The past six months has seen significant developments in the consolidation of the wealth management sector.
A recent report from EY highlighted that while there had been a record number of deals in the first half of 2023 – 67 up from 55 in the same period of 2022 – the total value of mergers and acquisitions was £2.2bn less than in the first half of 2022.
So, what is happening?
Higher interest rates are undoubtedly having an impact.
The cost of borrowing is causing private equity, who have been the main driver of consolidation in the UK in recent years, to at least pause to reflect.
Some have slowed the pace of acquisition; others are deferring completing deals to wait and see if the interest rate outlook stabilises.
That said, there are more than 150 potential acquirers in the market, and as is often the case, some potential acquirers will see the present situation as an opportunity.
Consumer duty is also having an impact.
Certain consolidators have integrated their acquisitions faster than others and a few have barely started.
It is interesting to observe how more acquirers, many of whom are PE-backed, are now looking at deals through the lens of wanting – and needing – to integrate acquired businesses more quickly than may have been the case until now.
There is also more scrutiny of the value delivered by different client segments, and for sellers, the need to have granular client data to demonstrate the worth of their clients has never been greater.
What can reasonably be charged to clients is also under closer scrutiny because of consumer duty and that may, over time, reduce projected margins.
The antidote to this is for intermediaries and their funders, to squeeze platform and fund charges, and this is evident across the market as arguably it is the intermediaries who are closest to the client.
The next obvious question for both acquirers and sellers is what might happen in the next six to 12 months?
Scenario one is that interest rates stabilise as inflation is brought under control and as a result greater confidence returns to the market, making 2024 an easier year to obtain or renew funding, which in turn leads to deal flow increasing.
Scenario two is that the position does not improve due to stubborn inflation, and the consequence is that there is less money to do deals. The best ones will get funded, some will not, and valuations could be less as a result.
Most importantly, what should would-be sellers do?
We at Catalyst Partners start with two questions: why do you want to sell your firm; and have you first considered other options such as a management buyout, an employee ownership trust, or if there are children in the business, family succession?
