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Fred HanssonPARTNER

Volumes48

20%

Values

Corporate activity in

the Investmentsector in 2019

£12bn

27%

Source: IMAS-insight. The data refers to announced sales and purchases of companies and businesses, each with an actual or estimated value of £5m or more, based in the UK and defined asbeing in the Investment sector. Where values have not been disclosed, IMAS has estimated the values based on available data. The data used in IMAS-insight has been obtained, verified andcollated by IMAS. All intellectual property and other rights in that data belong to IMAS and you may not exploit our data without our express written consent.

Last year saw consistently high volumes of transactions in the Investment sector, quarterby quarter. Fund managers merged and wealth management groups consolidated theirpositions, both horizontally and vertically in the value chain. Private equity funds werelarge net investors in the industry, backing two offers for public companies and theacquisition of one of the largest privately held investment management groups in thecountry. Overseas buyers with operations in the UK remained active, both in fundmanagement and in high net worth wealth management.

Valuation multiples held firm and, in some cases, gradually improved among publiccompanies, a development which was also mirrored in the private sector.

What happened in the Investment sector in 2019?

Our definition of the “Investment sector”covers businesses involved in the management,distribution, administration and advice oninvestments including fund managers, wealthmanagers, stockbrokers, life companies,actuarial consultants, financial advisers andinvestment platforms.

Source: IMAS-insight.

0

2

4

6

8

10

12

14

16

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

Q12019

Q22019

Q32019

Q42019

Nu

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Transaction volumes by quarter in the UK Investment sector

£5 - 25m £25 - 100m £100m +

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2017 2018 2019

Val

ues

in £

mill

ion

Aggregate transaction values

£5 - 25m £25 - 100m £100m +

“Investment sector”: IMAS records all announced transactions with an actual or estimated value over £5m in the Investment sector. The sector covers businessesinvolved in the distribution of and advice on investment products as listed in the categories below.“Product”: Life companies and mutuals.“Advice”: Asset managers, private client wealth managers, actuarial consultants, corporate finance advisers and other specialist advisers.“Distribution”: Employee benefits consultants, health protection brokers, IFA businesses and networks.“Trading”: Interdealer brokers, securities brokers, investment banks and other specialist traders.

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Values• Aggregate transaction values rose sharply in 2019 (by

27%) driven by two multi-billion deals in the life andfund management sectors: Prudential’s spin out of M&G(worth £5.6bn) and Phoenix Group’s acquisition of SwissRe’s life subsidiary ReAssure (for £3.25bn).

• The value segment below £25m to £100m counted atotal of 20 transactions with a combined value of closeto £1bn, which is high, both by value and numbers,compared to previous years.

• The largest values were recorded in the fundmanagement (£6.1bn) and life company sectors(£3.7bn), followed by wealth management (£1.2bn)(excluding Epiris’ £206m offer for IFG Group).

Volumes• The graph below shows transaction volumes grew by

20% in 2019, representing a 60% increase in volumesfrom 2017.

• The highest growth was within the value range of £25mto £100m, in which transaction activity was high acrossall the subsectors of Investment, featuring severalprivate equity funds and public companies as buyers ofand investors in businesses.

• Almost half of all the transactions (23) involved targetsin the wealth management sector, including IFAs andpersonal discretionary portfolio managers.

• Volumes declined in the other value bands compared tolast year, but were higher in relation to 2017.

0

10

20

30

40

50

60

2017 2018 2019

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Aggregate transaction volumes

£5 - 25m £25 - 100m £100m +

Nu

mb

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f tr

ansa

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ns

Aggregate transaction volumes by subsectors

DEFIN

ITIO

NS

Aggregate transaction values by subsectors

Val

ue

in £

mill

ion

Source: IMAS-insight.

Source: IMAS-insight. Source: IMAS-insight.

Source: IMAS-insight.

