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True Potential has borrowed more than £1bn to fuel its rapid expansion in the UK’s financial advice market in the latest sign of the mounting debt piles of private equity-backed advisory firms.
The Newcastle-based business, in which Cinven has a majority stake, has borrowed to acquire financial advisers across the UK and boost its assets, which have risen rapidly over the past few years from £17.3bn to £32.4bn.
Analysts note that True Potential has taken on more debt than many of its rivals in the UK’s so-called advice consolidation market — companies that buy financial advice firms — with analysts at S&P pointing to its “elevated leverage”.
The advice consolidation sector as a whole has amassed at least £3.4bn in debt and credit facilities, according to an investigation by Citywire, although the extent of borrowing in aggregate is opaque because a lot is held offshore. Some of these firms pay interest of more than 20 per cent on their debt, the investigation found.
The findings come as the Financial Conduct Authority warned financial advice firms in October that “where acquisitions are funded by debt, you should have a credible plan to service the debt.
“This should be supported by realistic and stress-tested financial projections,” the FCA added.
However, the extent of True Potential’s borrowing, which is reported through its holding company Kane Bidco, and its business model have come under scrutiny.
Until earlier this year, True Potential offered financial advisers an 8 per cent upfront payment of each client’s assets to move across to its service. This practice caused complaints from a handful of customers, with some saying they had been switched to less suitable products, the Financial Times has previously reported.
Attracting advisers this way was estimated to have cost True Potential up to £280mn a year had it continued with the practice, according to S&P. Analysts at the credit rating agency said in a recent note that “such debt-driven growth creates risks in case of higher-than-expected asset outflows or weaker financial performance.”
However, the analysts said True Potential’s move to defer the costly payments to advisers “may slow the group’s growth in client assets and earnings” but lead to “gradual deleveraging”.
According to True Potential’s last quarterly report, its leverage multiple, which measures how much of its funding has come from debt compared to equity, has dropped to 3.4 per cent from 3.6 per cent last year.
True Potential, which was established in 2007, offers financial advice and also sells products directly to consumers. Revenues jumped from £28mn in 2013 to £407mn last year.
The business was co-founded by Sir David Harrison, who retired as chair last year. His son, Daniel Harrison, stepped back as chief executive in October. Former Tesco Bank chief executive Gerry Mallon has become chief executive.
Before stepping down, Daniel Harrison told the FT that “the normal hold period” for a private equity firm was “three-to-five years, so we’re now entering that period,” in response to speculation that Cinven could look to exit its position over the coming years.
Cinven and True Potential declined to comment.
Additional reporting by Alexandra Heal in London
https://www.ft.com/content/b8de41cb-ef64-4116-b8b0-f047d4ba0b55
