M and A

IFA Luminary Is Unhappy As Private Equity Firms Eye UK Wealth Manager Targets

Tom Burroughes Group Editor London 12 December 2013

IFA Luminary Is Unhappy As Private Equity Firms Eye UK Wealth Manager Targets

Amid the flurry of merger and acquisitions among UK-based wealth managers and advisors in recent months, one small but noticeable trend has been the involvement of private equity.

Amid the flurry of merger and acquisition activity among UK-based wealth managers and advisors in recent months, one small but noticeable trend has been the involvement of private equity. And an outspoken practitioner in the UK sectors is concerned about this pattern.

In early November, Permira, one of the largest private equity houses in Europe, purchased Bestinvest, the UK wealth management and advisory firm; Bridgepoint, another private equity firm bought Quilter, the UK investment house, from Morgan Stanley, in early 2012. (Quilter has subsequently joined with Cheviot Asset Management.) In 2011, Duke Street acquired a majority interest in UK Wealth Management, an IFA. As late as this November, there were media reports – so far not substantiated officially – that Permira was poised to buy the UK wealth management business of Deutsche Bank. Belgian investment firm RHJ International bought Kleinwort Benson, the venerable UK private bank, from Germany’s Commerzbank in 2009 (the German firm was forced to sell its non-domestic businesses as a condition of receiving state bailout aid).

In a related field – trusts - Doughty Hanson, another private equity firm, bought Equity Trust in 2010; in September 2009, Waterland Private Equity Investments, a firm with operations in the Netherlands, Germany and Belgium, bought out Intertrust, operating in the global trust and corporate management services business.

Given that private equity buyout players typically have a three- or five-year horizon over which they realise their clients’ investments (or else suffer a nasty bite to internal rates of return), are such organisations likely to have wealth management clients’ best interests at heart? No in most cases, argues Brian Spence, founder of Harrison Spence, a business advising IFAs and similar organisations about M&A.

“The raison d’etre of private equity firms is to achieve, often ambitious, returns for investors. With a 3-5 year time horizon typical and their eye on a sale to another company or IPO, private equity firms often have ambitious growth plans and want to build scale quickly. For this reason, their focus is mainly on obtaining assets. The acquisition of larger firms is the best way to do this and firms with £500,000 plus in fund-based renewals are especially sought after, with no upper limit on the size of the deal,” Spence told WealthBriefing.

He said the regulators who have pushed the Retail Distribution Review programme of UK reforms – with its impact in pushing up costs and creating “orphans” among smaller clients who are increasingly excluded from affordable financial advice – have to a certain extent created a situation where private equity firms are able to pick up such companies.

“As many smaller firms struggle due to the regulatory and administrative demands on them post-RDR, it is creating opportunities in the industry. Shrewd outside investors are taking advantage of this,” he said.

Spence said the regulatory cost burden has an impact that those who implement it are often constitutionally incapable of appreciating. “The regulator tends to have a civil service mentality. Working with entrepreneurial IFA businesses is therefore always going to be conflicted-to the detriment rather than the benefit of the end user, the client,” he continued.

“The buyers of businesses that see the potential in and are dominating M&A activity in the industry at present have widely differing models,” he said.

Spence is at pains to stress that not all buyers of such businesses have a short-termist mindset, and for those who take a longer view, the benefits should be worth it.

“Some do have a short-term profit motive, but others take a longer term view of what they buy and this will naturally benefit the service proposition to the end-client,” he said.

RDR impact

Spence is not the only person to reckon that the RDR, and a general rise in costs, is forcing consolidation among advisory businesses, attracting in private equity players that have traditionally not been a prominent type of owner in this space. (Wealth managers have traditionally been likely to invest in private equity than the other way round.)

Stephen Wall, senior analyst at Aite Group, the consultants, noted in a recent blog comment that Permira’s Bestinvest deal is a sign that private equity activity may significantly increase, after a number of false dawns. He wrote: “Under the RDR regulatory regime, it is common knowledge that firms are being squeezed and deals are coming to market.”

“The interesting thing for Permira, compared to RHJ International and Bridgepoint, however, is that the firm is closer positioned to the huge independent financial advisor space, smaller discretionary fund managers, and the online advice market, throwing open a very interesting prospect for Permira, and one that was no doubt in its strategic thinking: It is now positioned to fill the famed "advice gap" - where millions are thought to have been left without access to financial advice under the RDR as firms have focused on higher value and wealthier clients - and responding to investors' increased appetite for self-service and supported platforms,” Wall added.


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