Strong growth dynamics remain in place at Alpha FMC
Alpha Financial Markets Consulting (Alpha Financial Markets Consulting PLC (AIM:AFM)) has comfortably delivered on its goals since listing on AIM in 2017. It met its original objective of doubling the business a year early in 2020. In spite of the recent financial market turbulence, we believe the group remains well positioned to meet its objective to double the business again by 2024.
The group generated 33.4% organic growth in fiscal year 2022 (FY22), less a 2.1% currency headwind along with a £29.2mln contribution from Lionpoint, a US-based alternatives business which was acquired in May 2021. Adjusted underlying earnings (EBITDA) jumped by 56% to £33.9mln and cash generation was strong, with cash conversion at 112%. The group ended the year with £63.5mln in cash and had no financial debt.
At the time of the final results in June, management said that strong momentum has continued into the early part of FY23, and growth is supported by a strong pipeline of potential new business while the structural tailwinds that underpin demand for Alpha’s services remain robust. Nevertheless, management was mindful of the macroeconomic backdrop including inflationary pressures and believed it is well positioned to balance the risks of these pressures and continue to deliver attractive growth and margins.
We will be looking for any evidence of tempering in industry trends, with a particular focus on outlook, when the group reports its interim results, for the period ending in September, later this month.
Strong business drivers
Alpha is a premium consultancy focused on the global asset & wealth management and insurance industries. Alpha enjoys a tailwind from structural growth drivers, especially relating to cost pressures across its end markets, and it is expanding geographically as well as into new sectors and service lines. Alpha competes with the large integrated global consulting firms; however, as the only listed pure-play in the sector, it has a distinct advantage in luring talent and accelerating its unique selling point as the place for clients to go for deep subject-matter expertise.
On page 2, we outline the key factors of the investment case for the business.
A track record of under-promising and over-delivering
Cash conversion has exceeded 100% for four years running, while return on capital employed (ROCE) has comfortably exceeded 20% over the same period. We estimate that ROCE was 36.3% in FY22.
The stock trades on 17.9x our maintained FY23 forecasts, falling to 17.6x in FY24, which looks attractive given the group's track record of growth, high return on capital employed and strong balance sheet.
Alpha offers a unique proposition as a premium consultancy focused on asset and wealth management space, now moving into insurance, and operating on a global scale. The group brings deep subject-matter expertise to help its clients with very difficult operational and organisational challenges. Its pool of knowledge-based consultants are specialists in these industries, which gives the group a significant edge over the large integrated consultancy firms which lack this focus. We highlight the following features on the group's investment case:
Favourable business drivers. Amid a backdrop of industry consolidation, digitisation, shrinking margins and automation, the industry has experienced for many years underlying industry trends of cost pressures (to maintain margins), increasing regulation and growth in assets under management, which continually drive change programmes globally.
Clear strategy to double the size of the business. The core growth strategy is centred on expanding the group's US business and growing in the insurance sector. Ongoing industry changes are driving the evolutions of practices such as the digital and ESG practices. The company has an acquisition pipeline to help accelerate the growth.
North American opportunity is seven to eight times the size of the UK. Management believes there is a huge opportunity for growth in North America. The company entered the US in 2009 on a small scale and has been ramping up its presence there in recent years. Clearly, the North American opportunity is enormous, and the group has the potential to continue to build market share.
Insurance opportunity alone could double the size of the business. Alpha expanded into personal and commercial lines in 2020. The industry dynamics are very similar to traditional asset and wealth management consulting and management believes the insurance opportunity is at least as big as its traditional business.
Adding new service lines. The group added an ESG practice during the last financial year and this new practice got off to a very strong start. The ESG practice is supported by strong business drivers as nearly all new investment mandates require ESG compliance.
Positioned to attract the cream of industry talent. Alpha is the only quoted pure play in the sector, competing with large integrated consultancy firms, as well as smaller niche operators. This puts it in an excellent position to attract high-quality talent from its competitors. The ongoing disruption at the big four, including the proposed EY demerger, could provide and opportunity for Alpha to acquire talent.
Expansion into the alternatives space. Alpha acquired Lionpoint in 2021, giving the group significant exposure to the alternative investment industry, which is one of the fastest-growing areas of the asset management industry. In addition, it gives the group scale in the US market.
An excellent position to consolidate the space. Alpha is in an excellent position to consolidate the asset and wealth management and insurance consulting spaces and is actively pursuing bolt-on acquisitions to strengthen its skills base or boost its technological offerings. The acquisition of Lionpoint is the group's first significant acquisition.
Strong track record and financial position. Alpha has grown net fee income by a compound 32% per annum over seven years, with the help of three small bolt-on acquisitions and Lionpoint. In addition, operating margins have held above 20% over the last five years and stand some 350 basis points (3.5 percentage points) higher than they were eight years ago. As a result, the group has built up a cash pile of about £63.5mln and has no financial debt.
