Regulatory changes may see 'beginning of the end' of consolidation in 2024

The managing director of Gunner & Co said a more stable and positive stock market would reduce the risk of returns on transactions, in turn make acquisitions more attractive to buyers.

But she raised concerns about the impact of the FCA's capital adequacy proposals if they are poorly applied.

M&A had lagged somewhat in 2023. While the number of transactions was up on 2022, this was concentrated among far fewer acquirers.

Jeffreys said the biggest macroeconomic factor impacting the M&A market in 2023 was the rapid rise in interest rates, with 14 rate rises since last December.  

“This will very much hurt the pockets of major acquirers, who leverage equity with debt – now often paying in the region of 14 per cent interest on new loans,” she said.

“Not surprisingly, this has had an impact on both business valuations and the volume of acquirers in the market."

Coupled with the consumer duty and the ageing demographic of financial advisers, Jeffreys expected the calmer macroeconomic environment of 2024 to see more acquirers return to the M&A market.

But she raised concerns about the FCA's proposed "polluter pays" rules - which require advisers to set aside capital to meet potential claims. 

At the heart of the FCA's capital adequacy proposals is for firms to take more responsibility to assess the value of potential claims in advance which would lead to more capital being set aside, both for firms in operation, but also for firms looking to deauthorise and exit.  

Jeffreys points out this is essentially a requirement for firms to leave money in the bank after they have sold.

She explained this was positive for consumers, the industry as a whole and small business owners faced with ever increasing levies. 

“However, the key will be how any new guidance is applied – many financial planners felt the FCA’s handling of liabilities surrounding DB transfers had a one-size fits all approach,” she said.

“Highly compliant businesses should have nothing to worry about – it is essential not all businesses are tarred with the same brush.  

“If not, it could lead to some business sellers unable to enjoy the fruits of their labour following the sale of their business.  

“Poorly applied, 2024 could be remembered as the beginning of the end for IFA consolidation."

'A meaningful drop'

As at the end of October 2023, according to Gunner & Co’s deal analysis tool, average multiples of recurring income have dropped by 12.5 per cent from their 2022 highs.  

“While this is a meaningful drop, it brings valuations back in line with the three years prior to 2022,” Jeffreys said.

“Given that, what is perhaps surprising is that deal volumes continue to increase. 

“Transaction volumes rose 16 per cent over 2022, with Perspective taking the top spot for a second year in a row, announcing 20 transactions by the end of November.”

But many big names cut back on their acquisitions this year with one major player dropping from 10 announcements in 2022 to only one.

Jeffreys said in her reflections at the end of 2021 she had talked about the growing disruption of the buyer market by start-up acquirers. 

“Three years on from the beginning of 2021 we’ve seen that segment of acquirers fall back, with some major players seemingly exiting the acquisition market completely,” she said.

“There are a lot of similarities between this segment, and so they are frequently competing over the same transactions, making meaningful growth difficult."

Longer-standing national firms are regaining their footprint, with 25 per cent of transactions announced coming from five major national firms. 

The other major factor impacting both the profession and the market is the FCA’s rollout of consumer duty.  

Many small business owners felt the pressure of implementing business changes that major firms will not have been phased by.  

“As a result, consumer duty has certainly contributed to a continued trend of smaller, owner operator businesses exiting that market due to operational pressures,” she added.

Jeffreys said the regulatory change has led many major acquirers to look differently at firms they are proposing to acquire, and in particular, how clients from acquisitions will be integrated.  

In the past, if a buyer picked up clients on a higher charging structure on their own they may not have automatically reduced charges – this is no longer an option. 

“Of course that has an impact on how much they can pay for the business and their opportunity for a return on investment,” she added.

 sonia.rach@ft.com

What's your view?

Have your say in the comments section below or email us: ftadviser.newsdesk@ft.com