How is private equity consolidation changing in the advice market?

0:02Amy Austin: Hello and welcome to the FT Advisor podcast. Each week we'll be joined by guests from the financial services world to discuss the most pressing industry issues. I'm Amy Austin, News Editor at FT Advisor, and today I will be discussing the state of the advice firm consolidation market with Nicky Sevel, co-founder and CEO of Woburn Advice, and Tony Spain, who set up IWP Holdings. we've got a big topic to talk about today um you know consolidation is a big talking point in the advice world um especially as private equity deals have become quite more prevalent in recent years and people tend to like to talk about them um tony if we start with you because i understand you do have first-hand experience of selling a firm um as iwp was sold to titan at the end of last year So would you kind of say that we're entering, you know, a new phase of consolidation and consolidators of the consolidators, you know, because it does seem that the big ones out there are really snapping up quite a lot of little firms.

1:08Amy Austin: But then also sometimes you'll come across, you know, a big firm takes over a big firm. It tends that, you know, it's kind of nobody's off the table kind of thing. Well, I would go so far as to say that I'm not suggesting that we're reaching a new phase of consolidation. I think everything is continually evolving. And the circumstances and the context that M &A took place in back in five to 10 years ago has changed enormously. And the PE companies themselves will be cognizant of that and they will be responding accordingly. The first thing to say, of course, is the fact that many of those PE companies that got involved in consolidation five, six, seven years ago will now be through a fairly late stage of their processes and they will be looking to exit at some point in the future.

1:59And that is principal driver of the consolidation of the consolidators. But in the intervening period, a lot has changed. So if you turn the clock back to pre-2020, pre-COVID, we're in an environment where the multiples in the valuations for IFA companies were considerably lower than they are now. And where interest rates were considerably lower than they are now. So for a potential consolidator, PE company or anyone for that matter, the financial models that existed at the time have changed enormously. In those days, it would have been fairly easy to model the acquisition of small to medium size IFAs with a view to an arbitrage between the purchase price and the exit price.

2:51and funding that acquisition largely through, or if not majority through, but with a lot of lending. But of course, as those valuations have risen and risen and risen, and interest rates have gone up and up and up, that is no longer feasible, let alone a model on its own. So a lot of those PE companies today, if they are joining today's market, the arbitrage between buying and selling is far lower than it would be unless you are able to add considerably to the value of that business through increased efficiency through increased P &L or indeed which a lot of them has done by taking a lot more value out of the value chain through vertical integration the other thing was that typically albeit not exclusively my experience was that if you turn the clock back five or six years, the PE houses were involved, but didn't offer much in terms of what they were bringing to the party in terms of expertise or governance or management input.

3:59They kind of left that to the management team that they inherited, for want of a better word, or supported. But that is increasingly changing. And I think that is largely as a result of the fact that the market has moved considerably in the intervening period. And we have seen the arrival and the adoption of an awful lot more AI and data-centric tools and techniques. And of course, it's often this AI and data influx has kind of been driven from the States. So any PE company that has also come from the States will probably be far more cognizant or aware of this than we ourselves are in the UK. So they can offer quite a lot to that equation.

4:45Amy Austin: Yeah, and that's the thing. I think as well, we saw, you know, like a week ago or so, PE taking over PE now, you know, PE firms buying advice firms off of other PE firms. So it is kind of, you know, the market is kind of getting a little bit different. And I think, Nikki, moving to you, like we are seeing, you know, that there are maybe fewer, larger, big consolidators rather than, you know, the new smaller consolidators coming through. Don't get me wrong, you know, we do still see, you know, the small firms taking over one another, you know, when someone wants to retire, especially in more like local towns and stuff.

5:22Amy Austin: But how do these, you know, smaller consolidators work differently compared to, you know, your typical massive consolidators? Yeah, I mean, I actually think, you know, that right across the chain, there's been an increase in buyers in the market. And I think everyone defines themselves a little bit differently. No one really likes to be called a consolidator unless they're probably at that top end of P-backing where they can't call themselves anything different. But, you know, from our research, in the last three or four years, the kind of confirmed number of buyers or consolidators has gone from something like 30, 35, you know, key PE backed consolidators to having there being over 70 firms that are known to be buying other firms in the advice industry.

