Private equity firms can capitalise on opportunities for modernisation, digitalisation and consolidation in the wealth management sector, according to Christian Kent, a Managing Director in global investment bank Houlihan Lokey’s fintech group, who last month advised on CBPE Group’s sale of Perspective Financial Group to Charlesbank.
The Financial Conduct Authority (FCA)’s implementation of consumer duty regulation has put pressure on the approximately 5,000 independent financial advisors (IFAs) in the UK — many of which are relatively small — to manage their compliance. The rules, introduced last July, require all FCA-regulated firms including banks, investment platforms, asset managers, insurers and financial advisers to show they are following the best interests of their customers. As a result of these regulatory changes, many of these smaller firms are seeking to modernise by joining larger, well-capitalised organisations, which will allow them to better manage compliance, entrust back-end management to their new owners and focus on client services.
Last October, St James’s Place, the UK’s largest wealth manager overseeing £180bn, started a radical overhaul of its fee structure and business model following the roll-out of consumer duty, the cost of which — for implementation alone — was estimated by SJP’s Chief Financial Officer Craig Gentle to be between £140m to £160m. For private equity-backed businesses in the wealth management sector, however, consumer duty can present more of an opportunity, says Kent.
These businesses, he said, recognise compliance is a differentiator and well-invested platforms have had “the benefit of being able to hire the best people.” Compliance, therefore, demands attention, because the opportunity for private equity firms arises from being able to buy more of the small firms, who encounter challenges because they lack the “internal competence or desire to really manage it”. In his capacity at Houlihan Lokey, Kent has observed that “a lot of the bigger firms are getting a lot more enquiries from smaller IFAs or as a result of consumer duty”, adding that “the amount of M&A that they’re currently doing is probably also driven by the level of consumer duty”.
Speaking with Private Equity Wire, Kent described the market for IFAs as “very fragmented”, attributing underlying sector growth in the UK wealth management sector to an ageing population and pension reforms “as the UK population migrates towards managing their own pensions through defined contribution rather than defined benefit”. This wave of activity, he said, “has led to more assets being controlled by IFAs and financial advisors”.
Kent, who also co-leads the firm’s European financial services & technology team, described “a higher level of penetration of financial advice” in the UK compared to other European markets, where the independent wealth management sector is smaller and “often still concentrated within the large banks and insurance companies”. As a result, the UK is home to “a lot more IFA firms, large and small”, and the “pool of opportunities is better identified,” he added. “I think it’s clear which businesses are either owned by private equity, or potentially could be owned by private equity.”
Despite the challenge, continental Europe ultimately presents an interesting opportunity — the biggest difficulty for private equity firms is in identifying platforms of scale, but if they can find a platform, Kent says, then it is “potentially quite rewarding”.
The sector, like many others, is ripe for digitalisation, with ‘wealthtech’ (wealth management technology) companies poised to become prime targets for private equity deal activity over the next 12 to 24 months. Kent listed FNZ and InvestCloud as examples of larger private equity-backed businesses that have successfully capitalised on wealthtech. FNZ received $1.4bn in committed capital from CPP Investments and Motive Partners in 2022, as part of a transaction valuing the platform at $20bn. InvestCloud was also backed by Motive in 2021, in addition to Clearlake Capital Group.
Central to these businesses is recognition of the increased functionality and efficiencies that come with good technology, which Kent believes is particularly valuable for the small to mid-tier part of the wealth management market. Adoption is the next step — enhancing a business’s ability to market to new customers, potentially through technology and digital marketing, can benefit them in the long run, as well as increasing the likelihood of a private equity acquisition as backers navigate the size spectrum, starting with bigger tier-one clients through to tier-two and tier-three.
The IFA segment is clearly relevant to the mass affluent up to the high-net-worth, but what interests Kent more is how these IFAs can help manage the smaller customers who, over time, will migrate their assets up into those upper segments. Kent believes there is plenty of room for consolidation, especially in the UK, where the market is still relatively early on in its evolution, and a clear trend of private equity-backed platforms moving up the size spectrum in an active secondaries market, like Charlesbank’s acquisition of Perspective Financial Group. This shift towards consolidation, whether at the small end or mid-tier, will see the emergence of more platforms making £50m to £100m of EBITDA, when currently, there are “very few that do that”.
