The author of this article argues that now is a good time for independent businesses to be thinking about a sale or raising capital. There is a lot of capital ready to be deployed in backing either new consolidators or sitting behind existing consolidators.
A trend of private equity firms buying into UK financial advisory and wealth management firms isn’t a brand-new phenomenon, but there has certainly been quite a flurry of activity of late. With their billions of pounds in “dry powder” funds seeking (hopefully) profitable destinations, private equity houses have fastened on to a fragmented wealth sector that they think need shaking up. Notwithstanding the impact of COVID-19, rising regulatory burdens and other headwinds, the expanding ranks of high net worth individuals in the UK and abroad make this an attractive market for private equity firms to tap into. With their time-horizons and need to chalk up robust internal rates of return (IRR), are such entities best suited to owning wealth management firms, and more to the point, what about the end-clients? To try and answer some of these points is Christian Kent, managing director at Houlihan Lokey, a US multinational investment bank. (More detail on the author and his firm are below the article.)
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Private equity continues to see the UK wealth management industry as highly attractive as the sector continues to experience consolidation through this influx of fresh capital. Since the beginning of 2020, we have seen seven significant private equity-led transactions in the UK: Apiary/Radiant, Beech Tree/Advanta, Carlyle/Harwood, CBPE/Perspective, Flexpoint Ford/AFH, HPS/Canaccord Wealth, and Warburg Pincus/Tilney.
The need to consolidate is driven by a number of factors: the generational change within the advisory firms; the need to transition clients and employees to a modern, stable platform; and the desire to monetise their client books. The UK wealth management industry has proved to be attractive to private equity - and a COVID-19 beneficiary - due to the resilience of the business model. The investment management industry tends to see outflows based on fund performance, whereas wealth managers benefit from “stickier” client assets.
Investors want to back resilient businesses, and the wealth management business is a growing industry with a natural “moat,” i.e. the barriers to entry are high and attract a premium. The product-driven fund management industry has become commoditised, and the core fee-based model is under threat from the passive investment model. The investment platform industry is no different - size and scale is the only way to develop.
The broader asset management industry has recognised the trend towards broader financial planning needs and is keen to “close the relationship gap” between the asset manager and the customer. Schroders and M&G in particular are building advice propositions to create this closer relationship.
What does the future hold for the market? How do you create and sustain a growth strategy in the UK market, which has high penetration? The market is highly fragmented and, in order to grow the client base, acquisition is perceived to be the easier and cheaper route. The exception to this rule is perhaps St James’s Place and Hargreaves Lansdown, which already have well-developed franchises.
To create a long-term business model, wealth managers must produce a service to attract clients across the broad strata of entrepreneurs, wealthy professionals, and younger generations. With a lack of awareness as to what each of the wealth managers and platforms are offering and how much the service costs, it is hard for individuals to know where to go and make comparisons. In this respect, the fragmentation probably works against the industry.
In that sense, firms that have more of an execution-only/DIY offering have been able to attract more customers and scale rapidly, e.g. AJ Bell, Hargreaves Lansdown, and Interactive Investor. More recently, share-trading platforms are getting more attention from the younger generations. Can these platforms convert clients to a wealth management offering? And how successful are they?
We think that the advice delivery model is critical to future success; “hybrid” financial advice is how we refer to it. The advisor is at the centre of client relationships but is supported by digital/technology capabilities. Building a better and more specialised investment offering for clients is the key. Often, UK wealth managers have rudimentary offerings, and those at scale will have a form of “discretionary fund management” that is not yet a holistic offering. We are seeing increasing interest in alternatives (e.g. private equity, real estate, hedge funds, private credit, etc.) for the right investors, typically high net worth/ultra-HNW, and sustainable investment opportunities that help to attract younger clients.
A one-stop shop is not universally available in the UK, and the experience can be clunky and incomplete, as clients have to go to various places for their complete needs. We have seen this be very effective in other markets, and it creates a very sticky relationship between the client and the firm.
Drawing on experience from a couple of markets, firstly Scandinavia, often an earlier adopter of technology, we have recently advised a business called Formuesforvaltning on its transaction with ICG and IK. It has built a highly effective digital onboarding process, hybrid advice proposition, and a holistic service for its clients. As a result, it is the number one player in Norway and is growing rapidly in Sweden. Further afield in the US, today we see the industry recognising the very significant wealth transfer that will take place over the next 30 years. It is estimated that, at its peak (2031–2045), 10 per cent of the total wealth in the United States will be changing hands every five years. The approach used to build franchise value and win new clients is further advanced than we typically see here in the UK.
This is a good time for independent businesses to be thinking about a sale or raising capital. There is a lot of capital ready to be deployed in backing either new consolidators or sitting behind existing consolidators. For the mid-sized or larger platforms, whether they are the private equity backed consolidators, banks, or product providers, there is a great opportunity for them to evolve their models, taking advantage of new technologies to provide a better and more cost-effective offering to their clients.
About the author
Christian Kent is a managing director in Houlihan Lokey’s Financial Institutions Group. He is based in the firm’s London office. Previously, he was an MD with Quayle Munro prior to its acquisition by Houlihan Lokey in 2018. He joined Quayle Munro in 2014 from the Financial Institutions Group at Canaccord (formerly Hawkpoint). Prior to Hawkpoint, he spent four years at PwC in London with a focus on banking and capital markets. Throughout his career, Mr Kent has advised on a wide range of completed transactions, including sales, acquisitions, capital raisings, IPOs, debt financings, and restructurings. Mr Kent has primarily focused on businesses in credit and specialty finance, wealth management and pensions and fintech.