Long ReadMar 13 2023

The legal issues around PE and potential IFA acquisitions

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The legal issues around PE and potential IFA acquisitions
Photo: ateemee/Envato

According to a recent survey from international law firm Mayer Brown, the number of merger and acquisition deals targeting UK financial advisers and wealth managers has risen 11 per cent to a record high of 440 from 398 in the past year.

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. 

What do PE firms look for? 

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:

  • Reliability of revenue: How long the adviser has had the clients, if the adviser acts for the family tree, the age profile of the client base. 
  • Ease of transfer: If the client’s assets are all on platforms, if it is a DFM mandate or solely advisory, the kind of products they are invested in and how transferable they are – for example EIS.
  • Likelihood of rising revenue: Age profile of the client base, the ancillary services currently offered eg financial planning, accounts. 
  • Costs, and cost savings: Staffing and management profiles, pension benefits of staff, outsourced advisory/market information, outsourced compliance and regulatory.

Pricing 

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. 

Deal structures

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.

Niche specialisms may be of interest to particular consolidators, depending on their particular strategy.

For others, simple transferability is a more important factor, favouring a more generalist managed business where all client assets are invested on platforms and follow a model portfolio.

Although the more common deal structure is a simple sale of 100 per cent of the shares of an IFA business, alternative structures are being used to reflect differing factors for the buyer or seller.

For IFA sellers not retiring, certain consolidators are offering IFA owners ongoing equity involvement and are prepared to take minority stakes.

For those buyers wishing to avoid historic liabilities, there has been an increase in sales of trade and assets or transfer of funds, rather than share sale.

Tax implications of such sales, together with being left with historic liabilities in the IFA company, should be factored in for such sellers.  

Deals are consequently taking longer. 

Advantages for IFAs in being acquired by bigger platforms

The reasons for sale will have a large impact on the structure of the deal. The two main reasons IFA owners sell are for retirement or continued growth. There has been a growth in alternative acquisition structures driven by the reasons for sale.

The majority of sales are still due to retirement. Some 17 per cent to 20 per cent of IFAs are estimated to be aged 60 and above.

Where owners or managers look to exit the business entirely, structures focus predominantly on AUM retention.

A large platform buyer may nonetheless be able to offer higher multiples and greater deal certainty than a smaller peer buyer, with systems geared up to maximise transfer retention and synergies.

However, as the IFA acquisition market matures, there are also buyers who are prepared to structure for continued management involvement.

These owners may feel that operating as part of bigger businesses will relieve some of their balance sheet pressures.

The larger PE consolidators can offer such IFA owners ongoing equity involvement for them to continue to grow their aggregate AUA.

Disadvantages for IFAs in being acquired by bigger platforms

This will in some respects depend on the reason for sale. As more consolidators of larger scale operate in the acquisition market, prices may reflect different business types.

Differential pricings can be applied to for example inheritance tax or retirement-focused businesses, versus vanilla practices based on model portfolios with all assets on platforms.

For owners who have retained an ongoing involvement or equity interest in their business, the benefits of a larger business may come with constraints.

With expansion capital from such an owner comes targets and granular oversight that would not have come with bank debt.

What might put off a PE consolidator buyer

These are similar to the issues facing any buyer in the IFA sector, but these will be more focused given the time horizon and target multiples of PE-backed consolidators. They can affect certainty, and also the price of a deal.

The nature of the portfolio will be considered carefully. The weighting of the client base to more senior cohorts will have an impact, as will non-transferable assets.

The more a portfolio is based on advisory, and the less assets are on platforms, the greater the level of work will be needed post-completion in order to maximise the transition of those clients.

Legal due diligence will be critical. Red flag issues, such as regulatory, may impact the smooth progress of a deal.

A lack of information, or a lack of organisation, can slow a deal, sometimes to a critical extent. Committed IFA sellers would increase their chances of success by organising their information in advance of a sale process starting. 

Conclusion

The IFA acquisition market is still active, with a growing number of PE-backed consolidators constantly expanding the range of pricing and deal structures.

Prospective buyers and sellers should seek the proper practical and commercial legal advice to ensure a successful deal.

Paul Rosen is a partner at Mayer Brown