Old Mutual Wealth's (OMW) acquisition of discretionary investment firm Quilter Cheviot this month looks expensive, at first glance.
Agreeing a £585m deal for a business with just over £16bn in assets means OMW is paying the equivalent of 3.6% of AUM for the discretionary firm.
That percentage is well above the industry average, though direct comparisons can be tricky, depending as they do on the asset profile in each individual case.
A simpler assessment would be to say the price is more than double the combined £275m private equity group Bridgepoint paid for Quilter (£175m) and then Cheviot (£100m) in 2012. More than doubling their outlay compares with a 20% rise in the FTSE All Share since the start of that year.
The head of a rival business remarked last week that the acquisition had been made ‘at the top of the market’
But there are a number of mitigating factors - some large, some small.
What is most notable since 2012 is both this year's personal finance reforms (which will surely help the investment industry in the long run) and strong earnings growth at Quilter Cheviot. There is also the way the group will fit in with OMW’s wider business.
OMW believes it can forge closer links between Quilter Cheviot and the Intrinsic adviser network without jeopardising existing relationships on either side.
Its plans to build a “vertically integrated” wealth conglomerate will also mean the discretionary firm makes greater use of Old Mutual Global Investors’ funds. Other wealth managers will have their own view on what that integration will do to Quilter Cheviot’s fund selection process, but the attractions for the company are obvious.
It is the earnings profile that is perhaps most in question. Barclays analysts note that forward P/E estimates for Quilter Cheviot cast the business in a more attractive light than peers (insofar as direct comparisons are possible), but what of the outlook for the sector as a whole?
The head of a rival business remarked last week that the acquisition had been made “at the top of the market”. If that is the case, estimates will surely have to come down for the whole sector.
OMW is unsurprisingly confident it can produce a double-digit return on its investment, and maintain Quilter Cheviot’s healthy operating margins.
In one sense, the success of the business on its own is of less importance than how it fits in with the rest of OMW: the firm sees Quilter as the final piece of the integration puzzle.
What comes to mind is one of the wealthier football clubs: the price they pay for an asset often seems excessive, even by the logic of their market. But they still reap the benefits nonetheless.