6:11And I reckon there's a lot that we don't know about as well. So we could be looking at up to 100 different buyers. Now, there's what we see at Wavened Advice is a lot of smaller and immediate to medium size PE backed advice firms popping up and that PE backing could take all different definitions. But at the end of the day, it's private equity and it's money coming and there's sometimes different goals behind it. But there's an increasing popularity there because they have a slightly different feel to them. So if you're an IFA and you're selling your business, it's a different proposition to sell to someone who you become actually one of the family and you might feel a stronger association for your clients to move into that business as opposed to a larger machine that is just going to get flipped in a few years' time.

6:59So the small to medium size are definitely on the rise. And they also have an incredible ability to adopt technology. I think that's what really gives them an edge where, you know, as Tony said, some of the larger ones are getting to the end of their cycle. They don't really have the budget or the intention to bring in any of the new technology available in the market. and that really that that means you know it's a lot harder harder for them to compete and bring the bring the cost of advice down the way they expect to so there's that opportunity for small to medium ones to really take it take this opportunity and run with it yeah and that's

7:36Amy Austin: the thing you know we've heard before that obviously selling a firm isn't always easy you know you have to kind of someone needs to want to buy you tony i know that one of the things that kind of affects this is like poor data and stuff like that you know within an advice firm and like you know these these consolidators are doing their due diligence and you know they're not just plucking up firms they are looking into them and saying you know is this good for us so what kind of what needs to be done by a firm to get themselves like you know like data ready to be bought well the the reality is that whether you're talking about a seller a vendor or indeed to buyer data remains very important on both sides so i'll i'll suppose those in a bit but looking at the vendor at the moment um when in my former life we we made about three dozen acquisitions over a period of three or four years um but you will of course understand that in order to make those three dozen acquisitions we we probably um did a deep dive analysis on 250 plus firms, which effectively meant that we probably only bought about 10 % of those that we actually investigated.

8:51And I don't just mean those that we said hello to, I mean those that we'd actually got down to a serious data trawl with some of these companies. And the reality is, and increasingly so, with all of the increase in regulation, and with the fact that particularly as these companies are now becoming more and more expensive, you can't afford to take as many risks as you might once have been able to do. You know, if that valuation difference, if the arbitrage between the buy and sell was significant, you could perhaps afford to take the occasional risk. Now that that arbitrage is so much smaller, you can't, which effectively means that from a vendor's point of view, having the transparency and the granularity of the data that you have around your clients and your assets, your platforms, your advisor data, as in how many clients they've got, how many visits they're doing, and very importantly, how many clients they're servicing, what's realistic, all of that type of thing becomes more and more important.

9:57If for no other reason than that actually what you might find is that if you don't have that information available up front, we so many times had to go back to particular vendors asking, for more and more and more and more information, which means that it delays the process significantly, that you end up making changes to your SPA every time you find a new piece of information that affects the valuation, which extends the process of the acquisition enormously. And something which you would hope to be able to get done in a matter of weeks becomes months, because the vendors don't have access at fingertips to all of the salient and relevant details that either buyer would need to know.

10:40So not only does it make an acquisition less likely if you don't have quality data, but it also makes a dam site more expensive for both parties. And I, for one, would turn around and look at a potential acquisition and say, my goodness, actually, is this acquisition worth it? If this is going to cost me 80 ,000, 100 ,000 pounds in accountancy, legal due diligence fees and this, that and the other, and this is going to go on for month after month, is that a cost that is worth it? When I've got another company next door that looks pretty much the same, that can give me everything that I need in an instant.

