The UK financial advice industry has been overflowing with M&A deals – both large and small – for the last decade.
Since the introduction of regulations like Retail Distribution Review (RDR), the market has been consolidating and acquisitions have become a key part of the sector.
There have been some consolidators of all sizes buying up firms like kids in a sweet shop. But is there a point when consolidators end up acquiring each other?
We have already seen big deals take place between acquisitive firms and giants such as between Aviva and Succession Wealth.
International Adviser spoke with Bronswe Cheung, partner at LEK Consulting, to discuss the future of the advice M&A market.
‘On the cusp’
Cheung said: “We think there is a lot of similarity between the wealth sector and the insurance broking sector – but there’s basically around 10-year gap in between. It used to be a very fragmented market but now highly consolidated.
“We think consolidation of consolidators is sort of already happening or it’s on the cusp of already happening. If you are consolidator with £10bn ($12.2bn, €11.5bn) of assets under management, it just doesn’t make sense to distract yourself by buying one or two man bands anymore because it doesn’t move the dial. So, these firms need to get on with consolidation.
“We don’t think it’s going to be the case where there’s just one or two consolidators and that’s it. We think the diversity of the market means that there needs to be different models out there. But it’s very possible that you end up with basically somewhere between 10 to 15 major national consolidators or firms, which basically hoovered up everything they can.
“Between them, there’ll be various different sizes, and every now and then there might be consolidation within those. But what we expect is a steady state of these firms remaining.
“They will have a very clear differentiation in terms of what they do, and how they approach the market.”
But buying out companies is not a cheap business.
The values of advice firms has grown dramatically over the last few years – but Cheung believes this is now starting to slow down.
“I think it is fair to say that valuation has crept up quite a lot and most of those actually happened in the last two years post-covid. It’s slowing down a bit and stabilising. Our view is it’s a good thing because it creates a more stable environment where people can actually access deals.
“One of the biggest drivers of that increase in valuation was American private equity houses coming into the market. They reset the baseline.”
On the matter of PE firms in the advice market, Cheung says that more are looking to invest in the industry.
“We have picked up an increase in interest from PE houses, that we have never interacted with before, interested in what options there are for IFA businesses.”