IFASep 22 2021

Private equity could be a force for good

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While the activity of private equity companies in financial services is by no means a recent phenomenon, the level of activity has increased markedly of late.

The question is: is this good for the advice sector? Or would we prefer that these third parties restricted their activities to buying producers and platforms?

As advisers, we are perhaps less sensitive to changes in the product part of the sector than we are to the current increase in activity in the advice part of the sector.

It’s no secret that well-established product distribution businesses are more profitable on a pound-for-pound basis than manufacturers

But it should not surprise us that the 'smart money' behind private equity companies has started to follow the same path as peers in other sectors. It’s no secret that well-established product distribution businesses are more profitable on a pound-for-pound basis than manufacturers.

The wisdom of buying shares in Ford dealerships as opposed to in Ford Motors itself as source of future returns is almost a cliché.

While we don’t like to describe ourselves as distributors, those who own and control the client relationships do look like distributors. And they seem to have the potential for resisting the inexorable pressure to reduce costs and margins experienced by all manufacturers, whether of pens or pensions – hence the increased private equity involvement in buying into the client contact end of our sector.

Of course, all this has always been true, but I believe that there are two other factors at play. Firstly, poor returns on capital elsewhere means that our sector is able to attract capital in search of an attractive return, and, secondly, the widespread practice of charging fees based on assets makes consolidating assets attractive from an economies of scale viewpoint.

For too many years the capital value of advisers was minute compared to that of providers, despite the fact that IFAs dominate the advice market, so it's good to see the balance change.

Positive consequences

New additional capital and the process of consolidation adding scale to advice businesses, together with potential falls in the costs of technology may mean that the long-held aspiration of advisers to own the platforms they place clients on may be becoming reality. There are a few regulatory issue to manage, but it seems to me they are issues, not barriers.