Investment case
A unique premium consultancy focused on the asset and wealth management and insurance spacesCompany description
Headquartered in London, UK, Alpha Financial Markets Consulting is a leading global provider of specialist consultancy services to the asset management, wealth management and insurance industries. It has the largest dedicated team of consultants in the industry, with over 760 consultants operating from 16 offices across the UK, Europe, North America and Asia.
The group has evolved into a unique premium consultancy focused on asset and wealth management space, and now also insurance, operating on a global scale. The group's secret of success is based around deep specialism and highly talented people — its customers struggle to find this level of deep subject-matter expertise in larger more generalist consulting businesses. Alpha operates a global collaboration model and around 90% of work is handled by full-time consultants, with the balance carried out by contractors who are sourced through the group's Omega contracting business. Omega maintains a database of contractors who have either worked with Alpha in the past or have otherwise been thoroughly vetted.
Highly talented people with deep specialismTalent and incentivisations
Alpha is a people business and the key to the group's success is its highly talented people with deep specialist knowledge. This very deep expertise enables Alpha to help its clients deal with complex operational and organisational challenges, and clients often struggle to find these strengths in the larger more generalist consulting businesses. Alpha is keen to attract the highest quality people in its fields of operation and the company's goal is to recruit the top 5% in the field.
The group employs around 760 revenue-generating consultants (full-time equivalent basis), of which around 10% are contractors with the rest being full-time staff. Contractors bring specialist skills or experience in delivering a certain service or provide short term cover where the group’s consultant resources are constrained. The work culture is important, and the average age of consultants is late 20s to early 30s and the group has a low staff turnover. Full-time consultants receive a profit share in the form of a cash bonus. For a manager, this can reach 30% of the annual salary. In the case of the senior executive team, the cash payment is smaller, while equity options are awarded on annual basis, under the management incentive plan (MIP). The company anticipates an approximate 3% equity dilution over time (strictly a maximum of 10% over three years). Unvested awards granted under the MIP are limited to a maximum of 10% in aggregate of the company’s issued share capital. Vesting of the awards is linked to several factors, depending on the individual, including earnings per share growth, total shareholder return or specific business unit EBITDA.
Last years organic growth was an impressive 33.4%FY22 results
In June, the group reported its FY22 results for the year ending March 31, 2022. Net fee income for the period surged by 61.1% to £157.8mln, which was slightly ahead of our forecast of £157.0mln. This reflected strong organic growth of 33.4%, less a 2.1% currency headwind along with a £29.2mln contribution from Lionpoint, which was acquired in May 2021. Adjusted underlying earnings (EBITDA) jumped by 56% to £33.9mln (we had forecasted £33.7mln). Cash generation was strong, with cash conversion at 112%, and the group ended the year with £63.5mln in cash and had no financial debt. The final dividend was increased by 55% to 7.50p and the total dividend by 49.6% to 10.40p.
Consultant headcount increased by 69.6% from 448 to 760 over the year, including 33 new directors and the wider Lionpoint team. Lionpoint, a US-based consulting firm focused on the alternative investment industry, has been successfully integrated and has been trading ahead of expectations. It brings global scale in alternative and other private asset classes and enables cross-collaboration opportunities on client projects. Offices were added in Denver, San Francisco, Sydney and Frankfurt, taking the group to 16 client facing offices globally. The number of clients that the group supported increased to 718, up from 439 in fiscal 2021 (FY21). There was continued strong momentum in the group's insurance consulting offering, with the team doubling over the year, and it has expanded into general Insurance and speciality client segments in the UK market.
Outlook and strategy
Management reported that the strong momentum has continued into the early part of FY23, and growth is supported by a strong pipeline of potential new business while the structural tailwinds that underpin demand for Alpha’s services remain robust. Nevertheless, management is mindful of the macroeconomic backdrop including inflationary pressures and believes it is well positioned to balance the risks of these pressures and continue to deliver attractive growth and margins. The group's strategy continues to involve growing the business through geographic expansion in all regions, both organically and through selective acquisitions, with a particular focus on North America. It also involves extending the depth and range of client segment and service line offerings.
Consulting services are typically priced on a time and materials basisBusiness model
The vast majority of the group's consulting services are priced on a time and materials basis using daily charge-out rates. Alpha occasionally uses fixed-price contracts, typically in continental Europe or North America, which involve billing on reaching milestones — typically reached every four to six weeks. In addition, there is a modest level of software rental revenues relating to the software solutions in the group's Aiviq unit, which operates a software as a service (SaaS) revenue model.
Projects typically span multiple service lines and vary in size, duration and nature. They range in length from a few weeks to two to three years for a large M&A integration project. The group undertakes projects across most of the asset and wealth management value chain and these fall into three categories, as below:
Major programmes: these typically span more than one financial year, are multi geography and would be valued in excess of £2mln. There are usually two to five major programmes running in any year. A typical example would be a large mergers & acquisitions (M&A) integration project, for example, the group began working with Abrdn in 2017 — the year it acquired Standard Life — and Alpha is still working with Abrdn to this day.
