Why advice firms are attractive to private equity

Financial advice firms are attracting interest from private equity players because they represent a good investment.

“When you see private equity coming into the market and taking stakes in advice businesses it is a sign of people ringing the bell that it is a good place to invest,” Super Concepts chief executive, Matthew Rowe told Financial Newswire’s Advice, Wealth and Super Conference.

At the same time, Fortnum chief executive, Neil Younger said that an examination of the advice value chain and where the revenue and profit exists then it presents very favourably.

“There’s lots of businesses out there making strong EBITDAs and with extremely strong growth prospects and that’s where people like AZ-NGA’s Paul Barrett saw the opportunity to invest in the sector,” he said.

“And there are others who have followed in the sense of investing in well-run, profitable advice businesses with growth prospects. I think it is quite logical.”

“In the rest of the value chain you are seeing some interesting dynamics, you’re seeing businesses such as ourselves looking to get larger because a component of our offer in the licensing space necessitates scale to get the economic model correct and also to get the investment profile correct,” Younger said.

“But we’re not stopping at the licensing services component and many who are growing through acquisition are looking at other ways to make sure that they are monetising correctly and I this is just part of a natural cycle,” he said.

“We saw banks exit the sector, we saw a significant amount of fragmentation and when you stand back and look at your P&Ls post that outcome you say maybe the economic model could benefit from scale and I can see the logic in that.”

“And I think we are far from done on that,” Younger said. “I think we will see plenty more whether that be in the licensing consolidation sense, whether it be in the advice space where there is considerable amount of consolidation going on there, Younger said.

For his part, Matthew Rowe said that there were high barriers to entry with respect to financial advice, not least due to the regulatory environment but also economic tail-winds generated by compulsory superannuation.

“There is more demand than supply for financial advisers and you’re starting to see profit margins come up and many of the firms I follow and sometimes help are following the ‘Rule of 40’ – where you add up your EBIT margins and revenue and your revenue growth is 40%.

“And a lot of the good firms out there are making profit margins of 30% and increasing revenue by 10% so it ticks all the boxes so I can see why the space is so attractive to private equity,” Rowe said.