Acquirers in the financial advice market come in all sizes.
Not all business have the capital to fuel a large range of M&A deals. Not every firm has been pumped with private equity cash to boost the coffers.
So, firms have to look at all the options available if they want to grow via acquisitions. In the last year, International Adviser has reported on three IFA firms that have agreed loans from banks.
Banking group Santander provided Sedulo with a £2.85m ($3.23m, €3.26m) funding package to help the firm expand in the UK wealth management sector.
International Adviser spoke with OakNorth Bank about its goal to be the go-to banking group to help IFAs with their acquisition plans.
Target the market
Stewart Haworth, director of debt finance at OakNorth Bank, told IA: “The stats show around 25%-to-30% of financial advisers are looking to retire in the next five years and the average age of an adviser is around 55.
“That creates a market of consolidation and growth. That’s really where we found an opportunity to support ambitious management teams which have built and scaled reputable businesses. There is a lot of private equity interest in the market because the dynamics of the sector are positive, in terms of the robustness of revenue and cash generation.
“There’s transactions happening in the market because of the dynamic of the aging population and advisers looking to grow their own businesses in that big market space. We’ll continue to see an acceleration of M&A over the next few years.
“Within the IFA and wealth management market, we look for the same attributes we look for in any business, which is a good management team, solid cash flows and a business with a good plan.
“Some of the other lenders are turned away from the IFA market because it’s a regulated industry. But what that means for us is that there’s a compliance area that you’ve got to get your head around and understand. We have done that now and have done a few transactions in the space.
“We have learned from them and what we’re starting to do is target the businesses that are out there looking to make acquisitions and give them the funding war chest to support that.”
Attraction of debt financing
So, why are IFAs turning to debt financing and loans to fund acquisitions?
“From an owner and shareholder value perspective, it is a pretty simple arbitrage,” Haworth said. “Growth can be accelerated for a firm through buying a company or assets rather than hiring an adviser to build up assets over time. Head office functions can be more efficient in order to provide improve customer service to consumers.
“Why use bank lending to do that? The obvious answer to that is because you’ve got to outlay a large sum on day one to get a large income over the next 12 months which requires funding.
“There’s a cash flow timing element which needs to be funded, and most of the sector isn’t private equity- or large corporate-owned. The majority in the market don’t have large balance sheets to make acquisitions without the need for funding.
“Everybody else in that middle ground is having to look for funding as most SMEs are trying to grow.
“OakNorth was invented to support the missing middle, which is owner managed entrepreneurial businesses looking for growth capital, and it’s exactly the same in this sector.”
Competing in the M&A market
Small and medium advice firms turning to acquisitions to grow is ambitious.
But are they going to find it hard to compete with bigger firms?
“The big corporates at the top don’t necessarily want to buy the one-man bands because their growth is 10/20% per annum,” Haworth said. “They are trying to buy the SME. Then, the SME is looking at the smaller firms/single advisers and this is natural filtering down.
“We’ve backed AFM and Cullen Wealth. AFM has got about £500m in assets under management and Cullen Wealth has about £1.5bn in AuM.
“These are big numbers, but quite small relative to the size of the market. Those are the types of companies that are buying the one- or two-people advisers because for them to add on £50m or £100m in assets under management is a good proposition.
“It’s a filtering down exercise. The middle ground is trying to get to a milestone because by hitting a milestone they become more attractive to bigger players who will pay larger EV multiples.”
As much as the IFAs are looking to grow, OakNorth Bank wants to expand its work with acquisitive advisers.
“We are still a new lender and if we can lend around £250m to the IFA space within five years that would be incredible for us,” Haworth said. “We don’t see the sector going away. There’s more mobility in the employment sector, so people are picking up multiple pensions plans across their careers and even more so since the introduction of auto-enrolment.
“The market will always be there and expect it to grow over a number of years. We typically offer five-year loan terms, and tailor each funding solution not the needs of the borrower.
“Our view is we’d like to target as many of those businesses. I don’t think we have a cap or a target number. It’s just a case of getting out there, having conversations and working out who wants to be acquisitive.”