Backed by an ambitious venture capital partner, Centric Wealth aims to capitalise on a shake-up in the non-aligned sector. Simon Hoyle reports
Within three years or so, Centric Wealth aims to increase in value by two to three times, according to its chairman, Philip Kelly. That growth will be partly organic, but will also come partly from continuing the growth-by-acquisition strategy that has produced the group, as it exists today.
Centric is majority-owned by a private equity firm, CHAMP Private Equity, and like all good private equity investors, CHAMP didn’t go into the investment without already having thought deeply about how it would exit.
A trade sale remains an outside chance. But Kelly says a sharemarket listing is the best way of maintaining Centric’s hard-won and fiercely defended “institutionally non-aligned” status. To be a viable ASX-listed entity, however, Kelly believes the group needs a market capitalisation of around $500 million to $600 million. Hence the ambitious target.
“We have to make the business two to three times bigger, because that’s the threshold for a sensible entry point on the ASX, if you want to have a long-term viable listing,” Kelly says.
“When private equity comes into a business they’re always looking at the way they will exit when the time comes. They don’t have a specific time period in mind, but they’re not permanent owners of anything.
“In the case of this business, the logical exit route is to listing, because that’s the easiest way to maintain its institutional independence.
“That’s fundamentally important. Our institutional non-alignment, which is the phrase we use here… is fundamental to our positioning in the market. So we have to have, eventually, a form of permanent ownership that guarantees that.
“In theory, you could have a trade sale to somebody who was not an institution, in that sense, like Wesfarmers, if they decided to go into financial services, for example. But most likely it’d be listing. In order to help form our objectives we use listing as the model. To be viably listed you need to be two to three times bigger than we are now, to ensure you come onto the ASX at a level where you get reasonable research coverage and liquidity.
“Based on revenue and what profitability we expect out of that, three years down the track, multiplied by a [capitalisation] rate, and that kind of gets you to $500 to $600 million market cap.
“Then you’re on the research radar and you can be pretty certain that most of the time, most of the way through the cycle, you’ll have reasonable liquidity, and so you’ll be properly priced.
Then you should be able to use your scrip for further acquisitions.”
Kelly says a big merger between several non-aligned planning firms is almost inevitable in the near future.
“When you look at the non-aligned group of significant players in the industry, it’s not that big, and they’re all talking to each other,” he says.
“You would imagine there’s going to be some sort of combination of one, two, three of them. It’s almost as inevitable as night follows day that something like that’s going to happen.
“Everybody’s got the same problem. They need to be large enough to have decent operating scale, and, if you want to be listed, big enough to get over that threshold. So I suspect there will be a sizeable merger at some stage within the industry, and I hope that we’re involved – on attractive terms.”
It’s always been Centric’s ambition to list on the ASX, to maintain its “institutional non-alignment”. However, its original plans were shelved when global sharemarkets went into meltdown in late 2007 and 2008, and as a Plan B, it invited participation from venture capital investors. That was when Kelly joined the board as chairman, knowing CHAMP from the late 1980s, when he was at State Super.
Centric as it exists today is the result of a total of 37 acquisitions of financial planning, accounting, general insurance, risk insurance and corporate benefits firms.
Things kicked off in 2002, when Robert and Glenese Keavney’s Investor Security Group (ISG) merged with Pillemer & Agranat, a company co-founded by Michael Pillemer. In 2003, the ProVision and Thorpe-Apps financial planning businesses joined the fold, and a year later a home lending business, Home Packages, and the Howarth financial planning business joined.
The business was renamed Centric Wealth in 2005 – the same year the Berkley Group financial planning business became part of the group (and Berkley offices were opened in Brisbane and Canberra).
Further acquisitions followed, in 2006 and 2007 (including the PKF financial planning division), but then the economics of the growth-by-acquisition changed, albeit temporarily.
As part of buying into Centric, venture capitalists CHAMP gained representation on the Centric board, and Chris Cuffe, the former head of Colonial First State and co-founder of Social Ventures Australia (SVA), also has joined.
As part of the restructuring of the business and CHAMP’s investment, Centric’s chief executive officer, Michael Pillemer, announced his intention to leave the group. Centric announced last month that Pillemer would be replaced by the former managing director of the AMP-owned Hillross, John McMurdo.
“Michael decided he didn’t want to renew his contract, and so I stepped in as the acting CEO, which was always part of the plan, that I would be a backstop if we had a gap in the senior management ranks and we needed more arms and legs at any point,” Kelly says.
“There have been a couple of gaps that I’ve filled, and things that have needed to be done in the business at different levels, things that I’ve particularly liked and have an interest in. On the investments side, for example, I’ve been able to be a key part of the process.
