All that glistens is not gold
Last week I had a message on my phone from a client that ended “…remind me to tell you about the 10% coupon I get on my reinvestment; you would not get that from a bank!”
Private equity – directly or indirectly – is behind the majority of M&A transactions that are currently happening in UK financial services. In these deals, sellers are often encouraged/required to “reinvest” a substantial part of their proceeds, as a way of aligning interests. The coupon is rolled up and paid along with the principal when the acquirer exits.
Another of our clients received a glossy offer purporting to be worth 9 times EBITDA (plus various bells and whistles) but with a long-term pay-out worth 11 times. How so? At completion the cash consideration would be 5 times, with the other 4 times reinvested into loan notes and preference shares. If held for five years at 10% per annum it would equate to 50% of the principal amount, if not compounding. 4 becomes 6, added to the initial cash payment makes 11 times. Happy days?
Not exactly. What prospective recipients often fail to appreciate is that the coupon is only paid when the loan notes are redeemed. The redemption is often predicated on a successful exit in which any outstanding bank debt (typically used by the private equity fund to purchase the company in the first place) is first repaid from the sale proceeds, before the rolled-up loan notes.
UK financial services have enjoyed a good run. High returns have been achieved in private equity exits at increasing multiples and everybody has been happy. But at some stage the exit multiple arbitrage will come to an end. A vendor expecting a second helping larger than the first could well find the bowl empty.
The buoyant market conditions mean there is a lot of “funny money” washing around. Cleverly packaged in complex and opaque structures that mean the risk sellers are taking are not properly understood. Equity-levels of risk are dressed up to look like much safer debt instruments. There have been car crashes before, there will be again.
You only sell once and having somebody who can look under the bonnet and check the brakes before you climb into the passenger seat has to be a good investment.
Taking advice is not simply about maximising the upside, it is also about minimising the downside risks which buyers naturally skirt around. We are always happy to meet, to give you the balanced view so you have the information to make the right decision for you.
Insurance
Perhaps unsurprisingly given the flurry of deals announced in March and so timed to complete ahead of the Budget in that month, UK Insurance M&A volumes in April were rather more subdued, with only 7 announced transactions to report on.
Ardonagh, in a number of its guises, was the most active buyer, with three new acquisitions. Towergate announced it had acquired the assets of Swansea-based commercial broker Murton Alexander, Ethos Broking announced that it had acquired London-based broker Chambers & Newman, creating a 13th regional hub business, and retail unit Atlanta announced that it had purchased certain trade and assets from personal motor broker Be Wiser.
In other broking transactions, Aston Lark continued its recent run of acquisitions with a deal for motor trade specialist DNA Insurance, Partners& announced that it had acquired Nottingham-based commercial broker IFM Insurance Brokers (trading as Select), and independent Chartered broker Macbeth acquired Buckingham-based Peter Lole Insurance Brokers.
Finally, LDC-backed motor broker Right Choice Insurance Brokers (RCIB) announced that it had reached a deal to acquire the motor brands and customers of competitor Fresh Insurance Services Group, part of the Kingfisher (formerly Vantage) group of companies. Separately, there were press reports towards the end of the month reporting that RCIB had also reached an agreement to acquire Bennetts Motorcycling Services, the leading motorcycle insurance broker being divested by Ardonagh at the behest of the Competition and Markets Authority (CMA).
Investment
In the wealth management sector, Quilter announced the sale of its offshore business, with c. £22bn in AUM, to life assurance group Utmost Life and Pensions for around £483m, to focus on its higher growth UK wealth management business. Canaccord Genuity entered into an agreement with The Royal Bank of Scotland (part of NatWest Group) to buy the private client investment management business of Adam & Company for £54m. Private equity and infrastructure investment manager Foresight Group completed an equity investment into East Anglia-based Beckett Investment Management Group, which manages £775m in AUM.
The consolidation in the IFA sector continued apace. London-based Waverton Investment Management acquired £500m AUA Scottish wealth planner Cornerstone Asset Management. Progeny acquired Ayrshire-based Affinity, continuing its expansion in Scotland. IWP acquired three firms, Aberdeenshire-based Buchanan & Associates, Norfolk-based Moss and Roberts and Buckinghamshire-based Principal Financial Planning, which will collectively add £400m in AUA. Mattioli Woods acquired Pole Arnold Financial Management for up to £7m and Caledonia Asset Management for up to £1.6m, while IFA consolidator Fairstone Group acquired Dundee-based Findlay & Company Financial Services adding more than £100m in AUA. Octopus Group will invest £10m into Teddington-based financial coaching business Hatch Financial Coaching, to offer a combination of robo-advice and full financial planning. Fidelius Group acquired Bath-based Robson Taylor IFA adding £105m in AUA, and St. James’s Place Wealth Management’s appointed representatives Future Wealth Management and Frome-based Total Financial Wealth Management announced their merger, with the deal bringing the combined group’s AUA to £330m. Brunel Wealth acquired Bristol-based Academy Associates, adding £70m in AUA.
In the asset management sector, Paris-based asset manager Amundi entered into exclusive negotiations to acquire Lyxor’s (Societe Generale’s asset management arm) ETF business with £89bn AUM, and alternative asset management unit with £54bn AUM, for a total cash consideration of £710m. Ameriprise Financial’s subsidiary Columbia Threadneedle Investments agreed with BMO Financial Group to acquire BMO’s EMEA asset management business in a £615m all-cash transaction, which adds $124bn to the group’s European AUM and brings the firm’s total AUM to $1.2trn. Schroders purchased a 50.1% stake in Australian real estate lending company RF Eclipse as part of its plans to further expand its alternative offering.
Elsewhere, online pensions provider PensionBee floated on the growth segment of the London Stock Exchange, with a value of £365m on admission, raising £59.6m for the company. Employee benefits and pensions consulting business Broadstone Group acquired Midlands-based Quattro Pensions Consulting Actuaries to support its growth in the occupational pension schemes market and, Arlo Group, the Torquay-based financial planner, acquired Sheffield-based Purely Pensions, marking its entrance into the defined benefit market. Ludlow Trust Company acquired NatWest Group’s and Coutts UK’s trust businesses. Pensions and life insurance business Aegon UK acquired Grimsby-based finance engagement specialist Pension Geeks. Paypoint completed the acquisition of RSM 2000, enhancing its digital solutions business. Abry Partners-backed Options Technology, a provider of IT infrastructure to global capital markets firms, closed its acquisition of Fixnetix, a provider of outsourced front-office trading services.
Lending
Following last month’s announcement of a £272m Series D funding round, Starling Bank announced an additional £50m investment by Goldman Sachs Growth Equity to support its continued growth. Atom Bank confirmed that its £40m raise will be led by Toscafund Asset Management and BBVA.
The Co-Operative Bank announced that J. C. Flowers and Bain Capital Credit were set to become a significant shareholder, buying BlueMountain’s stake which comprised c. 10% of the A shares and c. 12% of B shares. Arbuthnot Banking Group announced that it has disposed of a further 250,000 ordinary shares in Secure Trust, raising gross proceeds of c. £3.0m, resulting in a residual 4.4% interest in Secure Trust. Metro Bank announced the completion of its previously announced acquisition of a portfolio of unsecured personal loans, with aggregate book value of £337m, from peer-to-peer investors who invested through the RateSetter platform.
Elsewhere, following its recently announced acquisition of Calverton Finance, Cubitt Trade Holdings announced that it had acquired a majority shareholding in Regency Factors and Regency Trade Finance.
*IMAS Corporate Finance LLP has been acquired by MarshBerry.
