The UK advice sector has been rife with M&A deals, particularly since RDR, but one of the key consolidators believes some rivals just want to “rip” businesses apart.
Kingswood has been busy with acquisitions over the last few years. It most recently bought Sheffield-based financial planning business WFI Financial for £14m ($18.3m, €16.6m).
To get some insights into the sector and Kingswood’s motivations, International Adviser spoke to group chief executive Gary Wilder and group chief financial officer Patrick Goulding.
Rip businesses apart
Wilder told IA: “When we looked at the sector; we saw that, from our perspective, there is a very significant number of independently-owned wealth planning businesses that are owned by several partners.”
Those ones where the partners are looking for an exit are “not typically the businesses that we want to acquire”.
“In fact, the businesses we’re acquiring are led by owners who typically want to stay, whilst creating a capital event.”
This allows them to “take some cash off the table”, Wilder added; reflecting “the hard work and evaluation of the businesses that they have been able to create”.
“[The owners want to] look after their existing staff well, but also stay involved in the business and be incentivised to grow, with continued investment from Kingswood, whilst having the burden of running their business, day-to-day, lifted out by Kingswood.
“Most consolidators out there want to rip those businesses apart and impose their views.
“They don’t want these guys to stay, they want to grab their books and they want to impose upon them their sort of their way of doing business, and they want to effectively affect a significant change in the business. That is not our approach.
“Unlike any other consolidators, we embrace seniority.”
The Kingswood chief was also outspoken about how other firms are funding their acquisitions.
“The sector is very interesting, in the sense, you have a number of consolidators out there that are perhaps not as stable as you might think they are,” said Wilder.
“When you acquire a wealth planner, there’s an element of cash paid up front, but there’s a deferred liability, that is due to be paid over time.
Without naming names, he added: “If you look closely at some balance sheets, you’ll see there’s a very significant creditor balance and the question is, how’s it going to be financed?
“Because there’s an expectation that the cash flow that’s going to be generated from the business is going to be sufficient to cover the deferred liability.”
But that doesn’t always turn out to be the case.
“Cash flows they’re anticipating or expecting don’t necessarily materialise at the time you expect them to materialise.
“The theory is interesting, but the reality is a different thing. A robust balance sheet is essential and our focus at Kingswood is on ensuring exactly that.”
In September, the UK wealth firm raised an investment of up to £80m, by issuing irredeemable convertible preference shares to some investors and funds of investment manager Pollen Street Capital.
The share will then be converted into Kingswood ordinary shares, on or before 31 December 2023, valued at 16.5p each.
“It was critical for Patrick and myself that we could show the market that we had this very robust balance sheet, that there was no creditor on our sheet from a lending perspective, and that we had permanent capital to move into the next phase of our development,” said Wilder.
“If you think about the Pollen Street capital raising, that probably gets us about six or seven acquisitions, depending on size.
“There are around about 500 independent businesses in the UK, which are independently owned, that sit in our sweet spot.
“We have a very exciting pipeline, there is no shortage of opportunities.
“Putting that capital to work sensibly is not particularly difficult. What’s difficult is finding the right fit for the business, robust underwriting and integration, which is where we focus all our time and beyond.
“We will be looking at doing another capital or equity raise to continue the growth story, at some point, once we have bedded down the acquisitions that we’ve got and the ones that we’re going to be doing.”
So, what is the firm looking to buy next?
It acquired UK financial advisory firm Marchant McKechnie for approximately £4m in October 2018; followed by Thomas & Co for £3.3m in February 2019.
Additionally, it entered the US market in May 2019 through the acquisition of a 7% stake in registered investment adviser consolidator Manhattan Harbor Capital, and completed a second US deal in December 2019.
“We are broadly agnostic in terms of location,” Goulding said to IA. “We’re looking to create a UK regional network of offices.
“We’re in due diligence on a potential opportunity in Glasgow right now, we are also in due diligence on one that essentially covers the whole of the north east. And then we’re also hopefully, in the next couple of days, entering exclusive due diligence on a platform in Essex.
“Hopefully, we will complete those transactions by the end of the first quarter. These are subject to due diligence and final documentation – no binding commitments are yet in place.”
Goulding also said that the firm would be keen to bolster its operation in areas where it does not have a presence, such as the south west and north west of England, as well as around London.
“We are looking at a number of smaller books of business bolt-on opportunities for our existing platform,” he added. “And even some of the ones that are in due diligence, we also have flagged potential bolt-on for those as well.”
The wealth firm has openly expressed its plans to expand into Asia, with its eye currently trained on Singapore.
“We could press the button on it tomorrow if we wanted to, but we sort of held back,” Wilder said, citing the acquisition of Chalice before Christmas.
“We definitely want to have a strong presence in Asia.”
Goulding also said that the firm has identified a partner in the region, but it is “trying to focus now on the UK and the US”.
The Asia deal could take place “maybe sometime later this year”, he added.
Wilder said: “The deal that we’re looking at, at the moment, is a combined acquisition and a joint venture with an operator out there.
“We’re not the type of people who are so arrogant that we think we can do everything ourselves.”
Their ideal partner is strong and capable, with a good product range and a client base that Kingswood could tap in to, Wilder said.
“But at the same time, have some sort of joint venture arrangement, which is the sort of deal that we’re talking about at the moment.
“That is certainly our preference.”