Large programmes: these are typically up to a year in duration, single or multi regions and valued between £1mln and £2mln. There are around 10 large programmes undertaken in a year. Typical examples would include a front office integration project or back-office outsourcing project and might take 9-12 months to complete.
Small programmes: these are typically single region, focused programmes valued at less than £1mln. There are usually more than 100 small programmes undertaken in a year. A typical example would include a benchmarking project involving two consultants and taking four to eight weeks and costing around £100k. These small projects can lead to longer-term projects.
Revenues from the three categories are split roughly one third each. The insurance sector has a similar revenue model.
Essentially there are three consulting levels:
• Strategic advisory
• Selection of a service
• Implementation
An example of a typical Investments (front office) project.
1) Strategic advisory. A customer has decided that its technology platform is out of date and asks Alpha what they can do. Alpha will engage with the customer and look closely at the business. The key is determining the optimal go forward operating model and Alpha will look at the market and ascertain what platforms are available. Alpha will closely examine the target operating model and establish the roadmap to getting there.
2) Selection phase. Alpha establishes a list of several providers or technologies and runs a process to help the customer select the appropriate technology platform.
3) Implementation phase. This involves implementing the new technology, removing the old platform, transitioning data and processes and setting it all up.
A highly knowledgeable team of two to five people work for some twelve weeks in each of stages 1) and 2). The implementation phase is more substantial, taking one to two years, and generating the bulk of revenues. It could require two to three people for a smaller project or 10 people for the duration of the programme in the case of a large implementation.
Cost pressures force businesses to seek operational improvements, upgrade legacy systemsStructural growth drivers
The key structural drivers in the business, as outlined below, are very global.
Cost pressures. As the pressures on the asset management sector continue to increase, Alpha offers asset managers solutions to improving efficiency, reducing costs and upgrading legacy systems. This is probably the most important structural driver for Alpha since ongoing cost pressures force businesses to seek major operational improvements including upgrading their systems, which plays directly into Alpha's strengths.
Regulatory demand. Regulations are continually changing and evolving and new ones introduced and this is extremely challenging for businesses to cope with on their own. One recent regulatory development is the US SEC's plan to revamp the rules around fund names, which would require funds to prove that 80 per cent of their holdings match their names. The proposal would apply to everything from 'core' and 'growth' funds to funds that invest in 'sin stocks' or investments that meet 'ESG' criteria. According to a media report, the SEC has estimated the cost to the fund industry at up to US$5bn.
Growth in assets under management. Global assets under management run by money and wealth managers grew by 12% to US$112trn over 2021, according to BCG. This growth rate was well above the 7% average for the previous twenty-year period and was supported by higher than normal net flow rates at US$4.4trn or 4.4%.
Client and societal expectations. This factor has been made apparent through the ascent of ESG (environmental, social and corporate governance) in recent years, which resulted in the establishment of a new business practice for Alpha.
Structural drivers
Source: Alpha Financial Markets Consulting
Goal to be the world's leading consultancy focused on asset and wealth management and insurance industriesStrategy
Alpha's strategic objective is to be recognised as the world's leading consultancy focused on asset and wealth management and insurance industries.
The group listed in 2017, with the goal at that time to double the size of the business over four years. This objective was achieved in 2020, and the new goal was set to double the business again over the following four years. The plan is to identify attractive markets to expand, and at present that is focused on the US asset and wealth management along with insurance, which is initially UK and Europe focused. The geographic push is now tilted to the US, while there are also attractive growth prospects in the Asia-Pacific region. The strategy includes acquisitions, and management has been actively involved in a number of conversations. The focus is on bolt-on acquisitions, though a larger acquisition can not be ruled out. Nevertheless, the plan is to maintain a strong balance sheet, which would likely remain in a net cash position.
Geographic expansion
There is a particular opportunity for dynamic expansion in North America. Meanwhile, Alpha also intends to grow and consolidate Europe and the UK, with strategic expansion across Asia.
Sector and service line expansion
Alpha has expanded its offerings to fourteen business practices along with the currently ring-fenced Lionpoint alternatives business and its proprietary software and technology consulting divisions. The ESG practice was added during 2021 and management has been rolling out its plan for rapid expansion in the new insurance vertical. In addition, the management plans further expansion and geographic roll-out of its business practices globally.
Expand the group's product and technology offerings
This involves beefing up Aiviq (previously Alpha Data Solutions), which covers the group's proprietary software offerings, and currently mainly reflects the 360 Sales Vista products (acquired via Track Two) and the Obsidian acquisition. It also involves expanding Alpha Technology Solutions, which deals with the integration of third party solutions. In this area, the group at present has particular strength in the SimCorp platform, following the acquisition of Axxys and there is scope to expand this skill-set.
Strategic acquisitions
Management wants to build on the successful integrations of Lionpoint, Axxsys and Obsidian. It has a healthy acquisition pipeline to complement organic growth. The focus is on acquiring assets with a quality proposition, high quality of service and quality of product and that culturally fits well into the Alpha group. The group has built up a cash pile of more than £60mln and has no financial debt. In addition, it has an undrawn debt facility of £20mln available to help finance acquisitions.
