‘Perfect storm’ for international PE interest post-royal commission

Despite more legislative changes on the horizon, Forte Asset Solutions founder and director Steve Prendeville said that the relative stability of the financial advice industry following the royal commission, among other factors, has resulted in elevated interests among international capital groups.

“It’s because the lower Australian dollar provides immediate leverage. But it’s also, we’ve got now substantially enhanced corporate governance and that’s the sort of post-Hayne royal commission environment that we’re operating in. We’ve got secure government, doesn’t matter which side you go, and that stability adds to certainty,” Prendeville said on The ifa Show.

“We’ve got a known legislative environment and, yes, whilst we’re still waiting for the reviews to come through and tranche two and a number of, hopefully, liberators of back office, what we do have is a known environment. It’s going to improve.

“Where we were five years ago until, really, two years ago is, we were getting punitive legislation that we had to adapt to. So, we had headwinds. Now we’ve actually got tailwinds. We’ve got a really secure future and this is fuel.”

While the royal commission has had long-lasting ripple effects on the industry, Prendeville suggested that it has resulted in better, more profitable advice businesses, while the exit of institutions from advice and high demand for service has led to a non-competitive but profitable market.

“We’re in a stable environment. And it’s not just stable, we’ve actually got substantial growth impetus as well. We’ve got legislative mandatory growth from super which, again, internationally, is highly attractive. That’s why we’ve got all the international fund managers here and have had for decades,” he said.

“We’ve got the ageing demographics, the increasing need for advice. Also, with the exit of the banks, we’ve got an institutional void.

“But underlying all of that is through the pain and post-Hayne period, we’ve actually built better businesses. With the average financial advisory group operating at 28 per cent EBIT right now.”

Prendeville said that, as all of these factors have fallen into place, the Australian financial services marketplace has become “the perfect storm”.

Big moves in M&A

One of the most prominent figures in the Australian merger and acquisition (M&A) space at the moment is undoubtedly Insignia Financial as Bain Capital, a US private investment firm, and CC Capital Partners, a New-York based firm, continue to lob takeover bids at Insignia.

Bain Capital made its initial offer in December with $4 per share; however, this was deemed insufficient and thus rejected by the board. Earlier this month, CC Capital made a bid, offering $4.30 per share, 7.5 per cent higher than that of Bain Capital, totalling around $2.9 billion.

The most recent development in the bidding war saw Bain Capital revise its offer earlier this week, matching that of CC Capital, however, no response has yet been made public.

While negotiations are presumably still underway, Prendeville said the interest is due, in part, to Insignia being the “last real institution” left in the Australian advice environment following the exit of AMP last year.

“That in itself is attractive purely because of its size,” he said.

“It also is one of the larger assets around … and we don’t have many, to be fair. So, this is the last one standing.”

Another big event in the M&A space last year saw Oaktree Capital Management, a global investment management firm, acquire a majority interest in AZ Next Generation Advisory (AZ NGA) for $240 million.

Reflecting on this, Prendeville said that, unlike Insignia, the acquisition of AZ NGA was a “pure wealth play”.

“So, it’s pure wealth but it’s also got a really good history and success. It’s very well led. They’re buying quality businesses, and $240 million is a fairly good confidence tell on that as well and it’s a story that’s got a long tail yet,” he said.

“I think it’s around management. I think it’s also about the underlying quality of the businesses that are being acquired. I think it’s risk management within it. I think that there’s a diversity of skill sets around the board table. Yes, it’s led by a charismatic leader but extremely well supported.

“I think that, yes, there’s key person risk, but that’s relatively mitigated to a large degree given the quality of the board. So, they’re a really good example of what [private equity] is looking for.”

To hear more from Steve Prendeville, tune in here.