A good time for acquisitions?

Some consolidators are continuing to fire ahead with plans to buy, whereas others have decided to take a step back. 

Tavistock Investments, Attivo Group and AFH have reportedly paused their acquisition activity. 

Also, the Embark Group, which undertook three acquisitions last year (two in the platform sector and one in multi-asset fund management), has told Financial Adviser that it is not planning to purchase any businesses in 2020.

Others have indicated they are open to considering suitable acquisitions. For instance, Fairstone recently announced a deal to bring another adviser business on board, with more than 5,000 clients, six advisers, gross fee income of £1m and funds under management of £104m.

So, what are the chances of advisers selling their business during a pandemic? 

Key points

• The picture on mergers and acquisitions is mixed.
• Consolidation is expected to continue.
• Finding money to pay for an acquisition might be more difficult.

Ascot Lloyd, which completed seven acquisitions in 2019, is upbeat about consolidation prospects, as acquisitions director Gordon Kerr says: “We believe there continues to be a market for acquisitions during the current environment, and we have spoken with a number of firms looking to sell during the lockdown.

“We still see consolidation in the market and expect this to continue.” He adds: “Our goal remains the same: to grow the business both organically and through acquisitions.”

We still see consolidation in the market and expect this to continue Gordon Kerr, Ascot Lloyd

Succession Wealth, which has acquired 56 businesses to date, has a similar outlook, according to Paul Morrish, group corporate director: “We continue to work to complete the acquisitions that were in our pipeline as we entered lockdown.

“These are all progressing and, interestingly, we have seen notable numbers of new firms of various types and sizes being added to our pipeline in the past couple of months.”

And more could be welcome, he explains: “There is a very large number of excellent financial advisory businesses in the UK, and buyers such as Succession will always be interested in such businesses. The landscape, while undoubtedly different, affords good prospects for intentional sellers.”

Truinvest, which launched last year, is bullish about acquisition prospects too, setting its sights high in its first year as a consolidator, as 

co-founder Micky Johal, previously director of mergers and acquisitions at Mattioli Woods, says: “We have a clear strategy for creating scale in 2020, with an assets under administration target of £1bn.” Truinvest is currently close to completing its second acquisition in the advice market.

A swath of acquisitions and mergers

Acquisition activity may be more likely where buyers see the current situation as short term and where smaller advisers are feeling the weight of regulation or are bruised by the pandemic.

Rob Cherry, a partner in legal firm Blake Morgan’s corporate team, says: “The Covid-19 crisis is likely to leave many smaller and less financially resilient financial advisory firms either in difficulties or wondering whether they are too exposed to economic shocks to continue as they are. This could lead to smaller firms actively looking to become part of something larger and more resilient.  

“Conversely, larger and more acquisitive firms, which may be relatively robust, will be looking to take this opportunity to grow their profitable business areas on the basis that the current crisis is ultimately temporary. 

“As a result, I’d certainly envisage a swath of acquisitions and mergers in the sector. In any event, the ever-increasing burden of regulation for smaller financial advisory firms was creating a consolidation momentum and this has not gone away.”

Ian Barton, partner and corporate finance specialist at business advisory business Quantuma, also anticipates ongoing demand in the sector: “Volatile markets always create both challenge and opportunity, and I would expect to see an increase in IFA businesses coming to market in the next six to 12 months, both for normal business disposal reasons, but also for reasons of financial stress. This will create a consolidation opportunity for those larger IFAs with investment and management capacity”.

Raising money to fund acquisitions

Finding the money to pay for acquisitions might be a more uncertain prospect now, as Giles Dunning, financial-services mergers and acquisitions specialist and partner at law firm Stephens Scown, LLP says: “Prior to recent events, funding was in plentiful supply for those looking to acquire advisory businesses.

“A significant proportion of the funding came from private equity and it remains to be seen whether the sector will remain attractive to private equity investors.”

Some, however, already have funding lined up, as Mr Kerr explains: “We’re fortunate that we’ve got established relationships with our funding partners, whom we’ve engaged with throughout the current environment, and have secured acquisition funding for the remainder of the year.”

Others will be able to raise money too, as Mr Barton observes: “For well-run businesses with clear strategies there is always investment capital available.”

How much is paid is another issue for companies to contend with, whether buying or selling. As Mr Dunning says: “The biggest difficulty for sellers and acquirers alike is how to value advisory businesses in the current climate. Many firms base their charges on a percentage of funds under management, which can be affected in a falling market.

“The hope is that markets will recover further from current levels, and many sellers will want to see that potential increases, based on further market recovery, are built into their valuations.

“At the moment it is more likely that acquirers will hedge their bets in terms of headline valuations, and it is not as easy to make offers as attractive as we were seeing as recently as three to six months ago.”

Advisers looking to sell may therefore be stuck between a rock and a hard place, as Mr Johal observes: “The average age of the adviser is late 50s  many of the sellers will be looking at their business and will either accept it is worth less than it was a few months ago, or carry on.”

And for those who don’t want to carry on there are some hurdles to overcome first, as Mr Kerr explains: 

“The key challenges for those looking to sell their business remain broadly consistent with those prior to the pandemic – namely: engaging early in due diligence and the preparation of a library of materials before looking to sell; having good historical financial and client data; and appointing the right team of advisers early in the process.”

Summing up, Mr Dunning says: “The ingredients for M&A in the financial advisory sector are still there.

“We can expect to see acquirers and vendors alike looking to make things work as, to a certain extent, continued M&A activity is a necessity for both of them.”

Fiona Nicolson is a freelance journalist