Consolidator advisers ‘run too fast’ in loan applications

OakNorth is currently growing its IFA loan book, having recently signed a £5.3mn deal with AFM Wealth to help it fund its acquisition plans.

Over the past two years, the likes of Cullen Wealth have also borrowed from the bank.

As more advice firm founders reach retirement, there is a big opportunity to buy up books of business. 

If you try to run too fast, that’s how you end up with liabilities.Stewart Haworth, OakNorth

But OakNorth’s director of debt finance, Stewart Haworth, told FTAdviser the most common reason why the bank would not lend to an advice firm was if its M&A strategy was too ambitious.

“It’s where they are acquisitive, but they're probably running faster than what we would like them to run at. There is genuine appetite to lend to this group, but probably at a slower pace than what they've requested,” Haworth explained.

“It will be seen as to whether that is an opportunity that comes back to us in due course, or if another lender goes with the plan they’ve got and lends against that plan.”

Often, IFA acquisitions involve a 50 per cent deferred payment. This means the buyer expects to pay out the other half of the deal cost through future cash flows, only paying half of the deal upfront.

From a risk perspective, the bank has to measure how much it will lend against how much needs to be paid out of cash flows of the business.

“That’s why speed is important,” said Haworth. “If you try to run too fast, that’s how you end up with liabilities.”

This is why OakNorth tends to focus on operational efficiency - such as the ratio of advisers to clients, and the income these portfolios generate - as well as cash flow performance in different cycles.

The bank will also keep an eye on more obvious risks, such as evidence of defined benefit transfer advice - pension activity at the heart of some of the industry’s biggest scandals - and instances where a firm might be charging double fees for no apparent reason.

Equity uplift will beat cost of finance

With the cost of finance rising as interest rates climb, some are projecting a slowdown in M&A activity. Haworth echoed this sentiment, though he said the equity uplift in IFA deals will more than compensate for the cost of finance facing borrowers.

“We’ll see firms getting more selective. What we call ‘flight to quality’. We’ll see firms chasing better assets,” he explained.

This then leads to more competitive, higher valued deals with companies willing to pay more than a book of assets initial worth, according to Haworth.

“In terms of a corporate buying a small entity with, say, £50mn of assets under management - a typical market is paying between three and three and half times recurring income. That’s being paid 50 per cent day one, 25 per cent end year one, and 25 per cent end of year two, with deferred payments subject to clawback,” said Haworth.

“There is a bit of a trend that says, because it is getting competitive, firms might pay more times [recurring income] or they might pay 60 per cent upfront. They might pay the next chunk over 18 months rather than 24 months.

“As it gets more competitive, firms say ‘actually that’s a good book we want to acquire’. That’s the middleman buying the one-man bands. Then above that you’ve got the big boys which are equity backed and pay a multiple of Ebitda, rather than a multiple of recurring income.

“They’re paying anything from eight to twelve times that. And that’s what’s driving up prices.”

Compliance talent moves to top of firms

With the Financial Conduct Authority’s consumer duty edging closer, OakNorth is currently working on how it can drip feed this regulation into its lending criteria.

While the consumer duty is hard to translate into exact terms for a lending service like OakNorth’s, Haworth said it will boil down to whether a company can evidence why it has done something or not.

“It’s the day job. Treating people with respect, fairly, and being able to justify conversations you’ve had. In terms of IFA businesses, we don’t think there will be wholesale changes because regulation has been around a while and ever increasing in most entities.”

Back in March 2021, OakNorth issued a £4mn loan to Cheshire-based financial advisory firm, Cullen Wealth.

As part of the deal, the firm brought on a new chief executive - Gary Crossley - formerly the boss of 360 Compliance.

“You see more and more mid-tier IFA firms really focus in terms of building a robust compliance network," said Haworth.

ruby.hinchliffe@ft.com