Fragmentation and rising multiples drive continued wealth management M&A

M&A is continuing to perform strongly in the UK’s wealth management sector and many factors indicate that this could be a trend that continues in the long term. 2021 saw predictions of a “rush to complete” deals in the sector, amid incoming regulations and the threat of Capital Gains Tax reform. However, the M&A landscape now appears set for a stable, sustained period of strong dealmaking.

Among the most ambitious predictions came in a recent LEK Consulting report, which asserted that the factors pushing dealmaking in wealth management were enough to support “at least another 10 years of consolidation activities”. While this is, of course, difficult to forecast with any certainty, there is ample evidence that wealth management dealmaking should remain on an upward curve.

For one, despite busy M&A activity over recent years, the sector continues to be highly fragmented. From 2016 to 2019, amid strong dealmaking, the number of wealth management firms in the UK fell by just 0.9 per cent, seemingly contradicting predictions that the scaled-up acquisition strategies of firms such as Fairstone Financial Management and Perspective Financial Group would lead to rapid consolidation.

According to Jason Hollands of Tilney Smith & Williamson, there are more than 5,000 wealth management and financial advice firms in the UK (many of them smaller operators), leaving considerable headroom for greater consolidation.

Another factor that should drive dealmaking over the next few years is the fact that many wealth management firm owners are approaching retirement age. In 2019, the average age of owners at independent financial advisers (IFAs) was 58 and that is likely to have risen since.

This was borne out by a recent Gunner & Co survey which found that two-thirds of owners at financial advice firms are planning to exit within the next three years. 61 per cent of those planning an exit said they were looking to retire, while 14 per cent said that a sale of their business was part of a longer-term retirement plan.

The Gunner & Co report also demonstrated another interesting fact that is encouraging dealmaking: rising sale multiples. 18 months ago, the M&A picture was largely one of owners being pushed to sell up due to external pressures. However, the increasing popularity of wealth management firms among a growing pool of buyers (no longer just industry consolidators, but also private equity firms and other new entrants), is pushing multiples up and incentivising sales.

According to the survey, wealth management firms are regularly being sold at multiples of over 4x recurring income this year, compared to an average multiple of 3.4x recurring income last year.

To read more on these trends, as well as the numerous other factors driving dealmaking in the financial advice sector, check out our recent insight on how the wealth management M&A boom is continuing in a changing environment.

Find out what's driving dealmaking in the UK's financial services sector.

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