ThinCats expects to lend £200mn to IFAs as consolidation continues

With a third of IFAs looking to retire over the next decade according to a recent study from Opinium, Anand says his company has seen an increase in enquiries from advisers who want to buy other businesses or reduce their shareholdings.

Regulation and increased operational requirements have also been significant drivers.

For those owner-managers of IFA businesses looking to exit fully or partially there are various options:

• Sell their business to a consolidator IFA pursuing a buy and build strategy. 
• Sell to the existing management team through a management buyout.
• Sell to a wider range of employees via an employee ownership trust.

ThinCats, which was set up to help small businesses in the wake of the global financial crisis, lends to small to medium-sized enterprises.

In the IFA market, these are businesses typically with around five to 30 advisers, although it has a few adviser firms on its books with 50-plus advisers. 

If you're a decent business, what's your growth ambition and how are you growing? How do you get new clients?

Anand says where small and medium-sized IFAs may often struggle to secure lending via banks, ThinCats can fill that gap, as the private equity firms are more attracted to larger advice companies.

Depending on the fund size and investment strategy, ThinCats would typically exit its investment in three to five years.

Anand says: “We're particularly focused on that medium-sized business, where there may be a transition to management or management wants to retire; therefore a sale. 

“There are all sorts of potential transactions. [There are also] those IFAs that are trying to grow their businesses through acquisition.”

The way ThinCats funding model works is that it borrows from banks and also puts up its own capital, alongside that.

“[The banks] provide us with senior finance, and we put in the equity financing," Anand explains. "We originate a pool of loans that we fund with that. 

“Alongside that, we also have institutional capital: so pension schemes, insurance companies, and credit funds. So we've got a sort of balance sheet, which is effectively our own capital alongside third-party money, which comes together to fund loans.”

With this pool of money ThinCats lends between two and three times earnings before interest, tax, depreciation and amortisation (Ebitda).

“[This is typically] where someone's acquiring your business, they pay 50 per cent upfront, 25 per cent in year two and 25 per cent in year three. We find the 50 per cent, maybe 40 per cent. And there might be some cash that they put in,” Anand explains.

“That’s a relatively simple product, straightforward senior debt. You then have what we call transitional capital, or stretch, where we're funding maybe three and a half times capital, and you're sort of going beyond what senior debt looks like. We charge a lot more for that, of course, because we're taking some equity risks.”

Alongside those two lending models, ThinCats also provides a ‘committed facility’ targeted primarily at IFAs with a buy and build strategy. 

The lender provides a line of credit, so for example, an adviser may have bought three businesses but has other acquisition targets. Rather than constantly going to secure a new loan, they can draw on the committed facility provided by ThinCats.

While management buyouts remain a popular exit route where ThinCats has funded many transactions, it is seeing increasing interest from owner-managers seeking to transfer ownership to their employees via an employee ownership trust. 

One of its most recent transactions involved providing funding to Cheetham Jackson in March to help it transition to an employee ownership trust.

You need to understand the dynamics of the robustness of the industry to be able to lend.

An employee ownership trust is a trust that enables a company to become owned by its employees and can be set up by a company's existing owners, perhaps as part of their exit or succession planning strategy, or by founders starting a new business that they wish to be employee-owned.

The lender also entered into a funding deal in March with MWA Financial, which enabled the owners to hold onto 100 per cent of their shares.

ThinCats’ total book of business is worth around £800mn, of which the IFA sector makes up 15 per cent.

Anand joined ThinCats in 2015 after ESF Capital (European Speciality Finance) purchased a 73.4 per cent equity stake in ThinCats. Previously, he was the managing director at ESF.

The lender originally launched as a peer-to-peer business lender in the UK in 2011 allowing individuals to lend money to limited companies. It closed its P2P lending platform in 2019 to focus instead on institutional lending.

A trained accountant, Anand’s background is in investment banking, having worked for New Star, under Jupiter founder John Duffield.

As an asset manager, New Star primarily distributed to IFAs selling long only retail funds.

“So I got to know the retail market, primarily through that: understanding the challenges, regulatory issues, the management of client funds and dealing with high-net-worth money.”

ThinCats is attracted to IFA business, Anand says, because they are robust businesses with strong client bases and recurring revenues.

“Their assets are the clients and clients don't [leave a business easily]. The assets are the client base, and of importance is the quality of the IFA as well. From a lending point of view, it makes a lot of sense,” Anand says.

“You need to understand the dynamics of the robustness of the industry to be able to lend… so you can get to that decision-making very quickly.”

Conversely, ThinCats is cautious about IFAs who are heavily commission-based. He is also not keen on businesses that a 'star' adviser type of individual that controls half of the client book in revenues: “That's a challenge, right? Because you've really got key man risk.”

When it comes to due diligence, ThinCats may conduct an operational review depending on business size and what has been done before.

“[We want] advisers that are locked in through a decent package, which is combined salary and bonus, but not highly sales driven.”

The lender also looks at the quality of the advisers, advice and the quality of the IFA’s platform(s).

We will always do financial due diligence.

“What I mean by that is: what is their regulatory umbrella like? Is it in-house or out? Either is fine but [it is about the quality]. What is their operational infrastructure? What is the sort of range of funds that they provide? And are they active in managing the client books, right? 

“We always meet management and spend time with people. We may do an operational review depending on the size of the business and what's been done previously.

"We will always do financial due diligence."

For those looking to sell, Anand says IFAs need to understand what their proposition is to a debt provider, acquirer, or private equity backer.

This includes the quality of the book, the diversity of clients, platform and fund performance, and the churn of clients and advisers, to name but a few.

“Ultimately, if you're a decent business, what's your growth ambition and how are you growing? How do you get new clients?”

“There's always attrition, for all sorts of reasons, so that may or may not matter. If you're selling outright, and someone was willing to [acquire] your book as is, and they can grow it themselves, then that may matter a bit less.”

Ima Jackson-Obot is deputy features editor of FTAdviser