Advice firms have a mixed history when it comes to going public but this trend could be changing as a string of IFAs have listed in 2014.
From pet stores to bank branches, 2014 has hardly been short of flotations, and advice firms have got in on the action with AFH Financial, Tavistock Investments and European Wealth Group all joining the Alternative Investment Market (AIM).
This flurry of flotations is in stark contrast to previous years. In 2013, consolidator Perspective backtracked on plans to list, citing lack of investor demand, while in 2012, national advice group Lighthouse tried to delist, arguing it did not benefit from being a public company.
Other flotation failures litter the battlefield. In 2010, Towry announced plans for an initial public offering (IPO), which it is yet to follow through on, while in the same year, Clarkson Hill delisted as it struggled to meet capital requirements.
Given the problems faced by advice firms in the past, why has a new wave of IFAs gone public and how do they expect to benefit?
Consolidator AFH has joined AIM to raise funds for further acquisitions. AFH chief financial officer Paul Wright said the business had previously raised investments through being listed on the ICAP Securities & Derivatives Exchange (ISDX) Growth Market and through Enterprise Investment Scheme (EIS) investors.
He said the firm had grown too big to qualify as an EIS, the ISDX was no longer meeting its needs and AIM would allow AFH access to institutional investors.
‘Moving to AIM was not part of the plan in 2011 but it has been for the past 18 months. The rationale was that while ISDX was public, it was not supported by institutions and it was not that active.
‘With our growth we thought we would need more access to capital markets.’
The firm outgrew EIS status due to expanding through acquisition. It has bought about 20 businesses in the past two years and has also been growing organically, boasting 141 employees and 122 self-employed advisers.
AFH has a market capitalisation of £27 million and it raised £3 million from the flotation. Wright said the IPO would not have got off the ground had the business just been about acquisitions.
‘We were told if we were just a consolidator trying to buy up businesses then we would not have been as attractive as it would be a greater risk,’ said Wright.
‘We have reached a size where the institutions are starting to become interested. AFH is a multi-arm business that is profitable. It also has a track record of making acquisitions and successfully integrating them, and we have strong recurring revenue.’
Tavistock found its way on to AIM in June through a reverse takeover of a failed software company called Social Go.
Chief executive of Tavistock Brian Raven has ambitions to build up a new national advice firm after the acquisition of East Midlands-based Sterling McCall Wealth Management. Tavistock also acquired small discretionary fund manager Blacksquare.
Raven plans on raising money initially from the retail market and private individuals through EIS schemes as the firm is currently too small to attract institutional investors. He said being a listed company made Tavistock more attractive to advisers that were looking to sell their businesses or join a larger group.
‘In terms of talking to advisory and other businesses, you want to encourage them to either sell or join the network. The carrot that seems most popular with advisory firms is a guaranteed succession plan or retirement exit.
‘From a business perspective, there is a lot less risk involved if those deals are part cash, part paper, but that is meaningless unless the paper can be sold.’
Raven said public status would give Tavistock the edge over rival consolidators. ‘Offering someone shares in an unlisted company doesn’t really give them the equivalent of cash because they have to either wait until that business is sold or listed. And, as we all know, listing plans tend to get deferred for a variety of reasons. There is no certainty,’ he said.
Tavistock has also gained consultant Roderick Rennison and Threesixty managing director Phil Young as non-executive directors.
AIM for the top
European Wealth joined AIM in May following a reverse takeover of holding company EW Group in a deal worth £7.1 million. The firm had previously been backed by Swiss investors but, like AFH and Tavistock, it joined the market to raise capital to fund acquisitions and growth.
It has moved quickly since listing, acquiring Surrey-based IFA Compass Financial Benefits in June for an initial £539,150.
European Wealth is headed by chief executive Rod Gentry (pictured), who was previously Ashcourt Rowan chief executive. As with AFH, he said the firm needed a new funding model to support its growth plans.
‘It was fine in the early days but we have outgrown that now. We need access to more funding if we’re going to grow and we think there is a window of opportunity over the next two to three years in which we hope to accelerate our growth,’ he said.
Like Raven, he said having shares as ‘a currency’ would be attract future acquisitions and staff.
Former Lighthouse chairman David Hickey (pictured), who left in 2012 after failing to convince shareholders over his plans to delist the company, said floated firms would need to show they had a large client base that was loyal to the brand rather than individual advisers.
Hickey, now chairman of consolidator Moneygate, said: ‘If you have a very large retail client base that is not dependent on advisers, you have value.
‘Two classic examples are Hargreaves Lansdown and St James’s Place, [where] the adviser is less important than the house. The adviser can come and go and the majority of clients stay.’
He said for this reason it was unlikely any traditional adviser networks would list.
Director of consultancy firm Kingmakers Rob Stevenson (pictured) said advice firms would be more attractive to investors following the retail distribution review (RDR).
‘The thing professional investors will be heartened by is that the business model can potentially stand on its own two feet now,’ he said. ‘You don’t have these marketing packages and inducements [anymore] where the only real examples of scaled businesses were taking significant support.
‘It was still a distribution model, whereas now some firms are much closer to a professional services model and therefore that is more credible. Worries about the RDR have been and gone and it is growing up as a sector.’
He added that AIM listing was not for everyone and listed firms could possibly run the risk of putting shareholders ahead of clients.
‘There are a lot of additional pressures and you have to keep shareholders happy,’ he said. ‘If it’s a private business, you just have to keep your clients and your staff happy so it’s a very different model.’
To see how other companies have fared on their listings