The defined benefit (DB) pension transfer market has made the financial advice industry evolve dramatically over the last few years.
It has also impacted the M&A market in wealth management, as consolidators have previously tended to steer away from business with DB legacy cases and permissions.
But this may not be the case anymore.
Joshua Lee, senior broker at M&A consultancy firm Gunner & Co, said at the firm’s recent webinar ‘selling an advice business with DB Transfer exposure’: If this was the conversation we were having a year or two years ago, we would be talking about a blanket more often than not.
“I think now, we’re more into the meat of the businesses that are looking to exit the industry with some form of DB history. It is much more of a review and see process as opposed to no from an acquirer.
“You’ve got more chance than you probably had previously.”
Types of buyers
Lee also spoke about the different types of buyers in the M&A market and what they think about DB legacy cases.
“I think there’s probably sort of three categories maybe, of buyers,” he added. “There are those that will not consider DB work whatsoever, no matter size or any kind of review or risk analysis on that. There’ll be people who will consider it for an asset purchase, and but only for asset purchases. But there will still be businesses that will do a risk review based on your DB transfer position.
“The potential issue with that is what contractual security they then wish to put in place to ensure that they’re covered in the event of whatever may or may not happen in the future.
“That can be sometimes a hefty personal guarantee that you need to then contractually agreed to, in order to sell the shares in your business, which for many people we’re seeing that be quite unpalatable.
“It is down to what is considered significant, in many respects, some people may deem a very small number of very small historical DB transfers as being insignificant.”
Proactivity
During the webinar, Andy Sutherland, associate at business management consultancy firm Telos Solutions, spoke about how selling firms can help ease the issues of DB legacy cases.
He said: “If you are the one who brings that to the acquirer and say ‘I have got 25, but these 25 have been assessed independently, we can show you the data on these, they’re not risky’.
“That’s far more compelling to them coming back and saying, ‘we found 25 on the book, and we’re very nervous and actually my data is not very good’.
“This is about the proactivity, and then the importance of the proactivity. You get on the front foot, you prepare your case, and set your stall out ready for your purchases when they come.”
Louise Jeffreys, managing director at Gunner & Co, added: “I certainly have worked on a number of transactions where the buyer has asked for a DB transfer review during the transaction, and asked for the vendor to pay for it. What you’ve got is the cost of the DB review, without any time to actually do anything remedial.
“If you’re a couple of years out from a sale, and you do have a certain amount of this business, and you’re concerned about the rest, I think if by undertaking that review in advance, you’re likely to be having to spend the money on it later anyway.
“But actually, you have some control, and over the narrative as well.”
Revoking permissions
The panellists were asked whether a selling firm should revoke their permissions before a sale to help ease the due diligence issues.
David Edwards, associate at Telos Solutions, said: “I would hold on to them to be honest. You need a fundamental justification for removing them rather than a generic one.
“Clearly, if you are no longer executing DB transfers, then one reason to remove those permissions is one shouldn’t maintain permissions one doesn’t use in the business. I think there is an argument there. With that caveat. Personally, I think I would hold on to them.”
Sutherland added: “The plausibility of why you’re giving them up just because you don’t fancy it, isn’t a great answer. You need something more strategic.”
