Unique business with a compelling growth story
Alpha Financial Markets Consulting (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.
Alpha has recently expanded into the insurance sector, which has similar dynamics to the asset and wealth management markets, and management believes this opportunity has the potential to double the group revenues. Further, the group added an ESG (environmental, social and corporate governance) practice during the last financial year and this unit has got off to a strong start. Meanwhile, Alpha has been ramping up its presence in the North American market, which is six to seven times the size of its traditional UK market, while it is also growing strongly in Europe and Asia.
In May, the group acquired Lionpoint for a base cost of US$54.8mln. Alpha also undertook a £31mln fund-raising that comfortably covered the initial £24.5mln cash outlay for the acquisition, and we estimate this leaves the group with a cash pile of around £40mln to help finance further acquisitions. Lionpoint boosts the group's position in the alternative investment industry, which has been growing at a faster pace than Alpha's traditional markets, and it gives the group much-needed scale in North America.
Net fee income rose by 10.2% to £98.0mln in the year to March 2021, ahead of the £96.9mln consensus, while adjusted underlying earnings (EBITDA) increased by 7.2% to £21.7mln. The company saw growth across all regions, with North America standing out, and management says the strong momentum has carried through into the new financial year.
In wake of the 18-month rally, the shares trade on 3.1x the current year's consensus revenues, and 21x earnings, which reflects the excellent track record, compelling growth strategy and strong balance sheet. We highlight the latest offer for Sanne, Alpha's LSE quoted professional services peer, which values Sanne at more than 8x this year's revenues and 34x earnings.
Attractive growth strategy supported by strong structural drivers
Alpha was established in 2003 after its founders recognised that the large integrated consulting businesses were not servicing the asset management industry well. It expanded into the adjacent wealth management area in 2017 and insurance in 2019. The strategy has proven successful as the group has generated a 22% net fee income compound annualised growth rate (CAGR) over the last six years, which includes contributions from three small acquisitions. Adjusted operating profit has grown by 26% CAGR over the same period, with the margin holding above 20% over the last four years.
Seven year trading history
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.
Attractive investment case
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.
Favourable business drivers
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 practice and the ESG practice. The company has an acquisition pipeline to help accelerate the growth.
Clear strategy to double the size of the business
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 over the last five years. Clearly, the North American potential is enormous if the group can continue to take market share.
North American opportunity is six to seven times the size of the UK
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.
Insurance opportunity alone could double the size o the business
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.
Adding new service lines
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.
Positioned to attract the cream of industry talent
In May the group announced the acquisition of Lionpoint for up to US$90mln. The acquisition gives 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.
Expansion into the alternatives 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.
An excellent position to consolidate the space
Alpha has grown net fee income by a compound 22% per annum over six years, with the help of three small bolt-on acquisitions. In addition, operating margins have held above 20% over the last four years and stand some 360 basis points (3.6 percentage points) higher than they were seven years ago. As a result, the group has built up a cash pile of about £40mln and has no financial debt.
Strong track record and financial position
A unique premium consultancy focused on the asset and wealth management and insurance spaces
Company 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 550 consultants operating from 15 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.
Consulting services are typically priced on a time and materials basis
Business 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 Alpha Data Solutions 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.
Proposition & Capabilities
Source: Alpha Financial Markets Consulting
Highly talented people with deep specialism
Talent 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 550 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. Additionally, full-time staff can participate in the employee incentive plan (EIP).
Last fiscal year saw 8.0% organic growth
Final results for year-ending March 2021
Net fee income rose by 10.2% to £98.0mln, which included 8.0% organic growth. This was ahead of the £96.9mln consensus expectations. Adjusted EBITDA increased by 7.2% to £21.7mln. There was progress across all areas of the business over the last 12 months. The group added 11 directors, or nearly 20%, to around 65, while fee-earning headcount (consultants plus contractors) rose by 2.8% to 448.
The group added 58 new clients during the year. This increase was entirely on an organic basis and up substantially from 30 in the prior year. Management says there was strong momentum in the business and this momentum has carried through into the new financial year, meaning the business is well-positioned for FY22 (fiscal 2022) and beyond. The group has expanded its insurance practice into France, added an ESG & responsible investment practice and saw growth across all regions, with North America standing out. The final dividend of 4.85p is being paid, taking the annual total to 6.95p. This compares with 2.10p in the pandemic affected FY20 and 16% ahead of the 6.00p declared in FY19.
