There is a greater fear of firms losing their value over time and returns coming under pressure due to greater fee transparency. This has meant lawyers are brought in at an earlier stage, and there is a focus on different qualities the firm brings.
But does this mean deals can still be done? The answer is a definitive yes, with 27 advice firm acquisitions in the financial advice space since the start of September.
What's new?
Hyder Jumabhoy, a partner at law firm White and Case, who has worked on around 80 M&A deals in wider financial services over the past 15 years, says one of the biggest changes over the course of those years is that he now gets brought into deals much earlier in the process.
“In my view, the big change in the role of lawyers came in the aftermath of the global financial crisis. Prior to that, the deals were done by business and strategy teams, and the lawyers were brought in just to document them.
"But now I tend to be involved even prior to the first letter of interest being sent, when buy-side clients are considering whether they should participate in the auction process.
"At that stage, I am often involved in discussions around maximising closing certainty, appropriate risk allocation and structuring the offer price to ensure the buyer does not bear all asset under management attrition risk.”
An unnamed chairman, who preferred to comment anonymously, has worked on dozens of transactions, mostly as a buyer but also as a seller, at organisations ranging from a FTSE 100 company to consolidators. He says the priorities of buyers of financial services companies doing acquisitions has changed deeply over the past decade.
There are three things we look at with a potential acquisition. The first is, what are we buying the business for?Matt Timmins, Fintel“Probably the biggest change in recent years has been, when I started out, asset gathering was what buyers cared about. The entire model was to buy companies for their assets, merge them together and take costs out.
"But now I think there is a recognition of the limits of that approach because all asset managers are under margin pressure. So with the costs of doing a deal, as revenue margins are coming down, those deals don’t make as much sense now."
The RDR had a profound impact on the clarity of fees both to financial advisers and fund managers, as well as platforms, which has prompted a significant reorientation in terms of what acquirers are looking for.
"I think that nowadays the fundamentals of the company you are acquiring have to be right. You have to feel that whatever the assets under management are, you can grow them. It’s no longer enough to just want assets, you have to have another reason to buy a firm, and be confident that you can achieve and execute on that reason," the chairman adds.
Matt Timmins, joint chief executive of Fintel, the parent company of SimplyBiz and Defaqto, among others, has worked on around 15 transactions ranging from £1mn to £75mn, and is currently working on six deals.
Elaborating on the rationale he deploys for those deals he has done, he says: “There are three things we look at with a potential acquisition. The first is, what are we buying the business for?
"Any business you buy, it’s either for the intellectual property, to get access to the customers that business has, or to get access to the employees that business has.
"So the first step is to understand which of those, or combination of those, applies to a company you are buying. The second step is the revenue fit – if I buy this business, in what year will it start to generate revenue for me, year one, or two, or three?
"And the third thing is, would the culture fit? How do they deal with their clients, and what language do they use when talking about their clients?”
The chairman says that, in one of the roles he currently occupies, he has “walked away” from three potential acquisitions this year for cultural reasons, saying: “I felt in these firms there were people who wanted to dominate, but in our industry, I think the idea of the star manager or individual is gone now. There will always be names of course, but its about teams now and the firms having a brand.”
Nontheless, there has been a big impact on valuations.
Premier Miton’s recent acquisition of Tellworth came at a price of around 1 per cent of AUM – lower than some historic market averages for such deals.
Jumabhoy says: “Today, pricing is less about 'market expectation' and more about the specific attributes of the particular target business. If AUM is high quality and 'sticky', then premiums which are significantly higher than yesteryear are not uncommon.”
However, the unnamed chairman says he has never calculated the value of a financial services business based on AUM.
The big change in the role of lawyers came in the aftermath of the global financial crisis. Prior to that, the deals were done by business and strategy teams.Hyder Jumabhoy, White and CaseHe says: “In recent years the average annual management charge has dropped from 75 basis points to 60, and when that translates through to the profit and loss account it makes a big difference.
"Another big change in recent years has been that the typical client has changed from being a pension fund to being retail, as pensions have changed from defined benefit to defined contribution, and each of those markets is different and how you can communicate with them is different.
"You can’t speak directly to the retail client, you use data, so how well-equipped is the firm you are acquiring to do that? And as technology becomes more important, you have to see whether the firm is burdened by legacy systems or not.
"Once we have answered those questions, we then think about a valuation as a multiple of recurring revenue."
Whether it comes to buying a fund management business or an adviser firms, the basic variables may have changed, but the lawyers and bankers are still keeping busy.
David Thorpe is investment editor of FT Adviser