Fourteen practices (two insurance) along with two technology units and the acquired alternatives unitEvolving practices
The group currently has fourteen practices along with Alpha Technology Services (third party software integration) and Aiviq (proprietary software) units and the acquired Lionpoint in the alternatives space, which remains ring-fenced.
The insurance vertical is covered by two practices — Finance transformation as well as Retail distribution and advise. The company has established a new practice - Enterprise transformation, which is a carve-out from the Operations & Outsourcing practice and has a goal to focus specifically on enterprise transformation projects in the asset and wealth management industry.
Practices are as below.
1. Benchmarking. Benchmarking has been at the core of Alpha’s proposition since it opened in 2003. The group has spent many years building its database of cost and service data which is a key unique selling point. The data enable the creation of benchmarks to establish how much a client's operations are costing compared with its peers. This information helps Alpha to establish potential operating efficiencies for its clients.
2. Operations & outsourcing. Alpha works with clients to strategically optimise their operating models, including advising on their outsourcing relationships.
3. M&A integrations. This covers both pre-deal (including due diligence, focusing on the operating model, information technology and post-deal cost base) and post-deal (from integration to defining the operating model and realising synergies).
4. Front office (Investments). This covers different areas of the front office, from portfolio management to trading and risk & performance. Alpha will: 1) define the strategy and future operating model; 2) evaluate and select strategic partners and technology solutions, and 3) deliver end to end implementation programmes.
5. Regulatory compliance and risk. This is essentially about determining how customers get through the regulatory landscape and adopt what processes and technologies that are necessary.
6. Distribution. This involves applying processes and technology to improve and optimise customer services as well as sales and marketing. For instance, Alpha can create an enterprise view for its clients, of their clients and the end-to-end investor ecosystem.
7. Digital. This mid-sized practice focuses on how asset managers interface with their clients and involves a number of strategy type considerations. It is essentially about the digital transformation of businesses, such as moving to a “digital by default” operating model. This involves the implementation of various technologies and projects to change the client interface/s with end investors.
8. Investment guidelines. This is the most specialised niche of the practices, relating to coding in guidelines that funds can or cannot be invested in and involves plenty of rules and programming. While this work is typically managed in house, following a big technology or platform change it necessitates recoding all the rules, hence creating an opportunity for Alpha. The US SEC's plans to revamp the rules around fund names, requiring funds to prove that 80 per cent of their holdings match their names, could act as a driver for this business unit.
9. Fintech & innovation. While this is a small practice, a major theme is the enormous number of fintechs that can help to drive efficiencies. Areas include workflow automation, data management and validation, investment research (a particularly high number of solutions), ESG data and regulatory compliance. Alpha seeks to be thought leaders in the industry and holds industry forums, with fintechs presenting to potential customers.
10. ETF (Exchange traded funds) & indexing. This practice addresses a core theme in the industry. The issue of high fees charged by active management, along with the need to fulfil investment strategies sought out by the worlds' investors, has inspired a boom in ETFs, from the likes of Blackrock (iShares), Vanguard and State Street. Consequently, this puts commercial pressure on all asset managers to be able to offer indexing or ETFs. This area requires different technologies to normal funds. Alpha has a leading practitioner in the industry and looks at everything from the operating model, to product development, technology, outsourcing and delivery.
11. ESG and responsible investment. This unit was established in 2020 to help clients deal with the regulation associated with the burgeoning demand for ESG assets. Alpha helps its clients build an ESG strategy and roadmap, develop an investment approach, implement reporting procedures and understand regulations and standards. This also involves identifying appropriate fintechs and sourcing of data.
12. Finance transformation (Insurance). The unit was created following the establishment of personal and commercial lines in 2020 in France. The members of this new practice have developed expertise relevant for the CFO’s agenda: regulation (IFRS 9, IFRS 17, Solvency 2), technology (back-office tools, accounting, consolidation), data management (data management, data warehouse) or cost efficiency through transformation projects aimed at optimising the operating model of finance departments.
13. Enterprise transformation. Alpha offers clients strategic thinking combined with deep specialism to arrive at answers that make strategic sense in the board room as well as being operationally deliverable across organisations. This includes:
- Strategic target operating model design - working with C-suites to translate their strategic plans into an enterprise design spanning people, technology, suppliers and internal processes;
- Scalability and cost reduction analysis - working with CFOs across their fund range and investment desks, breaking down stranded costs and providing a true view of where cost sits and what reductions can be delivered;
- Independently reviewing and streamlining change portfolios - ensuring clients’ finite change spend is aligned to their strategic priorities.
14. Retail distribution and advise. This practice works across the investment and insurance value chain helping financial advisers, platforms and life & pension providers transform and grow their businesses. Market leaders are recognising the need to drive their businesses forward and capitalise on future opportunities as they transform to meet the evolving needs of consumers. Alpha has dedicated capabilities to support organisations participating within the retail distribution and advice market and is well -placed to help drive transformation across the industry. The team comprises ex-industry practitioners who have a deep understanding of these organisations and experienced consultants who have worked across a variety of clients and transformation initiatives in this market.
