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IFA sector ‘less risky’ investment for private equity firms

Ex-Skandia CEO says backing will help his company buy around 20 businesses ‘in next three-to-five years’

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During the pandemic, the majority of the conversations have been about how businesses can be saved.

Setting up a new company during the covid-19 outbreak is unconventional but not uncommon.

In November 2020, IFA consolidator Radiant Financial Group launched after CWB, PPS and Resource Mortgages joined forces to create the firm.

It wants to grow its business both organically and through a series of acquisitions, and started life with 20 financial advisers and £800m ($1.1bn, €933m) in assets under management.

International Adviser spoke with Peter Mann, chairman at Radiant Financial Group, to discuss what the firm is looking to do in the advice sector.

Setting up during a pandemic

“I don’t know whether it’s during a pandemic or not, bit it is quite difficult to set up a company anyway,” Mann said. “We launched in November and we probably first started talking about it around February.

“There weren’t any practical difficulties. In terms of the process of setting up a company, its lawyers, accountants, due diligence, all those things that you do remotely.

“In a funny sort of way, I don’t think it was any less efficient in setting it up. I mean, the clear difficulty is that you’re bringing together a whole number of people, many of whom haven’t actually met face-to-face and that that kind of de-personalises it a little bit.”

IA asked Mann, who was previously the chief executive of Skandia, about whether the industry has seen the last of small independent firms set up shop.

“The barriers to entry are just harder than they were 10 or 15 years ago,” he added. “That’s because the compliance regime and the amount of time that you have to spend in ensuring your business is compliant, as well as the capital adequacy that you need with the funds that you need at your disposal.

“It’s not a game built for the small-to-medium-sized enterprise now without the support of the larger networks or the larger nationals. You can still do it, but it’s harder.”

Private equity surge

Setting up a business is not cheap, especially in the advice sector, which has been suffering with rising regulatory fees and costs over the last few years.

But many firms have been getting a helping hand to grow in the industry through private equity backing.

Most recently, UK private equity firm Sovereign Capital Partners backed Hove-headquartered IFA and wealth firm Skerritts in a deal worth £55m.

This was no different for Radiant, after Apiary Capital invested an undisclosed sum in the group alongside existing management.

So, why are private equity firms looking at the advice market?

“Private equity, in its essence, is pretty simple,” Mann said. Private investors give them money and they give those private investors more money back at the end of a fixed period of time.

“When private equity invests, what they have to be convinced of, primarily, is that the value of the asset that they’re buying will be worth more in four to five years’ time, typically, three to four times what they pay for it.

“Now, that’s pretty risky. But in financial services, it’s less risky for two reasons.

“One, because increasingly post-RDR, most of the revenue from most of the advisory firms now is recurring revenue. We have gotten rid of upfront commissions.

“And also, the proven fact from any number of historical examples is the more businesses you put together, and the bigger scale you get, the more multiple you get on exit.

“You look at any valuation in the marketplace. You look at St James’s Place and Hargreaves Lansdown, the big engines have high multiples. The financial dynamics are a proven case.”

Acquisitions

The private equity backing from Apiary Capital will help the firm carry out its acquisition plans.

Mann said that the firm “will be pretty selective”, and Radiant will not buy like his “old shop Harwood at around 80 firms”.

“We’ll buy a dozen-to-20 firms in the next three-to-five years.”

The M&A market shows no sign of stopping and Mann says sellers are now starting to contact acquirers.

“There’s a lot more interest in selling because a lot more people are ringing advisory firms asking them if they want to sell,” Mann said. “That’s because there are more consolidators in the marketplace, so therefore it’s triggering the mind.

“Then there are two other factors. The fiscal imbalance that we’ve got as a result of covid needs to be addressed.

“The other is purely demographics. It is an aging population. There are more and more advisers who are coming to that age or maturity in their business where they say, ‘I do need to realise the value of this asset at some point in time, so let me begin the conversation now’.”

Competition

Over the last few months, more and more financial advice firms have become active in the M&A  market.

This leads to more competition to buy companies.

Mann said: “Opposition is definitely growing and it’s not surprising because when you think about the financial metrics of consolidation, it is a pretty compelling case.

“How do I feel about competition? Unless it gets completely saturated, which it isn’t, then I think competition is a good thing, providing you’re able to differentiate yourself from the competition in a way other than price.

“I think there is a danger that, if the only differentiator we apply is price, then what happens is the price of advisory firms just goes up. If somebody is prepared to pay seven times, the next competitor is going to pay seven and a quarter times or eight times. I don’t think that’s healthy.

“I want the advisory firms to be able to choose between different kinds of models, different kinds of approaches, different kinds of people, as well as it just being a price factor because otherwise prices just go up and you pay too much for the asset.”

Training advisers

Radiant’s plan is not just to buy companies and consolidate.

It has organic growth ambitions too which include an academy, and Mann said that the firm will “grow it”.

“The most efficient way in terms of use of capital in growing your business is organically rather than inorganically,” he added.

“If you buy some more things, you’ve got to integrate them, and you’ve got that integration indigestion. You buy some additional things to what you’ve already got, and it’s a much smoother and cheaper process. We will do a combination of both.”

But with more companies like Schroders Personal Wealth, M&G Wealth and Kingswood starting up academies, how can businesses like Radiant compete?

Mann added: “An academy by nature should be a nursery ground for the entity that you want people to grow into. Things like SPW, they have a really clear objective. They are recruiting people for a multinational sales engine, which is backed by a private bank and an investment company.

“The advice they’re principally going to give is to existing clients of either the bank or in some cases, the investment company. But that’s very different from giving independent whole-of-market advice in a small-to-medium-sized regional IFA like us.

“It’s really what the individual wants. Does the individual want to be part of an internationally branded secure institution providing advice to a whole list of existing customers? Or do they want to join a small regional advisory firm that has perhaps the opportunity to identify yourself more because there’s fewer of you?”

Ambition

IA asked Mann what he wants to see Radiant achieve in the next five years.

“I want us to be relevant,” he added. “I want us to not just be at the periphery of the consolidation market, but relevant in the market and want people to think that Radiant are different.

“I’d like us to be remembered as the consolidator with difference, and I think if you get remembered as the consolidator with difference, then the right sort of firm should come your way.

“I’m more interested in being different than acquiring a whole load of advisory firms. I’d like to acquire a load of advisory firms, but I’d like to acquire them for the right reason.”

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