Private
equity investment in financial advice firms is on the
rise. There’s a strong appetite for mergers and
acquisitions, and PE organisations are taking advantage of market fragmentation,
brought about in part by cost pressures on smaller advice firms and a
retirement generation of financial advisers. I know of more than 30 PE-backed
consolidations, and I’ve heard rumours of a few more.
That
means PE firms need accurate market intelligence that provides them with more
knowledge of the advice sector landscape - support that will enable you to
navigate its complexities.
More
than that, I’m speaking to a lot of PE firms that need search experts who know
the financial advice market. They need access to the right contacts who can
ensure they find the right talent at the right time to fuel their growth and
develop robust exit strategies. PE recruiters are experts in their industry,
but may not know the financial
advice market - or who’s who.
Financial advice market intelligence for PE firms
The
financial services sector has been increasingly attracting
the attention of PE firms over the last few years. Why?
In part due to robust growth, strong profit margins and consistent cash flow,
but also because we’re seeing an appetite from smaller advisory businesses to
become part of larger organisations.
There’s
also the fact that many leaders of financial advice firms are reaching the
point of retirement and want to leave their business in good hands. As private
equity firms typically have a specific investment horizon
and exit strategy, they can provide financial advice firms with a clear path to
exit and a potential exit multiple that can be higher than the firm may have
achieved on its own.
Private
equity firms have been following these market trends and opportunities by
pouring millions (possibly billions) into the UK financial advice sector over
the last few years. Many advice firms are really solid, there’s a great
opportunity for consolidation and investors looking for positive growth
recognise advisory businesses as a compelling proposition.
Another
point of note is that private equity firms probably see synergies between
financial advice firms and other companies in their portfolio, such as insurance
or investment firms. These synergies can be leveraged to create new revenue
streams.
How many PE firms have acquired financial advice
businesses
Analysis
by Dyer Baade & Co. counts 31 active
private-equity-backed consolidations as of January 2022 - a figure that had
doubled in 2021. Of these, 16 firms received investment during that year, and
there have been a few more since that time. More recently, a figure of note is
the 11% rise
in mergers and acquisitions targeting financial advice
firms, up to a high of 440 in 2022.
It
seems many of the private equity firms in the financial advice sphere are
looking to follow a buy-and-build strategy, making further acquisitions on the
way to building a company with a more complete financial services offering.
What PE firms are saying
Private
equity firms are enthusiastic about investing in the financial advice sector.
From the leaders I talk to at PE firms, I can see that they believe the
industry is ripe. Just some of the things they tell me is that it’s a combination
of factors that are influencing this. These include healthy margins, consistent
cash flow, solid growth and low capital needs in comparison to other types of
financial services firms.
Daniel
Baade, CEO of Dyer Baade & Co., says,
“Typically, 70 to 80 per cent of an IFA’s revenue is recurring. This makes the
revenue and cash flow very predictable, which is very valuable for a private
equity firm. The industry is also incredibly fragmented... Most of these firms
are small, they operate sub-scale and it makes sense to consolidate them.
There’s also a market where you have a lot of willing sellers, so it’s not hard
to find targets, which also makes it quite attractive.”
Challenges & opportunities for PE firms in the
advice market
As
a private equity firm, investing in the financial advice market offers both
challenges and opportunities.
Challenges:
- The
main challenge is operational integration. There’s often a strong
relationship between an advisor and their client that’s been built on
trust. This must be taken into account: if you don’t, you run the risk of
the advisor leaving because they don’t like the way the business is being
run, or the client leaving because they aren’t getting such high quality
service.
- The
market is hot. That means it will become more difficult for PE firms to
achieve their forecasted profit.
Opportunities:
- Look
to the regions. If you invest in a financial advice firm that knows and
understands the regional market, they’re more likely to be able to grow
within that region with the cash injection.
- Give
the advice firms that require reinvigoration the money they need, but also
provide them with vision and ambition. There’s a high potential for that
business to grow, but also be re-rated, and that means you can exit for a
higher multiple of earnings because you’ve significantly improved business
performance.
Why using an FS search expert will bring in the
talent that drives your advisory business forward
Financial
services recruiters are specialists, with in-depth knowledge and experience in
the market that allows us to understand the unique requirements and culture of
a financial advice firm. We also have a network of contacts, meaning we’re
best-placed to find the right talent for a specific role.
A
deep understanding of market rates also means we can negotiate better salaries
for candidates, leading to cost savings for PE firms - and getting the right
people in can open new opportunities, making a positive impact on your bottom
line while supporting your exit strategy.
I’ve
personally placed many C-suite roles in financial advice firms, from COOs and
Chief Risk Officers to Managing Directors and Heads of IT.
If you’d like to chat through your recruitment
needs for senior positions in financial advice, contact me directly
and let’s set aside time for a call.