Outlook
Management says that the structural growth drivers remain in place and hence providing a strong tailwind behind the business. Primary growth objectives remain in insurance consulting, expansion in North America and via acquisition. After the period end, the group acquired Lionpoint which strengthens the group capabilities for alternatives clients, boosts the groups position in North America and takes the group's fee-earning headcount above 550.
Strong growth record with healthy margins
Source: Alpha Financial Markets Consulting
*2015-2016 numbers are from the initial public offering (IPO) document, prior to listing, being revenue and operating profit less depreciation
Goal to be the world's leading consultancy focused on asset and wealth management and insurance industries
Strategy
The group'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 is to double the business again over the next 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 twelve 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 the last financial year and management has established a blueprint 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 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 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 about £40mln and has no financial debt. In addition, it has an undrawn debt facility of £20mln available to help finance acquisitions.
Expansion in North America
While the group established an office in New York in 2009, activity in North America was initially relatively small. Alpha has been building the franchise over the last five years and it hired and promoted several new directors in 2020. This resulted in an acceleration of new clients in North America, including Northern Trust, Franklin Templeton, Pimco and Invesco (NYSE:IVZ). In addition, the group has recently gained its first clients in Canada, including Canada Pension Plan Investment Board and Investment Management Corporation of Ontario. The acquisition of Lionpoint significantly scales up the business in the US. Clearly, the opportunity in North America is huge at six to seven times the size of the UK market.
Insurance industry dynamics are very similar to the traditional asset and wealth management market
New Insurance Practice
Alpha first moved into the insurance sector via its new pensions practice in 2019 and expanded into personal and commercial lines in 2020 in France. The industry dynamics are very similar to the traditional asset and wealth management consulting business. Cost pressures and regulatory change are strong business drivers and many players operate legacy information technology systems, or are behind the curve on digital and need to update their operating models. IFRS 9 (financial instruments) & IFRS 17 (insurance contracts) accounting standards are also business drivers. IFRS 9 became effective in 2018 while IFRS 17 becomes effective in 2023. The plan involves broadening the practice into life & health, pensions & investments and speciality insurance over time. Key operational areas include technology, distribution, regulatory change and M&A. North American expansion remains a couple of years away. Alpha is recruiting at senior levels as well as in the consulting team and believes there is a rich seam of talent available to target in this space.
Management reckons the insurance opportunity is at least as big as its traditional asset and wealth management consulting business, which suggests this new activity positions the group well to double the size of total group business.
Insurance
Source: Alpha Financial Markets Consulting
ESG and Responsible Investment practice has huge potential
ESG opportunity
The ESG (environmental, social and corporate governance) topic has flooded the financial media over the last couple of years. There is enormous investor demand for ESG assets and virtually all new products are ESG compliant. We note that research by Bloomberg Intelligence has suggested that global ESG assets are on track to exceed US$53tn by 2025, representing more than a third of the US$140.5tn in total assets under management. The topic is all-consuming and there is significant commercial pressure for asset managers to show that they operate in an ESG friendly way. At the same time, ESG definitions remain unclear, are continually changing and there are a plethora of further regulations coming out.
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.
Founders saw an opportunity that the asset management industry was not well serviced by the advisory arms of the big four
Company history
Alpha was founded in London in 2003 after its founders took the view that the asset management industry was not well serviced by the advisory arms of the big four accountancy firms. It initially focused on providing specialist operations and outsourcing consultancy services to asset managers and expanded into the closely related wealth management industry in 2017. It broadened into providing consulting advice and expanded its practices. Alpha stepped into the insurance market in 2019 when the group established its pensions practice.
The group’s international expansion was driven by a combination of existing clients instructing Alpha to advise on projects overseas and Alpha identifying local markets with a significant asset management sector and existing client relationships. In order to capitalise on this natural geographic expansion, the group opened offices in Luxembourg in 2008, New York in 2009 and Paris in 2010.
In October 2013, Baird Capital invested in the group, backing the current management team with a strategy to expand Alpha’s European and US customer base, add further capabilities to Alpha’s product offering, diversify Alpha’s client base and continue to develop Alpha’s business in the UK. In February 2016, Dunedin backed a secondary buyout of the business with Baird Capital exiting in full.
A period of further growth followed, with additional recruitment to support new lines of consulting business including Investment Guidelines, Regulatory Compliance and Digital, as well as further organic expansion into new geographies including Switzerland and Singapore.