There are overlaps among the practices, such as between ESG and regulatory compliance, or digital and regulatory compliance, digital and distribution or indeed fintech and most of the other practices.
In addition, the group has two technology units:
Alpha Technology Services. This is the group's technology consulting division and is a very new part of the business, mainly reflecting the acquisition of Axxsys in 2019. It provides highly technical advice to clients and helps them implement change and the goal is to be platform agnostic. ATS configures its clients' platforms and works closely with the clients' information technology (IT) departments. ATS provides a highly technical resource that often works alongside the group's consultants. It provides clients with a full service to change initiatives. There could be 100 people working on a particular project that would include ten from Alpha providing technical resources.
Aiviq (previously Alpha Data Solutions). This represents the group's proprietary software products, which at present generate relatively modest revenues.
Alternative investment industry. Alpha acquired Lionpoint Holdings, a US-based provider of specialist consultancy services to the alternative investment industry, in May 2021. The purchase price of up to US$90mln, reflected a base cost of US$54.8mln along with an earnout of up to US$35.2mln. Due to the earnout, the business remains ring-fenced.
Lionpoint provides strategy, technology and operations consultancy services to the alternative investment industry. The acquisition boosted the group's position in the fast-growing alternative investment industry and gives the group scale in North America. The acquisition added around 100 operations and technology consultants to the group and this number has continued to expand.
The alternative investment industry covers financial assets that do not fall into the conventional investment categories, which are essentially stocks, bonds, and cash. It includes private equity, venture capital, hedge funds, managed futures, commodities and real estate. The alternative investment industry has been growing at a faster pace than the traditional investment industry. The main areas of Lionpoint's focus are private equity and real estate. Lionpoint has a very strong technology focus as it is a certified implementation partner for over 20 specialist key technologies. These range from generalist alternatives platforms, to sector focused solutions (e.g. real estate, private equity) and more general enterprise technologies and solutions (such as business data, operational planning and low code).
Proposition and capabilities
Source: Alpha Financial Markets Consulting
Clouded by global inflation and tightening interest ratesMarket environment
The outlook for the world’s asset management industry improved markedly in 2021 following the pandemic anxieties of 2020. This was perhaps best exemplified by the record inflows into global equity funds in the first half of 2021, which surpassed the previous two decades combined. However, over the past year the markets have been impacted by rising energy prices and inflation, which were exacerbated by deteriorating geopolitics including the war in Ukraine. Further, the tightening interest rate environment - which reflects both the rising of official interest rates and the gradual unwinding of quantitative easing - have been a major dampener on asset prices.
We highlight the following key themes is the asset management industry:
1) Passive investments. The asset management industry has seen massive growth in index funds since the global financial crash in 2008, with the shift away from active strategies leading to tighter margins across the industry.
2) Alternatives. There has been a shift into alternative assets as investors seek higher returns compared to publicly-traded assets. Alternative products represented less than 20% of global AuM in 2021, while constituting more than 40% of total asset-management revenues. These numbers are expected to rise further in the coming years.
3) Sustainable investing. There is an increasing demand for sustainable investing and we note that net-zero targeting is driving major capital allocation into climate-transition projects.
4) New technologies. Novel technologies can put the core value proposition of asset managers at risk of disintermediation by simplifying the process. For instance, direct indexing enables new participants to enter the market by building personalised products that they can market directly to clients. This threatens to drive convergence between the asset-and wealth-management industries, with both industries chasing the same asset pools.
Professional service arms of big four accountancy firms along with Accenture (NYSE:ACN)Competition
The group competes on a global basis with the professional service arms of big four accountancy firms — PWC, Deloitte, EY and KPMG — along with Accenture (NYSE:ACN). It also competes with niche regional consultancy firms. This competitive backdrop applies to both the asset & wealth management and insurance industries.
Alpha argues that its target markets are not well serviced by the big four which are more generalist and largely staffed with junior resources. Alpha differentiates itself by employing knowledge-based consultants who have highly specialised skills focused on the industry.
The ongoing disruption at the big four, due to conflicts of interests between their accounting units and consultancies and exacerbated by various client accounting scandals, provides an opportunity for Alpha to continue to acquire talent. We note that EY has proposed to separate its consulting business from its accounting division, with the consulting business potentially being listed by the end of 2023.
Strong operating margins and high cash generationFinancials
Alpha has an asset-light business model, with strong operating margins and high cash generation. The group has grown net fee income by a compound 32% per annum over seven years, with the help of three small bolt-on acquisitions and Lionpoint, which contributed for ten months in FY22. In addition, operating margins have held above 20% over the last five years and stand some 350 basis points (3.5 percentage points) higher than they were eight years ago. As a result, the group has built up a cash pile of about £63.5mln and has no financial debt.
