Changes in regulation, technology and an ageing demographic of independent financial advisers and wealth management business owners has led to increased consolidation within the sector. That increase is due in part to acquisitions by private equity-backed consolidator platforms.
We will take a more detailed look below at some of the legal issues involved with PE and potential IFA acquisitions.
PE-owned platforms often have a general model to realise multiple initial leveraged investments within a timeframe of usually around five to seven years, often through acquisitions but also organic growth.
The IFA market appeals to this type of buy-and-build strategy, as even after some consolidation the UK market is still relatively fragmented and regionally focused. There are now some 30 to 40 PE-backed advice consolidators.
Here are some of the main factors PE firms look for in a target IFA business:
Among IFAs there is talk of headline multiples being paid as consideration. However, acquisition structures are becoming more sophisticated and bespoke to reflect the type of business being acquired.
For example, a headline 8x EBITDA multiple may be payable for the part of the assets under advisement attributable to the most productive age cohorts, but tapered for the more senior cohorts the closer they are to annuities.
They may also depend on the size of the business being acquired. Cross-border PE platforms may be viewed as paying higher multiples but are often only looking for larger AUA businesses.
The traditional 50 per cent upfront consideration and 50 per cent retention or deferred payment over two or three years based on AUA retention is becoming more tailored to individual businesses.
Additional conditions can be imposed to the deferred payments. Deferred payment amounts can be subject to conditions based upon revenue, AUA or profits.
Other conditions and structures may depend on the strategic reason for the acquisition.