62

4,9

78

17

1

11

8

3,6

50

1,4

52

16

2

3,9

87

3,7

60

7,7

42

20

1

50

Product Advice Distr ibut ion Trading

2017 2018 2019

2

13

10

44

20

11

54

27

14

3

Product Advice Distr ibut ion Trading

2017 2018 2019

R² = 0.8005

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

10% 15% 20% 25% 30% 35% 40%

EV/E

BIT

DA

EBITDA Growth over the last 3 years

EV/EBITDA vs EBITDA growth

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

Development of EV/EBITDA multiples

Wealth managers Stockbrokers

Fund managers Investment platforms

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Valuation multiples• The chart on the right plots the enterprise values in relation

to EBITDA of quoted companies in the Investment sectoragainst their three-year historic growth in EBITDA. Asexpected, the correlation is strong between growth trackrecords and valuation multiples.

• It reflects the high growth rates of the investment platformsand the market’s confidence in the prospects of theircontinuing strong growth by the imputed valuation multiplesin the sector.

• The wealth managers, which include a number of groupsengaged in consolidating the IFA market, have also generatedstrong growth and, given the fragmentation of the IFA market(as discussed later in the document), investors are clearlyexpecting the opportunity for further consolidation (onattractive terms) to prevail.

• Fund managers and stockbrokers have faced more headwinds, including some cases of corporate restructure, albeithaving still managed as a group to generate between 18-19%compound annual growth in earnings. But the market is morebearish here which has depressed their earnings multiples.

Investment platforms

Wealth managers

Stock-brokers

Fund managers

• Having been privy to several transactions in the sectors above, our experience is that valuation multiples in the privatemarket have broadly reflected, or been slightly below, the current market multiples on the regression line over the last threeyears.

• The chart on the left plots the enterprise values in relation toEBITDA of quoted companies in the same categories of theInvestment sector as above over a period since the mostrecent flotation of an investment platform on the LondonStock Exchange (AJ Bell in December 2018).

• Investment platforms enjoyed the highest ratings but alsoexperienced more volatility. Being a smaller and morenarrowly-defined group (three constituents only) it is notsurprising that the average valuation multiple has fluctuatedmore. Nonetheless, it has remained significantly above themultiples of its customers (included in the other categories).

• The wealth managers have also remained at a high valuationmultiple over the period but, given their strong growth recordas discussed above, this may be justified.

• Fund managers and stockbrokers have traded in a relativelytight range between 9.5x to 12x throughout the period.

• Being a sector that to a large extent charges fees on the basisof assets under management or advice, the multiples for allgroups within it have a degree of correlation to thedevelopment of stock market indices, albeit with individualvariations. Hence the improvement in the multiples in recentmonths.

Source: FactSet

Source: FactSet

27x

12x

11x

“Enterprise value (“EV”): The market value of the equity as at 27 December 2019 plus the last reported net debt, minority interest and preferred stock of the company.“EBITDA”: Earnings before interest, tax, depreciation and amortisation for the 12 months prior to the last reporting date.“Fund managers”: M&G Investments, Investec, Jupiter, Lindsell Train, Liontrust, Schroders and Ashmore.“Investment platforms”: AJ Bell, Nucleus Financial and IntegraFin (Transact).“Stockbrokers”: Rathbone Brothers, Brewin Dolphin, Charles Stanley, WH Ireland and Walker Crips.“Wealth managers”: Hargreaves Lansdown, St James’s Place, Brooks Macdonald, Mattioli Woods, AFH Financial Group, Harwood Wealth, Frenkel Topping, Kingswood.

DEFIN

ITIO

NS

17x

Buyers• The most notable increase this year was in the number of

private companies becoming active as buyers (27% of thetransactions) compared to last year (12%).

• It includes six transactions in which investors, some ofwhich were institutional and corporate, provided capitalto growth companies (e.g. Embark, Nutmeg, Moneyfarmand Netwealth).

• The number of purchasers from overseas (or ultimatelyowned overseas) dropped from 31% of the volumes in2018 to 21% in 2019 and represented mostly groupswhich already have an established presence in the UK.

• The data for public offers includes mergers of publiccompanies (Liontrust with Neptune and Premier AssetManagement with Miton Group) and one demerger(M&G being spun out of Prudential) in the fundmanagement sector.

Private27%

Public27%

Private Equity23%

Overseas21%

Mutual2%

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Sellers• The sellers of equity were overwhelmingly private

(over 2/3 of the vendors). This confirms the long-termtrend of successful private companies attractingexternal (private equity) capital in management buy-outs, raising capital for growth and becoming targetsfor strategic acquirers.

