“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.”