Maintained, reviewing after interimsForecasts
Following the group's strong results in June, we conservatively maintained our net fee income forecasts, noting the uncertain economic and geopolitical backdrop. Our forecasts translate to 7.7% organic growth in the current year and 2.9% in FY24. We edged our adjusted EBITDA forecasts upwards, due to higher depreciation feeding through, while our earnings per share (EPS) forecasts rose by 1.5% and 2.0% in the respective years, due to lower assumptions for the average number of shares balanced by an increased FY24 tax charge.
We are maintaining all of our forecasts at this time and will review them after the interim results are released in late November.
Income statement
Source: Company accounts and Proactive Research
North America is leading the growth driveRegional analysis
The table below shows revenue per consultant (fee-earning headcount including contractors). These numbers have not been adjusted for utilisation rates, which the company does not publish, and hence do not accurately reflect day rates. For instance, a typical 70% utilisation rate for the group would reflect 43% higher day rates. Also, we have estimated the average number of consultants from year-end data.
The group ended FY22 with 760 fee-earning consultants, slightly ahead of our forecast of 755. This was due to strong growth in the US with the UK slightly below our forecast; however, UK margins were ahead of our forecast. We conservatively eased our forecasts for net fee income per consultant, and are maintaining our group forecasts of £170mln for FY23 and £175mln for FY24. We are maintaining our forecasts for end-FY23 and end-FY24 consultant numbers and margins.
Fee earning consultant analysis
Source: Company accounts and Proactive Research
Cash conversion was 112% in the year to MarchCash flow
The cash flow statement reveals the group is strongly cash generative, with operating cash flows of £16.4mln FY19, rising to £18.2mln in FY20, £21.0mln in FY21 and to £33.5mln in FY22, supported by strong profitability and positive working capital inflows. As this is an asset-light business model with very little investment in fixed assets or capitalised development costs, the quality of earnings is high. The interest paid in FY21 of just under £0.5mln reflected the cost on the £5mln borrowing facility, which has since been repaid. The interest cost in FY22 and going forward reflects the fees on the undrawn £20mln revolving credit facility. The acquisition payment of £24.0mln in FY22 relates to Lionpoint, and we are forecasting £20mln outflows to satisfy the outstanding acquisition liabilities in each of the next to years.
Cash flow
Source: Company accounts and Proactive Research
Balance sheet position provides plenty of capacity for bolt-on acquisitionsCapital structure
The funds raised in the IPO in 2017 enabled the group to pay off the long-term debt of its private-equity backed financial structure. The group has maintained a strong balance sheet since the IPO. The strong cash generation continued in FY22 and pushed the group's cash pile rose to £63.5mlm at the end of March 2022. After deducting leases and acquisition liabilities, it has swung to a total net cash position of £20.5mln. In addition, the group has a £20mln revolving credit facility which remains undrawn.
Balance sheet position
Source: Company accounts
Management team has a wealth of experience in the financial services industryAn experienced management team
The management team has a wealth of experience in the financial services industry. Euan Fraser, chief executive officer (CEO), has been with the business for eighteen years.
While the management and staff's direct equity ownership level is moderate, the group management team is rewarded with the various share option schemes, which acts as a strong incentivisation. Following the grants announced in July and exercises in August, the company has 10,538,869 unvested MIP and EIP share options and JSOP shares outstanding in total, representing roughly 8.75% of the issued share capital of the company.
Euan Fraser, CEO, holds 778,029 MIP/JSOP and 286,343 ordinary shares, representing 0.25% of the company's total voting rights. John Paton holds 287,398 MIP options and JSOP shares and he and his immediate family are beneficially interested in 158,741 ordinary shares representing 0.14% of the company's total voting rights.
Lee Griggs joined Alpha in September 2021 to run the group's proprietary software business, now called Aiviq. Maeve Byrne joined Alpha as an independent non-executive director in May 2022.
Executive team
Euan Fraser — chief executive officer
Fraser has served as global CEO of Alpha since 2013. He led the group through two private equity transitions and the public listing on the London Stock Exchange’s AIM in 2017. Fraser was previously CEO of Alpha UK, starting in April 2011, where he established both Alpha’s M&A Integration and Operations & Outsourcing practices. He joined Alpha in 2004 and has over 20 years of financial services experience, having worked at Merrill Lynch and KPMG, where he qualified as a chartered accountant.
John Paton — chief financial officer
Paton is a chartered accountant with 23 years of corporate finance, banking and audit experience. He joined Alpha in February 2018. Prior to Alpha, he was at HSBC where he was a director in the UK Mid-Market Advisory team (2007-12), the Corporate Origination team (2012-16) and latterly, the UK Banking team (2016-2018). Over his 11-year tenure he advised on a variety of M&A transactions and led loan financings for UK corporates. Prior to this, he spent more than five years at MacArthur & Co focusing on capital raisings including AIM IPOs. Paton started his career at KPMG, where he spent nearly seven years, working across financial services audit and risk management with exposure to financial reporting requirements, governance, risk & internal controls and systems’ implementation. He is a member of the Institute of Chartered Accountants of Scotland, graduated with LLB (Hons) from the University of Aberdeen and holds an executive MBA
from the University of Bristol & École Nationale des Ponts & Chaussées, France.