11:18And I think what amazes me about that process as well is that I think so many sellers just thought they wouldn't have to bother or they could, you know, they could get to the end of that experience and, well, I guess the end of their firm before selling it and think that, you know, I'll deal with that at the end. Like what, you know, the journey to actually sell your company is a good two or three years of hard work to get into a state ready to sell. And I know that the market is competitive and that there are lots of buyers out there. But that doesn't mean firms are able to skip these examples of not having data available.

11:57So it is actually an investment in their firm to go and spend that time to get their business ready for sale. There are so many professionals in the industry that are available to help in that process. and there's technology to do that as well now. And so it is a massive investment in the sale value of a firm. It is also, in my opinion, vital as if I were one of those vendors, this is data that I would want because I could be given a hypothetical£1 million valuation. But if I as the buyer cannot see, for example, the quality and the extent of their client service or there is missing data in their files, one of the things I'm going to do as part of that SPA is to take an indemnity on the sellers for that future risk.

12:46Now, that could be unquantifiable. Yes, some of it is going to be covered by PI insurance, but things like client servicing are not. And therefore, if I'm the vendor and I'm selling my business with these, what's the word, caveats, I might find that three years down the line, I end up giving most of that money back again. so as a vendor i would want to know all of that information so that i know what my potential

13:09Amy Austin: liability is yeah and is it kind of important nowadays because obviously the fca is looking into consolidation of advice firms you know it hasn't gone unnoticed um by the regulator that you know this is an area that's ramping up so obviously having good data if the fca comes nothing you can just be like here you go see this is why it's a this is why this deal was great for us and you know is this something that's probably going to become more prevalent going forward exactly so and moreover i as the buyer are inheriting that historic risk so if am i likely to buy a business where i don't have transparency of that information and have to go through the process of creating that myself and only then uncovering some of those potential liabilities that i might be open to no is the answer i'm not going to do that yeah i mean why would you you know you want to see exactly what you're getting yourself into but yeah and nikki you're like with kind of when doing these deals you know this firm buying this firm is this something they look at through the process that you know that actually their kind of culture the way the firms run actually works together or do you get firms that you think oh actually this is going to be a really big change how do they kind of find that like kind of you know like how do they make it work after the kind of deal has gone through, especially for clients, I guess?

14:31Yeah. I mean, it's a really, really tough area of global commerce, really, because I think, you know, the statistics show that I think it's 70 to 90 % of M &A fails. Now, it's hard to define what a failure is in an acquisition, particularly in our industry. The acquisitions between advice firms are generally what we'd call homogenous. So the integration is simplified massively compared to, you know, if you were trying to imagine a merger of two big Wall Street companies. But it's no less important. And it is an incredibly tricky area to deal with. So as you said, you've got the people, the culture, all levels of operation, technology, data.

15:12But one thing that is apparent in the industry is it's getting better. And we talked about it earlier, how there's kind of a new phase of consolidation happening. But let's look back five years, consolidation was new to the space. Now, their management is much improved now than it was five years ago because there was a management team who weren't used to acquiring, weren't used to integrating firms. And whereas now there's that next generation of senior leaders who have been through this pain over and over again and are trying to improve that process sooner and catch as many of those, you know, early signals or warning signs rapidly to help adopting and integrating firms

15:49Amy Austin: a lot smoother. And how does it work with, you know, like when a PE firm comes in? Because I guess with an advisor buying an advisor, they kind of know what the business is like and how to run like an advice firm. What is it like, you know, when PE firms come in? Like, do they kind of want to go in and change everything up? Or are they kind of like, do you know what? Here's the money. From my experience, Amy, that is one of the things that has changed over the years. We've said, haven't we, that a lot of those earlier PE companies that came into back consolidation are going out they're getting out to the end of their cycle and they're looking to sell on well well the understanding of and the importance of data five or six years ago was less apparent than it is today thankfully um but as a as a company grows as you buy more and more and more businesses you've got more advisors more diversity within your company it is important imperative that you have the ability to oversee that centrally.

