The rapid surge of M&A deals in the UK financial advice market shows no sign of stopping as 2021 was the year for private equity backing in the sector.
According to a report by corporate finance boutique Dyer Baade & Company, 16 private equity firms entered the advice market last year.
This means there are now 31 active PE-backed consolidators.
The breakdown of PE firms backing advice consolidators per year is:
- 2 pre-2016;
- 1 in 2016;
- 1 in 2017;
- 0 in 2018;
- 5 in 2019;
- 6 in 2020; and
- 16 in 2021.
In terms of bolt-on acquisitions, there has been a 283% rise in deals to 88 in 2021 from 23 in 2018.
There has also been a 17% increase in median prices for bolt-on acquisitions in the last 12 months.
Future of advice acquisitions
The M&A 2022 – Outlook for the UK Wealth Management Industry report found that 89% of all IFAs in the UK have five advisers or less and just 48 firms (1%) have more than 50 advisers.
Overall, there are 5,137 firms and 27,501 advisers in the advice industry.
Dyer Baade & Company said in the report: “Acquirers will therefore either need to acquire large numbers of small firms, or face increasing competition for larger targets.”
Daniel Baade, chief executive of Dyer Baade & Company, added: “2021 has been a remarkable year for the industry. We have seen an unprecedented influx of new private equity capital into the industry, increasing the number of private equity backed consolidators to 31.
“At the heart of most private equity strategies is Ebitda-multiple arbitrage: Buy a number of smaller businesses cheap, consolidate them into one larger firm and benefit from the valuation premiums given to larger businesses.
“Our research shows that the potential for Ebitda-multiple arbitrage is substantial and could exceed 130% in some cases. It is therefore no surprise that, in addition to the private equity-backed consolidators, a significant number of regional and privately-owned firms have also started to raise financing to compete with the larger firms for acquisition targets with the aim to grow through M&A.
“Whilst the long-term macro trends are very supportive for the industry, our data shows that prices for small, medium and large acquisition targets have started to increase by up to 70%. Such an increase in prices makes it much harder to create value through M&A, in particular if buyers are pricing execution risks correctly.
“We expect the M&A market to continue to be strong in 2022 and valuations to continue to be at the top end of the spectrum. The increase in new PE-backed consolidators, deal activity and therefore valuations will make it harder for buyers to create value through simple consolidation.
“Whilst multiple arbitrage will remain a significant factor in value creation, planning to exploit synergies and technology will be key to create value at similar rates compared to prior years.”