Financial services consulting: opportunities and challenges for PE
We’ve helped investors figure out where to find value across many subsectors of financial services – investment platforms, FS tech, financial advisers, fund services, and private client services/trust services, in the recent past.
Growth and change in the FS market means there’s an interesting investment opportunity in financial services consulting services. These businesses are benefiting from positive host market growth drivers (e.g. ongoing regulatory change, need for digital transformation, growing product/service complexity, need for data analysis & insight, senior manager conduct rules) by delivering services (& increasingly the tech) to solve those challenges for clients.
There are value creation opportunities for mid-market PE in FS consulting through both organic growth (through land & expand in customers and hiring from larger firms) and buy & build opportunities.
Host market complexity drives the need for external expertise
Like its host markets, financial services consulting is fragmented – by function (e.g. compliance), by subsector (e.g. banking or wealth management), by customer type (e.g. financial adviser or investment platform), by regulation (e.g. PRA or FCA), and by jurisdiction (e.g. EU27 countries still have many local regulations).
Given the complexity and breadth of requirements, customers often to turn to consultancies for their expertise and capacity. The reality for many is doing this in-house is difficult and complex and ‘do nothing’ is not an option (‘do badly’ is more likely!).
How to grow an FS consulting firm
There are three broad approaches to growing an FS consulting firm;
- Functional: Focus on the core thing you are good at (e.g. regulatory compliance) and only do more of that, perhaps moving into adjacent subsectors or following your customers round the world (e.g. if you do digital transformation work for the London office of a bank, you can probably do the same for its NYC office).
- Sectoral; Focus on the core sector you know lots about (e.g. wealth management) and expand your service lines to cover the many things your clients need help with (e.g. digital transformation, regulatory advice, financial crime reporting, KYC/due diligence, US tax reporting … it will be a long list).
- Cross-sectoral/cross-functional; Depending on your starting point, try and do all of the above – if you can advise on regulatory compliance for an investment platform, you can expand to do that for a financial adviser, and then maybe the financial adviser needs some help with digital transformation, and so on.
The above requires a good platform that has an ambitious management team – which is always the challenge, given the many smaller players plus lots of trade buyers keen to expand.
Investors should also consider the opportunity to overlay technology on a lot of the services offered, to improve the service to clients through data & analytics, but also automation to help staff deliver them more efficiently. The consultancy may also deliver its own tech or sell/implement third party tech, like trade surveillance or monitoring impacts of new regulations.
Buy & build or hiring or both
The buy & build opportunity is driven by how hard it is to build a services business. Particularly now, with significant investment in tech and data analytics required to service clients. Also, FS consulting businesses are typically set up by people spinning out of much larger firms – at some point, many will realise they need to figure out their succession plan, or otherwise see the value in bolting on to a bigger platform – they can realise some £ and go back to doing what they want to do – helping clients.
The hiring opportunity is also interesting – FS consulting is one of many where smaller firms shelter under the price umbrella of the big consulting firms (Bain, Accenture, etc.) or the Big 4 accounting firms. The pandemic has accelerated the rate of burnout of staff in those bigger firms, so there is an increasing opportunity for smaller firms to recruit high quality staff looking to leave these big firms. The smaller firms then are able to deliver work of a similar quality to the big consulting firms, and offer a better service (as they can get closer to clients) but at a lower price. FS consulting is also very much relationship-based, so new hires will bring new clients (and potentially new staff) to help deliver the work.
Key reasons why growth is hard
While the market drivers are robust, FS consulting has long sales cycles which can be tricky to navigate. Buying decisions are often triggered by the appointment of a new CXO, a change in regulations, a new service line, or a change in systems. Developing a sales and marketing strategy given the inherent unpredictability of demand is a challenge for management teams and a potential headache for investors.
The success of many boutiques is due to their depth/strength of specialism, and their seller/doer model which maintains close relationships (important both for sales to clients and for attracting high quality staff), but both are notoriously difficult to scale – you need to hire people with relevant skills & experience and commitment to client service, which is what everyone else wants to do too. Technology solutions make client relationships stickier yet require significant investment and development time.
Armstrong has helped many investors work through investment opportunities in financial services, and there is much more we can say about FS and FS consulting in particular – if it’s of interest, we have a short presentation that goes into more detail on the above themes. Please contact Simon or Solomon to find out how we can help you.
Simon Hemsley, PartnerEmail Simon
Solomon Ishack, Senior ConsultantEmail Solomon