• The public company sellers include two mergers(Liontrust with Neptune and Premier AssetManagement with Miton Group) and one demerger(M&G being spun out of Prudential) in the fundmanagement sector, which represent publiccompanies as both buyers and sellers.

• It also includes two private equity backed public bids(Epiris’ takeover of IFG Group and Carlyle Group’s,Hurst Point Capital, offer for Harwood Wealth).

-25

-20

-15

-10

-5

0

5

10

15

PrivateEquity

Overseas Public Other Private

Nu

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A sample of buyers in 2019

“Mutual”: Mutual or Friendly Societies: An entity with policyholders as owners.“Overseas”: An entity directly or ultimately owned by an owner based overseas.“Private”: An entity owned by private individuals.“Private equity”: An entity directly or ultimately owned by a private equity fund.“Public”: A company quoted on a recognised exchange in the UK.D

EFIN

ITIO

NS

Net buyers• The graph on the right shows the net result of the

transaction flows of the seller and buyer categoriesabove.

• Private equity was the largest net buyer of businessesin the financial services sector in 2019, ahead ofoverseas and public company net buyers, while privateowners were large net sellers.

• This highlights the continuing development towardsgrowing institutional and corporate ownership (privateequity, public and, in most cases, overseas owned) ofthe UK financial services sector.

Private69%

Public19%

Overseas8%

Private Equity4%

A sample of sellers / targets / investees in 2019

Source: IMAS-insight.

Source: IMAS-insight. Source: IMAS-insight.

5,600

5,650

5,700

5,750

5,800

5,850

5,900

5,950

6,000

6,050

6,100

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Structure of the market• Despite the intense M&A consolidation activity in the IFA

market in the last few years, the Investment sectorpopulation as a whole has only marginally declined fromthe end of 2017 to the end of 2019 and now reflects justunder 10,000 entities, as shown in the graph on the right.

• As shown in the graphs below, the two largest constituentsof the Investment population are Distribution and Advicecompanies, encompassing fund managers, wealthmanagers and IFAs, which have seen rising transactionvolumes in the last three years (see page 2).

• But some of the decline in the number of entities as aresult of mergers and acquisitions has been somewhatcompensated by the creation of new entities, albeit at aslowing rate (an annual average of 10.3 and 15.4 entities inDistribution and Advice were authorised by the FCA,respectively, in 2018, versus 8.7 and 8.6, respectively, in2019).

3,240

3,260

3,280

3,300

3,320

3,340

3,360

3,380

3,400

3,420

“Product”: Life companies and mutuals.“Advice”: Asset managers, private client wealth managers, actuarial consultants, corporate finance advisers and other specialist advisers.“Distribution”: Employee benefits consultants, health protection brokers, IFA businesses and networks.“Trading”: Interdealer brokers, securities brokers, investment banks and other specialist traders.

www.imas.uk.com

DEFIN

ITIO

NS

Number of FCA authorised entities in Distribution Number of FCA authorised entities in Advice

0

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10

15

20

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30

0

5

10

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35

Number of new FCA authorised entities in Distribution Number of new FCA authorised entities in Advice

-

2,000

4,000

6,000

8,000

10,000

12,000

2017 2018 2019

Population of entities

Distribution Advice Product Trading

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About IMAS

• IMAS is an independent corporate advisory firmthat has been owned by its partners since 1992.

• We specialise in providing conflict-free advice oncorporate transactions across the financial servicessector.

• Our clients include entrepreneurs, corporates andprivate equity firms, for whom we prepare bespokeadvice and develop corporate finance solutionsthat achieve their goals.

• Our highly experienced team have backgrounds atleading global financial services groups, extensivetransaction experience and a track record of success.

• We partner with our clients, managing discreettransaction processes focused on achieving the bestoutcomes and maximising value.

• Our proprietary database (IMAS-Insight) and uniqueresearch capability offers our clients an unparalleleddepth of analysis of UK financial services to supportdecision-making.

• We typically advise on transactions in the £10m to£100m value range and have completed close to 220transactions in the last two decades, working with ourclients on sales and disposals, buy-outs and buy-ins,growth capital raisings and acquisitions.

Investment platforms

Wealth managers

Stock-brokers

Fund managers

Founded 1992

Number of Partners

Number of transactions

Years of combined experience

5

125

~220