the sector is also home to “plenty of viable businesses which are small and can carry on [growing]”. He dismissed the notion that such firms are too small to have an independent future.
Numis’s Mr McCann, however, suggested increasing regulatory pressures and the need for better IT systems were contributing to a rise in the minimum level of assets a firm requires to survive.
This figure, he said, was “probably not that much below” £10bn, though he conceded lower amounts could also be profitable for firms that can operate on higher revenue margins.
Another reason to assume consolidation will be a slow process, he said, stemmed from the “prima donna types” who run these firms.
“These are people businesses, so need a cultural fit, which is often hard to achieve in practices. [Owners often have] higher estimations of their business’s value than market prices.”
The sale of Towry by one private equity firm, Palamon Capital, to a wealth manager that is backed by another, Permira, is indicative of how private equity has become an increasingly significant player in the space. The spin out of Old Mutual Wealth from its parent has also attracted interest from the sector, and asset managers, too, are potential acquisition candidates, according to 7IM’s Justin Urquhart Stewart.
“Private equity firms are increasingly working with investment firms… You will see more private equity firms sniffing around asset managers,” he said.
In keeping with his theory that smaller firms are more vulnerable, Mr McCann said Brooks Macdonald was the most likely of the listed wealth managers to be bid for, but added: “I wouldn’t rule any of them out as possibilities, especially given private equity’s renewed interest in the sector.”
As the bigger players get bigger, those working with these businesses could be forgiven for expecting fees to fall. But Mr Pakenham said he had seen little sign of a downwards trend in terms of charges.
This is in part due to firms’ shift from advisory to discretionary management, an offering that typically commands a higher price. The change is reflected in figures released this week as part of the Towry deal.
Bestinvest was making £39m in revenues from an asset base of £5bn when first acquired by Permira two years ago, but the private equity firm said this would rise to £200m of revenues from £20bn of assets once Towry is acquired.
But greater scale does also give firms the ability to put more pressure on fees charged by suppliers – such as asset managers.
“We have seen relatively little compression of fees,” Mr Pakenham said. “What has happened is that the division of those fees has changed. Investment management is probably being delivered more cheaply, whereas the client handling has taken more of the cake.”
