Imagine that someone has put a lovely big cake in front of you. You’ve built up an appetite and it looks delicious. You have visions of devouring the lot.
But then, all of a sudden, other people start tucking in. Before you know it, half the cake has gone.
You’d be a bit miffed if that happened, wouldn’t you?
A strange analogy, perhaps, but it’s probably how some private-equity-backed consolidators are feeling at the moment.
For many, the aim would have been to gobble up as many independent financial advisers as possible, build up their assets over five to seven years, then look for an exit. It hasn’t quite happened that way.
There are a multitude of reasons, but it boils down to two: competition and regulation.
Many ‘start-ups’ haven’t delivered the growth their backers anticipated due to unexpected competition
Louise Jeffreys, managing director of Bristol-based M&A firm Gunner & Co, says several new consolidators, entering the market at the same time after the pandemic, have played a big part.
The “start-up consolidators”, as she calls them, began to compete over “quite similar” targets.
“I think everybody wanted the same thing and I’m not convinced the private equity’s modelling expected a lot of people to do it at the same time,” she says.
This unexpected level of competition, adds Jeffreys, means many of the start-up consolidators haven’t delivered the growth their backers anticipated.
She elaborates: “They haven’t won as many deals as they might have expected and they are sitting there at £1bn, maybe £1.5bn, under management, after five years of buying businesses.
“They were thinking they were going to be adding £1bn a year and after five or six years they’d be at £5bn to £7bn. At £5bn, or £7bn, they are a nice big business; the private-equity guy is going to make a lot of money. But that hasn’t happened.”
As a result, says Jeffreys, “the consolidation of the consolidators” — which many predicted around the time of the pandemic — is “absolutely, definitely still in the offing”.
Although the Consumer Duty hasn’t caused acquisitions to grind to a halt, it has slowed their pace and affected the consolidators’ ability to grow
She adds: “They are going to look to each other to merge, to be bought out, principally because the private-equity guys are going to get fed up and say, ‘This is a way we can get the scale we are talking about and get our exit.’”
NextWealth managing director Heather Hopkins agrees, stating that she “100%” thinks the consolidators will start consolidating soon. This is partly due to the regulatory and cost pressures they are facing, she adds.
“I speak to private-equity firms on a quarterly basis,” says Hopkins, “and what I hear is that all the numbers are moving in the wrong direction. Fees are going down but costs are going up. There’s more pressure on advice charges, platform charges.
“It is still a good business to be in, but it’s much more challenging. The cost of regulation is enormous.”
Due-diligence pressure
Although the Consumer Duty hasn’t caused acquisitions to grind to a halt, it has slowed their pace and affected the consolidators’ ability to grow.
According to data from NextWealth, in 2023 there were 33 acquisitions between January and the end of April. In contrast, this year there were 28 acquisitions in the same period.
Simply, there is greater pressure on the due diligence consolidators now carry out before buying a firm, and on how effectively they implement it post-acquisition.
As Jeffreys explains: “Consumer Duty has changed whom the consolidators are buying and what they do with them afterwards; but their appetite to buy has not.”
The aim would have been to gobble up as many IFAs as possible, build up their assets over five to seven years, then look for an exit. It hasn’t quite happened that way
Effective due diligence means understanding the risk involved in acquiring a business. And that leads us to the next problem: getting good data. When NextWealth spoke to 19 consolidators in February, this was the top challenge all of them identified.
Returning to the cake analogy, the consolation for hungry consolidators is that there’s still an ovenful of IFAs looking to sell. But the cake eaters, surely, will soon start turning on each other to feed their appetite for growth — and then things could get very messy.
Dan Cooper is news editor. Contact him at: daniel.cooper@moneymarketing.co.uk
This article featured in the July/August 2024 edition of Money Marketing.
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