Nick Fienberg — chief commercial officer
Fienberg has 15 years of experience consulting in financial services, and in particular the capital markets sector. Specialising in asset management outsourcing, he has worked with a wide range of clients on advisory and implementation roles covering large scale outsourcing and organisational change initiatives, strategic business studies and market trend analysis.
Sarah Peacock — chief operating officer
Peacock joined Alpha in 2008. Before moving into business operations, she spent over 10 years in asset and wealth management consulting with experience performing both project management and functional roles and working extensively on implementation and business transformation projects. As COO, she is responsible for overseeing operations functions globally including IT & infrastructure, data privacy, people and talent management, service delivery and knowledge management.
Lee Griggs — head of Aiviq
Griggs joined Alpha in 2021. Griggs has a record of international business building with over 20 years experience, providing market leading enterprise and SaaS solutions to leading financial institutions. Griggs has extensive knowledge of strategy creation, execution and expansion and has a proven track record in business development, process management and organisational optimisation.
Luc Baqué — head, asset & wealth management consulting
Before joining Alpha, Baqué spent five years with UBS in Paris and was head of change management. Prior to that, Luc spent six years with Solving International, a management consultancy, specialising in asset and wealth management in Europe.
Stuart McNulty — chief client officer and head of UK (asset & wealth management consulting)
McNulty began his career at Accenture, where he specialised in the capital markets sector, leading projects ranging from system implementations to process change initiatives. Stuart then moved to JP Morgan, where he ran strategic projects within the credit exotics and hybrids middle office team, before joining Alpha in 2007. Since then, McNulty has worked on a wide variety of asset management projects, including new product development, competitive analysis, rate card reviews and large-scale onboarding programmes.
Joe Morant — head of North America (asset & wealth management consulting)
Prior to joining Alpha, Morant held operations and technology leadership roles at Nuveen Investments and BNY Mellon (NYSE:BK) Asset Management. He has also held executive management positions at several service provider and consulting firms. Morant has worked extensively across the US and Europe, consulting a range of leading asset managers. He has a breadth of experience across all aspects of the asset management business ranging from major change programmes to corporate strategy and operating model definition.
Neil Curham — global head of innovation (asset & wealth management consulting)
Curham joined Alpha in April 2011 as a result of the acquisition of Tomtom Consultants. He established Tomtom Consultants in 2005; the firm became the leading consultant to distribution in investment management. Curham has fifteen years of experience working within investment management distribution and has more than eight years of consultancy experience. During this time, Curham has assisted with business, operational and technical strategy addressing areas such as service proposition, client relationship management, client communications, marketing automation and web delivery.
Mike Smith — executive director and global head of distribution (asset & wealth management consulting)
Smith has over 20 years’ consulting experience and is an executive director and the global head of Alpha’s distribution practice, advising asset managers globally across their sales, marketing, client service and product functions. Smith specialises in distribution transformation, including strategy, operating models, process optimisation, distribution technology, client experience, distribution data & analytics.
Non-executives
Ken Fry — independent non-executive chairman
Fry joined the board in 2016, following almost 10 years as the global chief operating officer at Aberdeen Asset Management. He was appointed the board’s non-executive chairman in February 2018. Fry has over 27 years of experience in financial services and has considerable experience integrating acquisitions within the investment management industry. Fry has a strong technology and operations background and has undertaken a number of transformational projects during his career. He directed the integration of many major acquisitions while at Aberdeen Asset Management, including assets acquired from Deutsche Asset Management, Credit Suisse Asset Management and Scottish Widows Investment Partners.
Fry keeps the skills to support and deliver the group’s strategy up to date by maintaining a wide network of contacts within investment management globally. He regularly attends conferences and discussion forums to keep abreast of industry issues and meets with both clients and investors. He also advises on M&A strategy within the investment management industry.
Penny Judd — senior independent non-executive director
Judd joined the board as a non-executive director in February 2018, having previously held the roles of managing director and EMEA (Europe, Middle East and Africa) head of compliance at both Nomura International and UBS. She has a strong public markets and financial services background, with over 30 years of experience in compliance, regulation, corporate finance and audit. She is also a chartered accountant and is currently non-executive director and chair of the audit committees for both Trufin PLC and Team17 Group PLC (AIM:TM17).
Judd keeps the skills to support and deliver the group’s strategy up to date through her experience gained on other listed company boards, while also maintaining a wide network of contacts in financial services and regulation. She attends various conferences and events covering relevant industry and governance matters and meets with a range of advisers and institutional investors in AIM and main market companies.
