Quilter’s planned purchase of AIM-listed advice firm Lighthouse underscores the momentum behind the ongoing wave of consolidation in the wealth management sector.
Quilter has agreed to pay £46.2 million for Lighthouse via its advice arm Intrinsic, offering a 24.5% premium to the IFA’s closing share price of 26.5p on 2 April.
The planned acquisition has received a mixed reception from investors so far.
Analysts at Bank of America Merrill Lynch describe it as a ‘good deal for Quilter’. They noted that the addition of 400 advisers from the Lighthouse network will provide a boost to Quilter’s adviser headcount, which currently stands at 1,621.
‘We believe Quilter will continue to shore up its national advice business through recruitment, training and further acquisitions to drive growth in flows,’ Bank of America Merrill Lynch said.
Some Lighthouse holders are less convinced by the deal. Paul Mumford, who owns 5.4% of Lighthouse through his Cavendish AIM fund, believes the offer deeply undervalues a company with blue-chip clients and good growth potential. He plans to oppose the deal and believes the company’s management have sold investors ‘down the river’.
‘There is nothing wrong with this company and other firms should not let this opportunity go begging. In five years it could easily have a market cap of £100 million and £20 million on its balance sheet,’ he added.
Direction of travel
This begs the question: what does the Quilter/Lighthouse deal tell us about valuations in the financial advice and wealth management sector right now?
It has certainly been a busy period for the industry in terms of mergers and acquisitions. Since the beginning of this year, at least 14 deals have been announced. They include Progeny Group’s trio of acquisitions in Scotland and the south east, alongside two deals from Harwood.
- Bought: Lighthouse
- When: April 2019
- Cost: £45 million
- CANNACORD GENUITY
- Bought: Thomas Miller Investment
- When: March 2019
- Cost: £28 million
- Bought: Castleton Financial Planning
and GD Withe
- When: January 2019
- Cost: £3.1 million (for both)
- KW WEALTH
- Bought: Thomas & Co Financial Services
- When: February 2019
- Cost: £3.3 million
- Bought: Speirs & Jeffrey
- When: June 2018
- Cost: £104 million
Canaccord Genuity Wealth Management has also been busy. It paid £28 million for the wealth division of Thomas Miller Investment last month and shelled out £80 million for Hargeave Hale in 2017.
In 2018, key deals included Rathbones’ buy of Speirs and Jeffrey for £104 million and Seven Investment Management’s acquisition of Tcam.
Yet despite the flurry of activity, the money changing hands doesn’t appear to have increased significantly in recent years – the price of distribution for those that disclosed a purchase figure vary from around 10% to 2.8% of a firm’s assets under management.
Quilter’s strategy and acquisitions director, Dominic Rose, believes there has been no real change in acquisition prices over the past three years.
The company has been very active in this field, scooping up 11 businesses in 2018. Prior to the Lighthouse deal, it had already purchased three financial planning businesses so far this year: Charles Derby, Freedom Financial Planning and Stephen Spires.
‘What we see is a shift in the market for fewer larger firms, but there are still many small businesses around, and I have seen no real impact on business valuations,’ he said.
‘I don’t see valuations rising over the next three to five years, but they might increase after that.’
- 2019 ACQUISITIONS
- Freedon Financial Planning & Stephen Pires
- McCarthy Taylor
- Astute Wealth Management
- Castleton Financial Planning & GD White
- AFH Group
- Hayburn Rock Financial Planning
- Charles Derby
- KW Wealth
- Thomas & Co Financial Services
- Juno Wealth Management, Quest Financial Solutions & Innovative Financial Services
- Thomas Miller
- Mattioli Woods
- SSAS Solutions
- Lumin Wealth
- Hyperion Financial Planning
John White (pictured right), chief executive at Sanlam Private Wealth, which has also been acquisitive in recent years, says one change is that the market has become more competitive. In particular, he highlights growing interest in the sector from venture capital firms.
‘At times the market changes with the dynamics and types of businesses being bought. Some businesses get bought, go into private equity or position themselves for an initial public offering (IPO). It’s the timing of things, and they have to decide whether their strategy is to merge or join a larger business,’ he said.
Pressure on buyers has picked up since 2014.
‘You’ve also got a lot of private equity venture capital-backed businesses. Historically, venture capitalists were not interested in the wealth management market, but now they are,’ he added.
The price paid for a business may be determined by the reason the firm has decided to sell, White said. For example, if it’s an integration, there might be a preference for companies that are not very efficient in terms of processes, as this will drive the price down.
‘We would be competitive for businesses based in big places where we don’t have a presence, such as the Midlands or Scotland,’ he added.
Size doesn’t matter
Vertically integrated firms such as Quilter tend to acquire businesses as part of their strategy to control multiple parts of the value chain and offer a full spectrum of products and services.
However, M&A activity is not just restricted to the bigger firms. It extends to smaller financial advice or discretionary businesses, which buy each other out or merge to lift the burden of rising costs.
‘I see a lot of that kind of conversation going on and that’s one of the things we’re trying to do by offering an umbrella for compliance and regulation,’ White (pictured below) said.
The firm formed its first partnership last year with Marlow-based Ergowealth, providing access to investment services, technical knowledge, special products, consultancy and capital.
Paul McGinnis, who is deputy head of research at Shore Capital, believes consolidation in the financial advice sector has, in part, been driven by advisers planning to retire, as well as higher regulatory and professional indemnity costs.
‘It is not necessarily an acceleration [of acquisitions] but a theme of the past three to four years,’ he said. ‘Prices are rising mildly, but not particularly.’
Analysts and firms agree that, regardless of company size, the trend shows no signs of slowing down. Nevertheless, they do not expect this to signal the end of the local IFA.
‘We have acquired in excess of 30 advice businesses over the last three and a half years, but our focus is on quality, ensuring alignment to our target client demographic as well as cultural fit, and, accordingly, we only acquire less than 10% of the firms that we speak to,’ Rose said.
‘In the longer term, there will be a lower number of smaller firms, but there will always be a place for smaller local businesses.