The company floated on the AIM market in October 2017, raising around £35.2mln in new money at 160p per share. In addition, a further £90.2mln was raised for selling shareholders at the same price, including Dunedin, which exited in full.
Further practices were established, including Fintech and Innovation, ETF and Indexing, Pensions and Retail Investments along with ESG and Responsible Investment. The group added new offices in Zurich, Toronto and Copenhagen, the latter coming with the acquisition of Axxsys. The Insurance practice was opened in 2021, essentially combining the Pensions practice with the new operations in France.
Company history chart
Source: Alpha Financial Markets Consulting
Acquisition history
The group acquired Track TWO in Germany in 2017, which brought to the group additional consulting expertise, a data and technology solution and further intellectual property. Track TWO's specialist data solution was the original component of the group's Alpha Data Solutions unit.
Alpha acquired Axxsys in 2019, which brought to the group a technology implementation provider with particular expertise in the SimCorp investment management system, and boosted the group's continental European operations. Axxsys has provided specialised management consultancy and technology implementation services to the investment management industry since 2003. This business is now a core part of the group's Alpha Technology Solutions unit.
In late 2019, Alpha acquired Obsidian Solutions, a provider of specialised software products to the investment management industry. Obsidian, which was founded in 2015, uses modern modular software design along with a software as a service revenue model. Its product suites include advanced business intelligence for sales and investment data, client portals, fund and client reporting, and an automated subscription/KYC management module. This business now represents the bulk of the group's Alpha Data Solutions unit.
Acquisitions table
Source: Regulatory news
The alternative investment industry is growing at a faster pace than the group's traditional end-market.
Acquisition of Lionpoint
In May, Alpha announced the acquisition of Lionpoint Holdings, a US-based provider of specialist consultancy services to the alternative investment industry, for up to US$90mln, reflecting a base cost of US$54.8mln along with an earn-out of up to US$35.2mln. Lionpoint provides strategy, technology and operations consultancy services to the alternative investment industry. The acquisition boosts 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.
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. We understand that 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).
In the year ended 31 December 2020, Lionpoint reported (unaudited) revenue of US$30.1mln (£23.5mln) and adjusted EBITDA of US$6.9mln (£5.4mln). Therefore, on the base acquisition cost of US$54.8mln, Alpha is paying around 1.8x FY20 revenues and 7.9x EBITDA for Lionpoint. This rises to around 3x revenues and 13x EBITDA if the maximum earnout is achieved.
Twelve practices along with two technology units and the newly acquired alternatives unit.
Evolving practices
The group currently has a dozen practices along with Alpha Technology Services (third party software integration) and Alpha Data Solutions (proprietary software) units and the recently acquired Lionpoint in the alternatives space. In the chart below, the darker blue practices are the established or more substantial practices, while the lighter blue are the newer and smaller practices.
Practices are as below.
- 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.
- Outsourcing & Operations. Alpha works with clients to strategically optimise their operating models, including advising on their outsourcing relationships.
- 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).
- 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.
- 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.
- Regulatory compliance. This is essentially about determining how customers get through the regulatory landscape and adopt what processes and technologies that are necessary.
- 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.
- 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.
- 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.
- 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.
- Insurance (includes Pensions and Retail Investment). The unit was officially created following the establishment of personal and commercial lines in 2020 in France and also includes the Pensions and Retail Investment unit.
- ESG and Responsible Investment. This new unit was established in 2020 to help clients deal with the regulation associated with the burgeoning demand for ESG assets.
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.
Alpha Data Solutions.This represents the group's proprietary software products, which at present generate relatively modest revenues.
Proposition and capabilities
Source: Alpha Financial Markets Consulting
Industry outlook has improved markedly since the pandemic anxieties
Market environment
The outlook for the world’s asset management industry has improved markedly since the pandemic anxieties of 2020. The industry has been buoyed by a heightened investor risk appetite, perhaps best exemplified by the record inflows into global equity funds in the first half of 2021, which surpassed the previous two decades combined. The growth in assets under management has been fuelled by inflows into index-tracking funds, private market assets and ESG strategies.
A report from Refinitiv in April titled “Accelerated digital transformation in asset management”, stated that buy-side firms were accelerating their operational change and digital transformation. This was driven by several factors including pressure on margins, increasing regulation, the shift from active to passive investment, the growth of sustainable investing and the impact of the coronavirus pandemic.