16:48Now, that means that all of your acquisitions that you take on board are going to have to use the same sort of data schema, the same workflows, and this, that, and the other, because only then have you got both consistent and comprehensive data amongst all of your acquisitions. And actually, you can never have enough. And even if you did that process with your back office system, you've only got a precaution of your client data there is a load more that sits in things like your cash flow modeling solutions your atr tools this that and the other a smaller consolidator today would be well advised to get all of that in place on day one so that they can add everybody into that rather than have to retrofit that three four five years down the line when it becomes a serious pain in the neck, right?

17:39So that is where the consolidators that are starting today, the smaller ones, have got a big advantage over those that have been around for a while, because they can actually set up the systems and processes that will help them and assist them with that MI, the KPI data, and this and the other going forward.

17:55Amy Austin: Where do we think PE is going to go in the future? Because, you know, when we write our acquisition stories, you know, X has bought Y, the comment section is, oh gosh another p firm you know why do people want to go with a p firm or we wouldn't do this i'm not selling to p and loads of people are really against it do you think we will see you know like private equity maybe not so much in this space anymore or do you think that it's just going to be here to stay and you know some will be p some will not well as regards consolidation of consolidators um i have to ask i have to say that i wouldn't want to be in that space because if you've got two really large vertically integrated consolidators trying to merge how do you do that without other than actually um reducing centralized costs and getting rid of one whole management team where are the synergies between one vertically integrated business and another vertically integrated businesses fundamentally you're going to end up having to re-platform all of one set of clients into another ah how many of those have ever gone well so i have to say that that's a problem I'm glad that I'm not likely ever to have.

19:04Amy Austin: Yeah but what I do think that the consolidated will move towards and without naming names is those that are actually looking as part of their model to increase efficiency and effectiveness and reduce cost in their model. There are some that are introducing and we know the names but are introducing advice ecosystems from their current country of origin into the UK to try and reduce the amount of headcount that they've got in the back office in administration and power planning, et cetera, et cetera, through leveraging things like AI and their data. And I think anybody that's going to be successful in this space has got to do a lot of that.

19:47Amy Austin: And Nikki, what do you think, you know, to kind of round this up, where do you think consolidation is going in the future? You know what, I think there will always be a level of consolidation. I think we look at the platform space. There are so many platforms. There's so much choice. Like, is that sustainable? And we've seen a lot of those platforming platforms where we're in the same space as consolidator to a certain extent. So I think it's always going to be a natural part of the cycle. Will it always be PE backing that's at the top of that? I think we're already moving to that stage where it will probably be that next layer of buyers.

20:22PE almost serve a purpose in the food chain, I suppose you could say. But also that breeds that next level of evolution as well. So all of the younger, not ready to retire financial advisors that are caught up in these acquisitions, like it's never fun being part of an acquisition. It doesn't matter whether that's come from PE backers or not. Sometimes PE backing is transparent, so at least it's simpler in that sense. But all those new young advisors who have gone through this experience are there and now I'm going to go okay what's next for me I've learned what I need to learn am I going to go set up my own practice or am I going to go work for someone else with with the you know the aligned values that I want and I think that's going to be great for the advice community it might you know might be a bit awkward or uncomfortable for some people with very specific time frames that don't have a lot of choice but I think I think it's going to end up positive it just might take a little while to get there.

21:18I would agree everybody everybody in the advice industry has been looking to try and find a way to capitalise the value of their clients in their income streams that's never going to stop and the other thing is that it was a consistent theme there will always be consolidation for defensive reasons as well as for opportunistic or productive reasons people just don't like seeing their own lunch be eaten by other people yeah and I think

21:42Amy Austin: you know advisors are getting a slightly better at succession planning so I guess you know this acquisitions will only just ramp up as we go forward especially as lots of them look to retire but I guess we might have to come back and do this next year and see where we are

22:01Amy Austin: well Tony, Nikki thank you so much for joining us today. You're more than welcome, pleasure. Thank you for having us. It's been a great chat so everyone else tune in next week where we will discuss other goings-on in the industry. Thank you.

22:46We'll be right back. at ShipStation.com, code audio.