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‘Big fat chequebooks’ squeeze small IFAs out of M&A market

As acquisitions by consolidators leave rivals in the dust

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Many different UK financial advice firms in all shapes and sizes have become part of the ever-growing M&A market.

One of those businesses is Sussex-based Pembroke Financial Services. It acquired Future Financial Services in April, after receiving backing from a local private investment company called Cow Corner.

International Adviser reported on 16 November that Pembroke had made its second M&A deal of 2020 with the acquisition of GMIFC for an undisclosed sum.

It is surprising to see smaller firms look to grow in the advice sector via acquisition, but they find it tough to compete with the big players in the market.

Consolidators in the market

“I don’t know how we’re going to compete,” Keith Relf, managing director at Pembroke Financial Services told IA. “We don’t have the financial resources necessary to sort of throw money around like some of the big guys.

“There’s a lot of competition, especially this year, a lot of private equity being pushed into consolidators, and there’s a lot of cash washing around. This means that it is more difficult for us as a growth company, rather than as a consolidator, possibly to speak to all the people we’d like to.

“And very often, if somebody is looking for the biggest number at the bottom right-hand corner of the offer letter, then we’re not going to be it, so it’s difficult from that perspective.

“I’m suspecting the latter part of this year and even sort of early part 2021 may be a bit tough for us with the big fat chequebooks floating around.

“But we’re taking a long-term view. We’re not going to rush into anything. I think what we have to find are people who buy into the story of what we’re trying to do in our geography to be the best go to IFA, rather than be acquired for a big chunk of money.

“We’re not trying to dominate the country. We’re just trying to be a force within our geography.”

Strategy

Relf is not going to be deterred by the big players in the advice industry and has M&A ambitions to grow Pembroke.

He added: “We’re having conversations with probably another three or four companies at the moment. They’re quite early stage discussions. Our aim is to be the go-to IFA in Sussex.

“The advent of Cow Corner as our investment partners has been an eye opener for us. It would be natural that we develop an M&A capability, attaching to our natural organic growth.

“We will pick targets well and make sure that we understand them, and make sure that they really understand what we’re trying to do.”

Due diligence

Some of the biggest M&A deals in the financial market have gone haywire and having a lot of money does not necessarily mean an acquisition will work.

Most of the small firms do not have the funding to be able to suffer the problems with a bad deal, e.g. defined benefit (DB) pension transfer legacy cases.

Relf said: “You really have to be relatively spot on in your due diligence and that’s something that we’re learning as we talk to firms.

“With Future Financial, there was no legacy DB liability and that was a nice, simple sort of deal. GMIFC had had some legacy DB stuff and that made it really, really quite complicated after exchange to sort out the professional indemnity issues that came out of that.

“But we got there eventually, these are issues that are not insurmountable, and you have to have a fair bit of flexibility.

“What we’re looking to do is to try and find people that really want to join in understand what we’re trying to do here and rather than just flog their business for the highest possible amount.

“We’re not avoiding those with legacy DB liabilities, but obviously, it makes the deal and the PI cover much more difficult.”

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