Financial Services Sector Comment – April 2016

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The wealth management sector has gone through dynamic change over the last few years. Players have dealt with waves of consolidation triggered by the implementation of new regulations and technological innovation. With the adoption of the Retail Distribution Review in 2013, costs of compliance for many of the smaller wealth management firms have become onerous. As a result, larger companies have stepped in to take the opportunity to acquire these additional assets and integrate them into their own infrastructures. Indeed, larger corporate as well as institutionally backed consolidators have aggressively deployed consolidation strategies to gain market share and take advantage of a fragmented market.

A good example of this consolidation occurred earlier this month when Palamon-owned Towry, one of the largest independent wealth managers in the country, was acquired by Tilney Bestinvest, owned by Permira Private Equity, in a deal worth €744m. The deal followed Towry’s €149m acquisition of Ashcourt Rowan in May 2015 at a hefty 97.9% premium to the target’s share price on the 30th of January, the date of the initial offer. The merger will create a leading player in the affluent and high net worth wealth management sector. Tilney Bestinvest itself was a product of the merger of Tilney and Bestinvest in February 2014. Other deals driven by similar rationale include Fleming Family & Partners’ merger with Stonehage in November 2014 and the merger of Bridgepoint-owned Quilter & Co and Cheviot Investment Management.

As well as dealing with large scale sector consolidation, traditional managers are also being threatened by disruptive innovation coming from a new breed of market entrants. A combination of regulatory costs and the rise in popularity of the passive investment philosophy created a penetration opportunity for the so-called robo-advisers, a low-cost wealth management solution targeting the masses. Wealth managers operating as robo-advisers simply invest in index tracking instruments given a client’s individual risk constraints. One of the reasons Exchange Trades Funds (ETFs) have broadly been accepted as superior investment products is that active stock picking has proved to be consistently outperformed by investing in market indices in the last two decades. Investing in the index tracking ETFs eliminated the cost of a human adviser performing asset selection. Using an automated risk profiling questionnaire, asset allocation requirements can be created within minutes for individual investors who can invest their funds at a much lower cost. The robo-advisory sector has already seen successful start-ups such as the fast-growing Betterment and Wealthfront in the US or Nutmeg and Moneyfarm in the UK.

In fact, the model is expected to become so successful that UK high street banks have announced investments in their own robo-advisory platforms which will extend wealth management services to an existing client base of mass market customers. Barclays, RBS, Lloyds and Santander are all developing platform-based low-cost wealth management solutions with at least one announced to be launched in the next two months. This development marks high street banks’ re-entry into the wealth management sector with robo-advisers, having previously being driven out from the sector and incurring hefty fines for mis-selling.

Notable deals in the Financial Services sector

Highbridge Principal Strategies, LLC entered into an agreement to acquire The Broker Network Ltd, Countrywide Insurance Management Ltd and Broker Network Underwriting from Towergate Group. The consideration for the acquisition shall be satisfied by the payment of cash of up to £46 million (including earn-out) together with the allotment to Towergate of approximately 19.9% of the shares (subject to adjustment) in the acquisition vehicle of Highbridge Principal Strategies, LLC.

Pearson Jones plc (trading as 1825), the UK-based provider of wealth management services, has agreed to acquire The Munro Partnership Ltd, the financial adviser and wealth manager. Earlier in the month, Pearson Jones plc acquired Almary Green Investments Ltd, another financial adviser and wealth manager. Both transactions had undisclosed deal values.

Global Reach Partners Ltd, the London-based online foreign currency exchange services provider, has been acquired in a management buyout backed by Inflexion Private Equity Partners LLP.

China Post Group Corp, the China-based diversified group, has acquired the exchange traded fund business of Royal Bank of Scotland Group plc for an undisclosed consideration. The transaction marks China Post’s entry into Europe.

Integro Ltd, the portfolio company of Odyssey Investment Partners LLC, has acquired Croton Stokes Wilson Holden Ltd, a London-based insurance brokerage services provider, from founder Mr Alan Croton for an undisclosed consideration.

Societe Generale SA, the French banking group, has agreed to acquire Kleinwort Benson Group Ltd, the London-based wealth management company, from its French peer, Oddo & Cie. The target will be merged with Hambros. The combined firm will have more than €17bn in AUM.

Inflexion Private Equity Partners LLP, along with the management of Global Reach Partners Ltd, the UK-based company that provides foreign exchange services, has acquired the company in a management buyout transaction for an undisclosed consideration.

LGT Group, the Liechtenstein-based company engaged in providing private banking and asset management services, has agreed to acquire a majority stake in Vestra Wealth LLP, the UK-based company engaged in providing wealth management services, for an undisclosed consideration.

Beech Tree Private Equity has acquired The Fluent Money Group Ltd, the UK-based loan broker company, for an undisclosed consideration.