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AFH: What does the future hold for the market’s most acquisitive firm?

With yet more acquisitions lined up, how long can the consolidator’s buying spree last?

Business-Handshake-General-Hire-Appointment-700x450.jpgAFH Group may not yet be a household name, but it has ambitions to become “the number one financial planning-led investment manager in the UK”.

Last week the advice firm consolidator announced a staggering 13th acquisition in just 12 months with a deal to buy Colchester-based Britton Financial.

It also shows no intention of slowing down. Two days later, AFH announced an extended £17.5m fundraising round, its second of 2017 following a £10m sold-out rights issue in April.

AFH formed in 1990 and listed on AIM in 2014. The latest issue was raised by way of an “accelerated bookbuild” – a short-term equity raising that usually takes place over a couple of days with no marketing or promotional activity – and is subject to shareholder approval.

Through the additional capital, AFH now has a £20m war chest to progress its dual plan of merging with other advisers while continuing to grow its client base organically through its team of 165 financial advisers across the UK.

The firm has called the latest investment a “resounding vote of confidence” in its model.

Of the rights issue, it said: “All our current institutional investors have increased their stakes in the group, and we picked up a number of major new institutional investors with this issue.

“Following on the success of our last issue, we see this as demonstrating continuing confidence in the company and an endorsement of its strategy.”

The Stock Exchange announcement also confirmed a “strong pipeline of potential acquisitions under negotiation”.

More importantly, AFH says it plans to achieve maximum UK market share “without compromising either profitability or quality within the sector and building the most respected and trusted brand within the sector.”

The market remains wary of negative connotations associated with private equity-backed deals in the advice market, however.

A major advice firm chairman with a background in investment banking says: “If you read AFH’s most recent announcements, they are raising money for working capital. That means they are raising money for things they have already bought, which may be a dangerous place to be.”

Capital and Trust chief executive Patrick Isaacs says for acquirers like AFH there are generally two main drivers for purchases: the profitability in the business when the deal completes; and the opportunity to increase that profitability after the deal completes.

The head of the specialist deal broker says this is then typically pegged back to a multiple of recurring income stream, which is driven by those two factors.

Firtms can consider increasing ongoing advice charges from 0.5 per cent to 1 per cent, and whether or not they can plug into a discretionary fund manager or model portfolio-based investment proposition run by a third party.

“Bar a couple of exceptions, that is pretty much everyone’s model,” he says.

What sets AFH apart, according to Isaacs, and boosts its appeal to the self-employed market, is that while it pays a discounted rate to the target business upon the initial deal, it offers a secondary payment to the individual adviser upon their retirement at a later date.

He says: “If you look at most of the deals they have done, they have tended to favour the self-employed model. This [payment structure] is why they have become such a popular home for self-employed advisers.”

Another M&A consultant says while AFH has a mixture of backers, liquidity issues may emerge because of its AIM listing. They also predict that while it has often picked up small IFAs, AFH will follow a broader market trend towards fewer, but larger, deals, funded by private investors.

They say: “Most of these deals are driven by private equity money and if it cannot find a better place to invest, then UK wealth management or personal financial planning businesses are obviously seen as a good place in which to house their clients’ money. So there will be a steady flow of money to make acquisitions.”

Size over substance

But is the size of firm important? Do particular challenges exist in taking on larger firms versus a selection of smaller ones?

The consultant says: “It may not cost proportionately more to make a large acquisition than making a smaller one. Rather what tends to put bidders off is if the target firm is listed and they want to delist. That can take a lot of time and makes them unattractive. That is why people have to consider carefully if they want to and how much it will cost compared to buying a privately quoted company.”

There are many operational hurdles to overcome in any deal, from historical liabilities and professional indemnity to the loss of key advisers.

Scydonia director Innes Miller warns of regulatory fallout from consolidation, with particular attention needed regarding unregulated investment schemes or defined benefit to defined contribution pension transfers.

But he says with regard to ‘integration’, in most cases AFH appears to pick up the clients and the assets rather than the ‘business’ itself, meaning the liabilities will remain with the seller.

Miller says in cases where integration is just about assets and clients, it becomes easier and may cost as little as £20,000 or £30,000 per deal. Larger, more complex deals with hundreds of advisers and legacy systems and brands on both sides might cost upwards of £1m, he suggests.

He adds: “You don’t have to contend with personality clashes and people disagreeing with the new proposition [in smaller deals].”

However, that does not mean there aren’t other risks to watch out for.  Miller says: “All the client data needs to be held in one place and the investment proposition would need to be reviewed, looking at the individual client portfolio and making sure they were offering something that better meets the needs of that client.”

As most clients are people and relationship-centric, Miller says placing contractual or remuneration-based ‘handcuffs’ on key advisers is critical to client retention.

“The key individuals would be encouraged to stay on for a period of, say, six months or so. Certainly until the acquirer has the opportunity to sit down with clients – and ideally with the person who has been dealing with them, doing a bit of a handover for continuity purposes.”

However, another M&A consultant notes that not all management staff in advice firms selling up to AFH may  be able to keep senior status once they have been acquired.

They say: “There are only so many directors or senior positions to go around, so you have to assume that people at the firms AFH is buying are willing to accept they are just staying on in an adviser capacity.”

AFH Alan Hudson 700AFH boss Alan Hudson on charges and culture   

Speaking to Money Marketing, AFH chief executive Alan Hudson does not detail his “priority steps” for integrating, and will not be drawn on which aspects are the most challenging or expensive
to mesh together.

Instead he just highlights the importance of patience and continuity: “We give the people joining AFH the time and support they need to develop into the group.

“That can help them and their clients a lot, as we have in-house expertise, such as economists, that smaller IFAs simply cannot develop.

“What is important is that the service they offer to their clients isn’t negatively affected.”

AFH maintains the recipe for profit isn’t as simple as just increasing the advice fees paid by the clients of selling firms. Whatever percentage the clients are currently paying, AFH will be able to deliver a particular service set for that. If it is not what the client is already getting, fees may have to increase if they want to hold onto that service though.

Hudson says “There’s no imperative for charges to go up or down. We have sufficient service propositions to accommodate just about every charging structure that a vendor’s business would have.

“We don’t have one proposition, and everyone has to fit into that. We aren’t shoehorning in any way.”

He maintains that, even as the firm grows, it will not shy away from picking up particularly small advice firms.

He says: “Small firms are actually quite attractive to us because we are able to have those clients looked after by the existing advisers.”

In fact, Hudson says AFH’s advisers get more leads this way than through self-generated business.

“For me its a people thing. We have never targeted the size of business or the placement of it. Its just about finding people who think the same way as we do.

“We genuinely are interested in the very smallest, it might be a one-man band IFA retiring just and looking for a home for their clients, or it might be a multi-adviser practice.”

Under a five-year plan put in place in 2014, AFH wants to have £5bn in assets under management in 2019 and a 20 per cent profit margin. Hudson maintains the firm is on track to meet that.

“We are not growing the business solely for the benefit of shareholders. With IFA valuations as they are, there
is shareholder value to be had, but we are growing organically at 20 per cent without acquisitions, and can use our purchasing power to get third party investment costs down.”

Hudson will not be drawn on his ultimate exit plan. He says: “It is way too soon to be talking about selling up.”

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