The possible float of mortgage club SimplyBiz kicked off the New Year, not long after the successful IPO of Mortgage Advice Bureau caused excitement in early November.
We’ve asked our panel of experts to examine the reasons for these market moves, their timing and whether to expect more in 2015.
Nigel Stockton, financial services director at Countrywide, discusses the attraction of large mortgage distributors for investors and looks at the pros and cons of private acquistions and public sales.
Peter Brodnicki, chief executive of the Mortgage Advice Bureau, looks at activity in the IPO and M&A markets and considers the driving forces and inhibiting factors in this years markets.
James Barraclough, director of accountants and business advisory firm BDO, looks at why the financial services industry is one of the most vibrant M&A markets and why that looks set to continue.
Nigel Stockton is financial services director at Countrywide
Between 2008 and 2012 both wealth and mortgage distribution networks and clubs were out of fashion. Commission levels were under pressure and there was little prospect of raising money to expand by flotation or merger. However, in the last 18 months the pendulum has swung back in favour of the distributor and we have regulation to thank for this.
Whilst the regulatory changes have been a fair wind in the broker’s sails, it is fundamentally a strong customer proposition to be able to have the range of products that great intermediaries have, and for companies like ours, to be able to partner lenders to bring the best options to market.
The power and scope of the distributor is clearer and much more transparent thanks to RDR a nd MMR. Brokers are gaining more market share and so too are the DA and AR networks, at the expense of any tied distribution. They have clear strategies on how to optimise income, for example short panels. Both wealth and mortgage distribution is now concentrated in just 10-12 major concerns with a long tail of small brokers.Investors welcome these larger concerns, they can value their numbers, look and verify growth and review the extent of recurring income versus one off commission/proc. fee payments. They can listen to management and decide by market review if their plans make sense. There is a rationality and transparency to the overview which makes investors comfortable in raising money.
Equally, distributors can grow and raise money to buy other concerns. Look at MAB and Intrinsic, think about LSL, Foxtons and, of course, Countrywide in its estate agency acquisitions and mortgage distribution. The announcement that Simply Biz was thinking of sale or flotation won’t be the last of such announcements and other companies in the sector are likely to follow in 2015.
It isn’t an easy choice to float a company. A private sale or acquisition enables much more flexibility and sometimes the opportunity to make longer-term decisions, although this is questionable, as a good growth opportunity is just that, regardless of ownership structure. Flotation brings with it the rigour of regular financial reporting and investor meetings, for example. Reputational issues are far more costly as a public company and investors can take flight and sell down the concern.
All of that said, with valuations now in the favour of the broker and at better EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiples than there has been for the last six years, I expect in both wealth and mortgage distribution for there to be rising commissions, more consolidation and more smaller quoted companies in 2015.
Peter Brodnicki is chief executive of the Mortgage Advice Bureau
I don’t think there has been any sudden pickup in the New Year, generally activity and interest has been going on since H2 2013, save the odd market hiccough on the way.
For IPOs: There was a big rush in H1 2014 to get things done and by May, investors were suffering from deal fatigue, plus seeing redemptions coming through in mid-cap funds.
The second half of 2014 was a complete roller coaster ride and stuff that was meant to be done in H1 2014 didn’t make it to market. So for 2015, in theory, there is even more potential issuance activity. But what are the problems? Some portfolio managers have hinted that the quality of some of the prospects is not necessarily that good (therefore still won’t see the light of day). Fund inflows into mid-cap companies are still very patchy (but at least there hasn’t been ongoing big outflows either). Lastly the UK general election gets in the way of the usual first half window and already, people are talking about deferrals into the last half of 2015.
For M&As: There has been a clear pick up during the course of 2014, and momentum continues into 2015. The drivers are firstly, corporates are more ‘risk on’ that they were 12-months-ago, they are trading well and there is improved confidence. Secondly, private equity houses are still on the hunt for good ideas and the strong performers have been able to raise new funds. In 2013 there was a complete mismatch in pricing but during the course of 2014 this has closed thus allowing more activity. So, as long as confidence remains, this trend is set to continue (in my view) almost regardless of who is running our country (!).
In the lending and intermediary sectors the opportunity has never been greater, and so this is the time to be bold, and those that are will be the true winners. It’s a time for entrepreneurs and trailblazers. Conversely, the risk of not doing anything in a rapidly changing market place have never been higher.
James Barraclough is a director of accountants and business advisory firm BDO
M&A activity in the financial services market has accelerated over the last 12 months with deal volumes rallying during 2014, especially those in the lower mid-market in the second half of the year. The headlines were full of completed deals and rumours of future transactions such as the private equity acquisition of Kensington, interest in Acenden, the MAB float, rumoured interest in the international arm of Coutts and the recent news concerning SimplyBiz.
The principal drivers of these trends include global economic performance, which was strong in 2014 although now stuttering, regulatory change, retail opportunities and positive equity market performance, although again the heat has dissipated a little here. Additionally, the liquidity of the private equity industry should not be overlooked. Many private equity houses see real growth in the financial services sector and are prepared to pay high multiples for it, often in contemplation of further buy and build M&A activity.
Looking forward, it is easy to see a continuation of significant demand by investors and consolidators for high-quality financial services assets. Continual regulatory pressures, global opportunities for innovative businesses and operational cuts by the larger financial institutions will undoubtedly continue to fuel this vibrant market. Volumes may not necessarily be at their historic peak but this is undoubtedly one of the most active M&A sectors. 2015 may have some quieter months with the impending general election and current concerns over economic growth and the eurozone but these are likely to cause a short term hiatus at most.
