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Just how sustainable is Tilney's debt-based growth model?
09/10/2018 , Ian Orton

The long wait between the announcement of Tilney’s preliminary full-year results and the publication of its statutory annual report and accounts is always worth it.

And not just to reveal the £96.05 million difference between the firm’s preferred “adjusted” EBITDA (earnings before interest, taxes, depreciation and amortisation) metric of £86.6 million, and its statutory pre-tax loss of £9.45 million.

For Tilney is just about the only firm to ignore the statutory pre-tax profit and loss metric in its results statement, which almost certainly makes it one of a kind within the UK wealth management sector.

But the firm is one of a kind in other respects.

It is the only UK wealth management firm of any size backed by a private equity firm (Permira). And although it is currently unprofitable it has grown very fast on just about every metric over the past two years to put it in the top echelon of UK non-bank owned wealth management firms with the promise of more to come.

Gross revenues have increased from £69.0 million recorded at the end of 2015 to £226.5 million at the end of 2017, a compound annual rate of growth of 81.18 percent. 

Average assets under management have grown from £9.3 billion to £23.6 billion over the same period, a compound annual rate of growth of 59.30 percent.

The firm now has more than 100,000 clients throughout the UK served from a network of 30 offices.

It is a very different animal from the days when it was a relatively insignificant UK wealth management subsidiary of Deutsche Bank. The firm now straddles the entire wealth management spectrum and can boast a significant investment management capability along with wealth and financial planning and execution only facilities.

Acquisitions, rather than endogenous growth, have fuelled this expansion with its 2015 purchase of Towry especially significant in this respect. For Towry was an important  consolidator and had absorbed a large number of wealth management firms before its subsequent purchase by Tilney. And like Tilney, it was also backed by a private equity firm.

And these acquisitions have given Tilney another differentiating attribute. It has used debt in the form of bank loans rather than equity to fund its acquisitions programme.

At present the firm has a £406 million term loan and a £25 million revolving facilities agreement with HSBC plc., Investec Bank plc., and Royal Bank of Scotland together with a loan agreement for an unspecified amount with Violin EquityCo Limited, a parent undertaking.

As a consequence Tilney has a rather inflated balance sheet with borrowings of £381.14 million at the end of 2017, the equivalent of 87.75 percent of net equity of £432.34 million.

This may explain the use of “adjusted EBITDA” as a preferred performance metric as Tilney’s amortisation (£42.7 million) and finance costs (£27.45 million) are significant, as are integration costs (£17.8 million).

Is this growth model sustainable?

From Permira’s standpoint it most certainly is as it is Tilney rather than its private equity backer than funds the expansion. 

And Tilney is probably more than capable of generating the necessary cash to fund debt payments. Indeed given its balance sheet and the revenue growth experienced over the past two years it can afford to make more acquisitions, especially if they are small to medium-sized firms, without raising further debt.

Furthermore, around 80 percent of Tilney’s outstanding debt is not due for settlement for at least five years.

During 2017 the weighted average interest rate paid for its bank and company loans amounted to 6.0001 percent and 5.5494 percent respectively.

And as Tilney notes in its strategic report there are substantial opportunities to boost revenues further and it is positioning itself accordingly.

Its client facing teams, supported by centralised lead generation through digital marketing, events and seminars as well as cross-service referrals currently account for over 90 percent of new business.

But Tilney also has relationships with UK and international advisory firms and its funds and model portfolios are hosted on a variety of platforms. The firm says it has also developed relationships with professional services firms, including leading accountancy firms and “magic circle” law partnerships.

Given this and its ongoing attempts to improve operational efficiency generally it shouldn’t be too long before Tilney generates conventional statutory profits either.

Nonetheless it may take considerably longer for the firm to generate the same levels profitability as its peers in the top echelon of UK wealth management firms where pre-tax margins of at least 25 percent tend to be the norm.

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