Jill May — independent non-executive director
May joined the board as a non-executive director in July 2020. She has over 20 years of experience in investment banking, with her executive career spent working in corporate finance for SG Warburg & Co. Ltd from 1985 to 1995, and senior positions in group strategy at UBS where she was a managing director from 2001 to 2012. She was a Panel member from 2013 to 2018 and a non-executive director from 2013 to 2016 of the Competition and Markets Authority (CMA), and a non-executive director of the Institute of Chartered Accountants in England and Wales (ICAEW) from 2015 to 2019. Jill is currently an external member of the Prudential Regulation Committee at the Bank of England. Her current listed company experience includes her roles as a non-executive director of Standard Life Investments Property Income Trust Limited, JP Morgan Claverhouse Investment Trust PLC and Ruffer Investment Company Limited.
Maeve Byrne — independent non-executive director
Byrne joined the board as a non-executive director in May 2022. Byrne is a fellow of the Institute of Chartered Accountants in Ireland and has over 30 years’ experience in Financial Services. She started her career as an auditor with KPMG Ireland and worked in several other KPMG international offices in Europe and North America. Within KPMG, Byrne moved from audit to transaction services where she was a financial services partner from 2002 to 2014. From 2010 to 2013, Byrne was seconded to Royal Bank of Scotland and the non-core division where she was CFO and a member of the group finance board & risk and control committee. From 2014 to 2017, she held senior executive roles at the Royal Bank of Scotland in capital resolutions group and Williams & Glyn.
Since 2017, Byrne has focused on transformation services, offering Board advisory services as an independent consultant. She has worked with financial services companies including Santander and clients in the fintech/neo bank space.
Sensitivities
We highlight the following sensitivities:
Economic downturn. The group's client base in the asset and wealth management and insurance industry has a relatively high market sensitivity. We note that the impact on stock market performance on assets under management are reflected in valuations and can also have an impact on investment flows. A sustained reduction in aggregate assets under management or overall returns and profitability in the asset and wealth management industry could result in a material reduction in the volume and value of consultancy services that clients choose to purchase from the group.
End-market changes. The asset and wealth management industry has experienced a high level of corporate mergers and acquisitions in recent years. This process has been driven by a long-run decline in management fees, which has forced consolidation, and further consolidation is widely anticipated. While this consolidation creates a significant amount of work for the group, over the very long term a continued consolidation of the industry could result in a reduction of the number of clients that the group can target even if there is still considerable change within these organisations.
Competitive environment. There are very low start-up costs for any new entrant into the market and the group cannot prevent any person or organisation from replicating their business model. Larger competitors may, in the future adopt more aggressive expansion strategies.
Project risk. The group’s revenues derive principally from selling the services of its people on a time and materials basis. The group typically does not work on a contingent fee basis and so invoices its clients as projects progress.
People and resourcing. Revenue growth is reliant on attracting new personnel to expand existing services and lead new service offerings. The group’s ability to generate fees from existing and new customers is reliant on its ability to continue to offer the expertise of experienced consultants. The loss of the services of one or more senior people may result in a material adverse impact on the group’s performance and future success. There is a risk that utilisation rates, which drive group profitability, may be adversely impacted by poorly timed headcount growth or an unexpected decline in client projects.
Technological change. One of the key aspects of the group’s success is offering a range of products and services that use the latest and most effective technology. There is a risk that should the group not be able to evolve along with the technology in the industry, this could result in a material adverse impact on the efficacy of the group’s offering to clients.
Geographical complexity. The continued growth of the group and expansion into new countries bring associated risks. The group currently generates the bulk of its client business from the UK, US and France, with the remaining proportion of work mostly in the Benelux countries, Switzerland and Singapore. The group’s head office and most of its senior management are based in the UK and there is a risk that the group’s continued growth overseas may result in a reduction in the quality of control and oversight provided by senior management.
Acquisitions: there are implementation risks in the acquisition strategy.
Strong cash generation, debt free balance sheet, along with ROCE at 36.3%Valuation
The group has attractive financials with low capital investment, positive working capital movements in recent years and growing/stable profitability margins. Cash conversion has been consistently strong and the ratio has risen for five years running, standing at an impressive 112% in FY22. Return on capital employed (ROCE) has also risen for five years running and stands at a superb 36.3% in FY22, based on our calculations. We are conservatively forecasting cash conversion to fall back to around 80% over the next two years, while we are forecasting ROCE to remain above 30% in the forecast period.
The group generated an adjusted free cash flow of £31.7mln in FY22. This equates to a free cash flow (FCF) yield of 7.5% at the current share price, after adjusting for the capital structure. Based on our forecasts, this would fall to 5.7% in the current financial year and rise to 6.0% in FY24.
Key investment metrics
Source: Company accounts and Proactive Research
Peer analysis
The stock trades near the middle of the range of its UK professional services peers in terms of EV/EBITDA and broadly in line with global consultancies on the same basis. Alpha trades at a discount to Accenture, which is the only significant direct competitor in the peer table below, although Accenture is clearly a substantially larger and a much broader business.
Peer analysis
Source: Regulatory news, company websites and market sources. *Proactive Research forecasts. Priced at the close of 4 November 2022