“It’s fair to say that historically, financial services has been something of a Marmite proposition for some houses, principally because they’ve been put off by the regulatory risk.
“However, the recent success and strong financial returns by firms that have invested in the sector has revived interest in it from those firms who have previously struggled to see the opportunity.
“This has been accelerated in the past couple of years since Covid, as private equity firms have looked increasingly towards businesses less exposed to the uncertain economy and with strong recurring revenues. As a result they’ve been willing to pay higher multiples for financial services firms.”
The importance of integration
Garland at Pollen Street Capital describes a 'good' consolidator as one that acquires and integrates smaller businesses to create a “scaled, best in class, operationally capable business that continues to offer excellent client experience”.
A specialist private equity investor will also have a deep knowledge and extensive experience of the sector and regulator, Garland says, and can add value across the different players in the financial advice industry.
Freddie Athill, investment director at Cabot Square Capital, likewise says that as a financial services specialist, the business believes that specific expertise is required. “We have technical, consulting, financing, analytical and regulatory backgrounds, which means we can give tangible help.”
Cabot Square counts MKC Wealth and SPF Private Clients as part of its current and realised portfolio of investments, the majority of which consists of companies in the financial services industry.
The business's collective experience is why business owners and executive teams decide to partner with Cabot Square, says Athill, who describes a profitable divestment after buying and building as “not that straightforward”.
Richard Thompson, a partner at CBPE Capital who led the investment in Perspective Financial Group, concurs. “The buy and build strategy is a clear opportunity to achieve synergies and multiple arbitrage through consolidation. However, achieving the greatest returns is not straightforward and requires an efficient M&A and integration process.
“Integration is key to realising synergies, ensuring consistency of the advice proposition and good advice across the client base. The more seamless consolidation can be, the more valuable the platform [company] is.”
Although buy and build is undoubtedly a significant opportunity for private equity companies to scale a financial services business and enhance value, Strickland at Palatine agrees that it is “never straightforward”.
“Having a track record in successfully executing buy and build is essential. Being able to integrate acquisitions smoothly and generate synergies is a big part of this dynamic. A further factor to think about is creating the right pipeline of acquisitions, which does require a degree of market knowledge and understanding, which is again easier said than done.”
