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EW Group to use AIM listing as growth platform

EW Group announced itself the day before its reverse takeover of European Wealth Management by posting a spectacular share price rise – and investors will be hoping this is just the start.

EW Group (LON:EWG) announced itself the day before its reverse takeover of European Wealth Management by posting a spectacular share price rise – and investors will be hoping this is just the start.

The reverse has cleaned up a “fairly messy corporate structure” and brings to AIM a fast-expanding network of independent financial advisors that is run alongside a fund management business. 

The latter has around £710mln under management, which isn’t bad for a private company that really only found its feet in 2011, although the goal is to get to around £3bn in the next three years.

The stock exchange listing provides the newly re-christened European Wealth Group with the currency to make acquisitions – which are becoming more prevalent the further we sail from the carnage of the financial crisis.

It also allows it to participate in the consolidation that is taking place following the Retail Distribution Review (RDR), which has altered the way financial advice is given.

These days you have to pay for guidance that was until recently given free of charge by an independent financial adviser (IFA) who would usually then make money from a commission paid on products sold.

This has turned the market on its head. Some IFAs have taken the RDR as their cue to quit the market.

Others, such as European Wealth, see it as an opportunity to provide lower cost advice to those who can’t, or just won’t, pay the fees charged by the private banks.

As the landscape changes, the big banks are targeting the upper echelons of the private wealth market, meaning the tier below is wide open to the likes of our AIM debutant.

Success is predicated on having the cost base and systems to provide this lower cost wealth management solution at a profit and the base from which it can grow. 

“There is a segment that has money and desperately need advice as these people probably don’t have the experience to say whether they have enough money to get them through retirement,” says John Morton, the company’s chairman.

“But it is very difficult for old established businesses to have the cost structure to be able to do that profitably. Layer on the fact that most people are not used to paying for advice overtly and you’ll realise the market is changing.

“Retail banks and discretionary fund managers are all trying to move into the private bank space.

“It is leaving a large gap, which means we are primed to do well; particularly as we do the IFA and investment management bit.”

Chairman Morton says he has no end of opportunities to add to the portfolio, but in bringing on board new businesses there are rules he adheres to.

First, and most importantly, an acquisition must be a good cultural fit, he says.  At the same time it is key not to overpay for a new business.

“There are a number of acquisitions we have lost because we haven’t been the highest bidder and that doesn’t concern me at all,” Morton says.

“In this business if you don’t keep the clients and the staff all you have done is acquire some very expensive office space.

“What we want to do is show a financial planning outfit that wants to sell, that we are going to look after the staff and the clients.

“That doesn’t mean there isn’t going to be change, there often is change, but it is spelled out when we do the deal. There are no surprises.”

This approach is one borne of years of experience creating and developing businesses. 

Morton himself helped set up Syndicate Asset Management, while director George Robb was a founding shareholder and former chairman of Aberdeen Asset Management

The group also appointed senior managers from blue-chip City institutions.

“If we hadn’t had the Lehmans crash we wouldn’t have been able to put the team together. You can’t learn the experience they have,” says Morton.

Directors and founders own 57% of EW Group and are subject to an orderly sale of stock; not that there is a stampede for the exit.

The group is also listing £5.75mln of convertible stock with a 10% coupon, which is one way to earn an income from a business that is unlikely to pay a dividend for at least three years.

When it does start making a pay-out, Morton insists it must be sustainable.

In the meantime, there are plenty of opportunities to grow. Acquisitions will propel that expansion, but there will be the opportunity to bring on board new personnel too.

In terms of deals, there is little the EW chairman can say without showing his hand; however, management won’t be diving in after a big bolt-on deal. 

“I don’t want to do the acquisition that goes wrong,” Morton says.

For those interested in buying the shares it is worth benchmarking them against others in the sector such as Brooks MacDonald and Mattioli Woods.

The standard method of valuing the fund management arm would be on a percentage of funds under management with a figure of 2.5-3% providing a good starting point.

Wealth management, if it was a standalone business, would trade on perhaps 3.5-4 times recurring income.

Doing this very simple maths reveals the current market capitalisation is well below the figures derived from those two calculations.  So, that share price may have plenty more headroom for growth.

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