By Louise Mahon, Corporate Finance team Partner at MacRoberts LLP.
The pandemic has put things into perspective for all of us. The trials of the past year have given pause for thought and provided a renewed incentive to plan our financial affairs, whether that be putting retirement plans in place or organising our succession arrangements. After all, COVID has shown that we can never really know what lurks around the corner.
With this in mind, it’s no surprise that the IFA sector has remained resilient throughout COVID 19. But what are the over-arching changes taking place in the sector? And what do business owners need to be mindful of as the sector evolves?
What’s driving market consolidation in the sector?
One key trend that’s taking place is a move toward market consolidation, fuelled by a new wave of private equity investment.
This investment boom was apparent even before COVID hit. In December 2019, the US private-equity giant Carlyle bought Harwood Financial Management for £91 million, making it their first purchase in the UK IFA market. More recently, in March 2021, Sovereign Capital Partners invested £55 million in Skerrits, the Brighton-based wealth management business, whilst Beech Tree Private Equity acquired Advanta Solutions, a financial adviser platform based in London and Glasgow.
With these deals representing just three examples among many, it’s clear that the pandemic hasn’t dampened enthusiasm for investment in the IFA sector.
But what attracts these investors?
Simply put, private-equity big hitters see an opportunity to acquire companies and implement “buy and build” strategies, where a host of smaller IFA businesses are bought over and consolidated under the umbrella of a single group. Two significant Scottish examples of this “buy and build” in action have occurred in the past two years:
In February 2020, Independent Wealth Planners’ (IWP) purchased AGL Wealth Management, and followed this up a year later with their acquisition of Sutherland Independent in February 2021. MacRoberts acted on behalf of the sellers in both transactions.
In these types of deals, larger companies such as IWP can acquire independent IFA businesses, add them to a consolidated entity and leave the day-to-day management with local teams. As of July 2021, IWP have acquired 22 IFA businesses in the past two years alone, demonstrating the speed at which the sector is changing.
A fragmented market?
Private equity investors have latched onto the IFA sector as it presents a resilient, lucrative market. Crucially, it’s a market which remains fragmented. A key attraction is also the recurring revenue streams offered by most IFA businesses. Investors see a golden opportunity to build businesses at scale based on combined client books and consistent cash flow, in a market which is still mostly made up of small, independent operators.
One other factor driving consolidation is the market demographic. Many independent IFA operators are owned by older advisers coming toward the end of their careers, who are keen to sell their business as part of their own retirement plan.
What does this drive toward consolidation mean for those who might wish to sell their IFA business?
Well, it’s clear that there may never be a better time to sell. The rewards of being acquired can be lucrative, both in terms of the immediate financial injection and the opportunity to become part of a larger, well-resourced group.
But selling a business can be a tough and complex proposition. Sellers, unversed in the art of mergers and acquisitions, may find themselves on the opposite side of industry giants backed by a host of expert advisers. Add to this the inevitable emotional strain of handing over control of a long-loved and laboured-over business, and it’s no surprise that many sellers may be daunted by the very thought of being acquired.
There are also significant risks involved in a business sale. In any buy and build acquisition, there will be complex issues surrounding the integration of IT systems, intellectual property transfers and taxation issues. This is why it’s crucial that prospective sellers have an expert guiding hand throughout the sale process.
