Acquisitions were the name of the game in the run up to the coronavirus outbreak, with a lot of deals completed or in the pipeline.
At the moment, things seem to have slowed down with only a handful of firms still looking to grow “inorganically”.
But that doesn’t mean that M&A has come to a standstill. Far from it.
Ascot Lloyd describes current M&A environment as a ‘mixed bag’
In June, IFA firm Ascot Lloyd announced it had completed six deals in the first half 0f 2020.
And it is still looking for the odd bargain during this outbreak.
Gordon Kerr, acquisitions director at IFA firm Ascot Lloyd, said to Portfolio Adviser sister publication International Adviser: “We’ve had a number of dialogues with brokers who we work with and, in this kind of environment, it’s a bit of a mixed bag.
“And I’ve heard of others that are pulling out of any of acquisitions.”
For Ascot Lloyd, the team will continue to have ongoing discussions with previously identified candidates and also look at new opportunities, he added.
A few weeks back, Kerr noticed a drop off in the volume of inbound queries the firm was receiving.
“But actually, I saw a bit of an uplift in the last few weeks or so in number of referrals which are coming our way.
“We are looking at the things that come our way. We are going to be looking at new deals in the shorter term.”
IWP still on the look out for acquisitions
IFA firm Independent Wealth Planners (IWP) also said it has not stopped looking for acquisition opportunities.
It has completed nine deals since launch in November 2019, with the most recent being financial planning firm Richmond House Wealth Management for an undisclosed sum.
David Inglesfield, chief executive at IWP, told International Adviser that the firm’s strategy has “largely remained unchanged” and “businesses are still showing interest” in the firm’s proposition.
He added: “IWP is still looking for quality firms that share its values. Some companies may be dissuaded from selling due to the uncertainty, but I think more often this is a factor which reinforces the benefit of joining a larger group.
“From IWP’s perspective, we are busier than ever. Our pipeline remains strong and we look forward to welcoming more businesses to IWP soon.
“We are currently working on several acquisitions and will make announcements as and when they complete and staff and clients have been informed.
“We are seeing an increase in the number of sellers exploring their options.”
Markets have kept the M&A market resilient
Giles Dunning, partner at law firm Stephens Scown, said that the “ingredients for M&A in the financial advisory sector haven’t disappeared”.
“Markets have remained remarkably resilient and have rallied significantly since the initial declines seen in late February.
“However, speculation remains that we may see further market adjustments later in the year and this is likely to mean that acquirers will remain cautious.
“I am still hearing of potential deals and a willingness to transact, but the type of offer may be different to suit market conditions.”
How is FCA disruption affecting M&A?
At the start of the outbreak, the Financial Conduct Authority (FCA) said it would only be carrying out necessary regulatory work.
Which begs the questions, could this have an impact on the M&A financial advice market?
“There are a large number of deals going on in this marketplace,” said Ascot Lloyd’s Kerr. “I would expect that to continue and I think that the FCA would want that to continue as well, so that they have a smaller number of firms that they have to deal with.
“They may look at deals a little bit more than they have done, but that’s something that they want to do as an organisation anyway. I don’t see it being a blocker to activity going forward.
“And I haven’t seen any signs of that so far.”
What’s the long-term outlook after coronavirus?
The pandemic is going to have a long-lasting effect on the world and the M&A market is no exception.
So, how will it change?
“I think what we’ve seen in the conversations that we’ve had to date, and that predates my time, is that a lot of people feel their sale is really driven by professional indemnity insurance cover and the increasing costs of serving customers and the impact of Mifid,” Kerr added.
“I think those will continue to be the drivers for sale for the majority of transactions that we go through than coronavirus.
“The organisations that we’ve seen withdraw their potential sales, due to the market and what’s happened in the last sort of couple of months, will look to ride this out and then potentially look to sale afterwards when the market stabilises.
“My view is that the historical drivers of acquisitions being cost to firms will be the main drivers going forward again, and I think the virus impact will be a medium-term impact for organisations, not the long-term driver for exit,” Kerr added.
How to price a business during volatility
One of the biggest issues facing the M&A deals in the advice sector is valuation.
It played a big part in the discussion of the ressurected Tilney and Smith & Williamson merger.
Stephens Scown’s Gunning added: “The biggest issue is valuation because the price of an IFA business is often based on a multiple of recurring revenue or earnings.
“Many investment portfolios will be affected by uncertainty in the markets, making it more difficult to provide robust valuations based on multiples of earnings or revenue.
“We have a widely predicted recession on an unprecedented scale and uncertain stock market conditions.
“Furthermore, while private equity funding was in plentiful supply prior to the pandemic, it remains to be seen as to whether it will still be as freely available for acquirers going forward.
“The M&A market may eventually need to agree on a valuation method that works for buyers and sellers to compensate for market uncertainty and future values.
“In the short term, a buyer could make a depressed offer to take account of the current conditions, but the seller could insist that the deal takes into account any upside in terms of any future rise in value of the business.”
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