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Will private equity interest shake up the advice sector?

Structural shift

A similar structural shift in financial advice models has drawn private equity into those businesses.

Mark Smith, co-founder of Truinvest, a new consolidator who spoke to private equity businesses when looking for a financial backer, says it is the post-Retail Distribution Review business model that is drawing attention.

“Since RDR, where firms were before being paid by commission, they now have ongoing remuneration, and it’s created really exciting recurring revenue, and that’s really attractive for anyone wanting to invest – you know that these recurring revenues are going to stick around for the long term.”

But it is also the shape of the advice industry that is focusing minds.

Christian Kent, managing director at Houlihan Lokey’s financial institutions group, says it is the traditional fragmentation of the market that is attracting the business.

He says: “The overarching theme is market fragmentation and the opportunity to invest in a platform and make a series of follow-on acquisitions.

“We’ve reached a point in the market where there are a number of small firms owned by individuals who have reached retirement age and are looking to monetise their back book of clients and they’re set to retire. 

“There are also the increased costs of regulation and oversight and increased cost of professional indemnity cover – a lot of these drivers are causing small firms to look to be acquired; private equity is looking to provide the capital to consolidate that position.”

New companies have been set up from scratch, specifically with that plan in mind, backed by private equity, often with experienced financial services executives at the helm.

For example, The Socium Group, headed by former Openwork chief executive Mary-Anne McIntyre, has backing from Penta Capital, launched as a business in 2019 and recently bought Beaufort.

Peter Mann, a former chief executive at Skandia, has recently launched a similar vehicle with backing from Apiary Capital.

The Covid-19 pandemic has accelerated this attention over the past 12 months. Kent says: “Some sectors have not been resilient to Covid, whereas the wealth management sector has been resilient. These periods of turbulence are a time when you want to talk to a financial adviser.”

Understanding retail

But there are many questions about what a private equity company brings, and whether they truly understand the retail financial services sector.

Some bring new insight from other sectors, as well as more modern technological skills; however, others simply see the upside potential without understanding the nuances of the adviser/client relationship.

Kent says one positive is that private equity businesses can bring expertise on digital marketing, helping advisers with one of the industry’s biggest issues: attracting new clients. John Cowan, chairman of Sesame Bankhall Group, says their experience outside financial services can bring new "discipline" and "fresh thinking".