Lender ThinCats is planning to write £200mn worth of business in the UK IFA market over the next three years, its managing director Ravi Anand says.
With a third of IFAs looking to retire over the next decade according to a recent study from Opinium, Anand says his company has seen an increase in enquiries from advisers who want to buy other businesses or reduce their shareholdings.
Regulation and increased operational requirements have also been significant drivers.
For those owner-managers of IFA businesses looking to exit fully or partially there are various options:
- Sell their business to a consolidator IFA pursuing a buy and build strategy.
- Sell to the existing management team through a management buyout.
- Sell to a wider range of employees via an employee ownership trust.
ThinCats, which was set up to help small businesses in the wake of the global financial crisis, lends to small to medium-sized enterprises.
In the IFA market, these are businesses typically with around five to 30 advisers, although it has a few adviser firms on its books with 50-plus advisers.
Anand says where small and medium-sized IFAs may often struggle to secure lending via banks, ThinCats can fill that gap, as the private equity firms are more attracted to larger advice companies.
Depending on the fund size and investment strategy, ThinCats would typically exit its investment in three to five years.
Anand says: “We're particularly focused on that medium-sized business, where there may be a transition to management or management wants to retire; therefore a sale.
“There are all sorts of potential transactions. [There are also] those IFAs that are trying to grow their businesses through acquisition.”
The way ThinCats funding model works is that it borrows from banks and also puts up its own capital, alongside that.
“[The banks] provide us with senior finance, and we put in the equity financing," Anand explains. "We originate a pool of loans that we fund with that.
“Alongside that, we also have institutional capital: so pension schemes, insurance companies, and credit funds. So we've got a sort of balance sheet, which is effectively our own capital alongside third-party money, which comes together to fund loans.”
With this pool of money ThinCats lends between two and three times earnings before interest, tax, depreciation and amortisation (Ebitda).
“[This is typically] where someone's acquiring your business, they pay 50 per cent upfront, 25 per cent in year two and 25 per cent in year three. We find the 50 per cent, maybe 40 per cent. And there might be some cash that they put in,” Anand explains.
“That’s a relatively simple product, straightforward senior debt. You then have what we call transitional capital, or stretch, where we're funding maybe three and a half times capital, and you're sort of going beyond what senior debt looks like. We charge a lot more for that, of course, because we're taking some equity risks.”
Alongside those two lending models, ThinCats also provides a ‘committed facility’ targeted primarily at IFAs with a buy and build strategy.