“We caught our breath and set out to recruit a long-term CEO in November. I expected, with the normal way these things go, that I’d be sitting in the chair until May or June, but we quickly were able to reach agreement with John, and he was able to start on the first of March, which was great.
“We did an active search around the market. When the opportunity was put in front of him, what really appealed to him was the change of scale. His previous career had been in a large bank and insurance environment, and he really liked the idea of coming to a business this size, that’s still substantial; you’ve got resources and capabilities – it’s not a start up – and it’s got fast growth ambitions. So it’s a different kind of management challenge.”
A challenge it may be, but Kelly says there won’t be any major changes in strategic direction or culture under McMurdo.
“It sounds like a glib answer, but the real answer is: not a lot [will change],” Kelly says. “The business will evolve, but it was always going to do that, under anybody’s leadership.
The things that Michael wanted to achieve, in terms of the culture of the organisation and the way it presented itself to the market, are essentially the same things as John would want to achieve.
“CHAMP and I, and Chris Cuffe, bought into the basic direction that the previous board had set, and Michael as CEO, and we’d all bought into that 18 months before. We haven’t substantially varied that – some aspects of the implementation, but not the overall direction – and when John responded to our inquiry, we explained that to him and he bought into it, too.”
Another part of the Centric philosophy is that referrals are valuable and the firm will not turn away a client referred to it simply because the client might not fit the template of the firm’s “preferred” client.
“So much of the business you do comes as a group of some kind,” Kelly says.
“One obvious example is corporate super, which we’ve got a reasonable base in, where you have to take the employee profile as it comes to you; but even when you’re dealing with referral networks, you can’t pick and choose within them. If you’ve got a good client who’s got a relative with some need, and the relative wouldn’t normally fit your profile for a client, you can’t say, well, sorry.
Almost all your business tends to be group business, in some sense. You just can’t cherry-pick. It’s just not practical, and it’s not even the right thing to do. We have to be able to deal with people right across the spectrum.”
There are mechanisms that a firm can use to turn away business it doesn’t want – for example, deliberately pricing its services out of a potential client’s reach – but Kelly says that presents some ethical and philosophical problems.
“If I was ever to become aware that someone had come in here at somebody else’s suggestion – they had been referred here – and sat at a table there and somebody said, ‘Well, our minimum price is X thousand dollars – you can’t afford that, can you?’ and somebody went away feeling mildly humiliated, I would just be horrified,” he says. “To me, that is just completely unprofessional, and you shouldn’t do it.
“But [the business] has got to be viable. The solution is that you create a scalable set of services, so you do have a solution for people who do not fit your main target profile. And it’s not hard to do that.
“Modularity is part of it. Another way you do it is the degree of flexibility in the service. So if, for example, you’ve got an IMA [individually managed account] for higher-end clients, you can do the same thing with an SMA [separately managed account] and a standard portfolio for lower-value clients. And you see them once a year instead of four times a year, and that sort of thing. And that works really well, because that’s really all they need.”
Kelly says Centric is well placed to achieve its growth targets, even as the world of financial planning evolves around it.
“We’re fundamentally fee-for-service, so we’re right, from that point of view,” he says.
“Increasing regulation is with us all the time, and we’re right on top of that.
“And we are also good on compliance. We’ve got an experienced lawyer who heads our in-house compliance group. So whatever the regulators throw at the industry, we can cope. And we don’t complain about it, we just do it.
“We’re spending quite a bit of money at the moment upgrading our practice management systems, which will strengthen our compliance as well as other benefits.
“A lot of that can be summarised as ‘becoming more professional’. More like the traditional professions: accounting, engineering – the engineers are the ones I really like. When did you last hear an engineer being accused of being unprofessional? It doesn’t happen.
“And if you talk to engineers, you see why: the way they’re educated, and the ethical system they sign up for is what should be the model for everyone. They’re even better than lawyers and accountants, I think. “And they deal with issues just as ambiguous and difficult as lawyers and accountants do.
“So engineering is the profession I always look to. And that’s why we’re all basically safe – because engineers create our world for us, and it’s essentially safe.”
Name: Philip Kelly
Position: Chairman, Centric Wealth
Years in financial planning/financial services: More than 35
Qualifications: Fellow of the Australian Institute of Company Directors; Member of the Australian Institute of Management, BA (Hons) (Econ) from University of Sydney; and MBA. (Distinction) from IMI (University of Geneva)
Relevant industry background and experience: Has worked in private equity and institutional investment management, retirement fund administration and retail financial advisory services. He has been chairman or a director of public and private companies in financial planning, software, tourism and funds management, as well as resources and manufacturing. Director of the services sector peak body, Australian Services Roundtable Ltd, and a former deputy chairman of the Australian Government’s Industry Research and Development Board.
