New York-based Merchant Investment Management has inked its first deal with a local financial advisory firm 12 months after entering the Australian market.
Professional Planner can reveal that Merchant, a provider of strategic capital to wealth management firms, has taken a non-controlling stake in MBS Insurance, a risk advisory firm with offices in NSW, Victoria, Queensland and Western Australia.
Merchant Australia partner David Haintz says the deal reflects growing demand for risk specialisation, praising MBS founders Kris Mason and Drew Burden for building an attractive national business over 17 years despite a tough commercial environment for risk advice.
“Your typical wealth firm is saying they don’t want to do risk insurance, it’s too hard to get PI [professional indemnity] insurance or get underwriting through,” Haintz tells Professional Planner.
“People are getting out of life insurance – but if there’s a problem – there are people looking for the solution and the solution is specialisation. More and more firms are outsourcing the risk insurance to specialists like MBS.”
The transaction comes amid heightened activity between surviving players in the troubled risk advice sector, including the joint venture between boutique firm Morrow Private Wealth and licensee Bombora Advice, unveiled in August.
Haintz describes MBS as a “pure play” insurance adviser, remunerated almost entirely by commissions. But while he views risk specialisation as an attractive attribute, he says Merchant will not take another stake in a local risk firm after MBS, with the aim to build a portfolio of between eight and 12 cornerstone Australian investments diversified by geography and demographics. He says Merchant is also in advanced discussions with a local high-net-worth investment specialist.
Haintz declines to disclose the value of the transaction or size of Merchant’s stake in MBS, which he describes as a “significant, non-controlling” chunk. It is understood that Merchant, which has interests in more than 60 wealth management firms around the world, ordinarily takes stakes of 20-25 per cent in its partners.
Merchant entered the Australian market in October last year, attracted to the nation’s highly regulated advice sector and growth tailwind emanating from the compulsory superannuation guarantee.
It is one of several global private equity players targeting the sector, including Connectus Wealth Advisers (owned by US-based Focus Financial Partners) and AZ NGA (led by high-profile local dealmaker Paul Barrett and backed by Italian asset manager Azimut).
But Haintz says Merchant will differ from competitors in restricting itself to minority stakes. Unlike traditional PE firms, which operate on seven-year investment cycles, he says Merchant is a long-term investor with equity being provided for 15-plus years or even “forever”.
“We don’t want to turn entrepreneurs into employees,” says Haintz, who was part of the founding team that built Shadforth Financial Group and sold it to then-IOOF (now Insignia Financial). “It just doesn’t work when you take entrepreneurs and put them on a salary.”
He says the firm is targeting just 1-5 per cent of the local market, with strict criteria including an “entrepreneurial mindset”, relatively young management team and track record of both organic and inorganic growth.
“If you want to play golf two or three times a week, you’re probably not for us,” he quips.
But Merchant chief operating officer Rebecca Wells, who joined the investor in February after close to a decade working for general insurance brokerage firm AUB Group, says a surprisingly large number of local wealth businesses meet the criteria.
“The firms we’ve been talking to are entrepreneurial, they are impressive in the way they move and think,” she says. “The life and wealth industries have been almost forced to rethink how they do everything [due to waves of regulatory change].”
Haintz, who has been a consultant to independent financial advice firms since selling Shadforth in 2014, suggests advice businesses will become more and more attractive to private capital, estimating that around 30 private equity firms focus on wealth management in the US market.
Locally, he says advice firms are more appealing than peers in financial services such as licensees and asset managers, and even platforms, usually seen as the most lucrative part of the value chain.
“The only margins that have expanded in the past 20 years are advice,” he says. “That’s where you want to be.”
This article was edited on 1 November 2023 to clarify Merchant’s role as a provider of strategic capital.