Cost pressures force businesses to seek operational improvements, upgrade legacy systems
Growth drivers
The key structural drivers in the business, as outlined below, are very global.
Growth in assets under management.
Global assets under management run by money and wealth managers are set to grow by up to 5.6% a year by 2025, to US$147.4tn, from more than US$110tn in 2020, according to PricewaterhouseCoopers in its latest global report — Asset and Wealth Management Revolution: The Power to Shape the Future.
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. ESG is a key example — it has become so substantial that it now demands its own practice within Alpha.
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.
Structural drivers
Source: Alpha Financial Markets Consulting
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 who are largely staffed with junior resources. Alpha differentiates itself by employing knowledge-based consultants who have highly specialised skills focused on the industry.
Net fee income growth in the year to March beat expectations
Final results
Net fee income rose by 10.2% to £98.0mln in the year ending March 2021 which included an 8.0% organic growth along with full-year contributions from the two acquisitions made in 2019. This was ahead of the £96.9mln consensus expectations. Adjusted EBITDA increased by 7.2% to £21.7mln while adjusted diluted EPS rose by 4.7% to 14.26p. The Axxsys acquisition has performed better than expected, and hence the earn-out assumption has increased to the maximum. The strong performance was due to the group being able to leverage the SimCorp skill-set across its global franchise.
Revenue and profitability
Source: Alpha Financial Markets Consulting accounts
Particularly strong growth in North America and Asia
Regional 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 UK remains Alpha's largest territory and net fee income increased 5.7% year-on-year in FY21 including 3.4% organic growth. The UK business saw strong contributions from M&A Integration, Distribution and Operations & Outsourcing practices, and continued good levels of demand for Axxsys's technology-focused consulting services. Alpha Data Solutions experienced longer sales cycles due to COVID-19, but the business has gone into the new financial year with a good pipeline and new project wins.
North America delivered strong growth, with net fee income up 14.4% (nearly entirely organic) in FY21 as the headcount rose by 20% at the targeted utilisation levels. The business enjoys strong visibility with more longer-term engagements. We note that revenue per consultant dipped in 2019, due to the decline in directors to two compared to 50 consultants, a ratio well below the group average and this had an impact on the generation of new business in that year. By March 2021, the group had expanded its directors in North America to nine.
Europe and Asia delivered 16.9% net fee income growth for FY21, including 14.3% organic growth. Europe saw a resilient performance in the first half of FY21 and this market returned to strong growth in the second half. In Asia, Alpha enjoyed a period of rapid growth in FY21, with a number of large projects delivered for clients in Singapore and Asia Pacific more widely, and the Asian business has a healthy new pipeline for the current year. We note the revenue per consultant rate dipped in 2020, mainly reflecting the acquisition of Axxsys in 2019 which has a lower price point. Also, the group has around 15-20 consultants in Asia, which has a lower price point than in Europe and North America. The largest European business is France, followed by Luxembourg and Denmark. Netherlands and Switzerland are smaller and consequently, their utilisation rates vary more.
The company says that rates in the newly targeted insurance industry are comparable to its traditional industry end-markets.
Regional analysis
Source: Alpha Financial Markets Consulting accounts
Cash conversion was 111% in the year to March.
Cash 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 and to £21.0mln in FY21, 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.
Cash flow statement
Source: Alpha Financial Markets Consulting accounts
Balance sheet position provides plenty of capacity for bolt-on acquisitions
Capital 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, with £34.0mln of cash, and no financial debt, as at 31 March 2021. On a proforma basis, following the Lionpoint acquisition and fundraising, we estimate that the cash position rose by £5.5mln to £39.5mln while acquisition liabilities increased by £39.5mln to £50.6mln. Hence, after including acquisition liabilities and IFRS 16 lease liabilities, the group is now in a net debt position of around £13mln. That is prior to including any leases from the Lionpoint acquisition.
We also note that the group has a £20mln undrawn committed revolving credit facility (RCF) with Lloyds Banking Group, which provides additional funding flexibility.
Balance sheet position
Source: Alpha Financial Markets Consulting accounts
Note: proforma figures ignore any leases from the acquired Lionpoint, as its accounts have not been prepared.
Management team has a wealth of experience in the financial services industry
An 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 seventeen 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 on July 7th, the company has 10,085,777unvested MIP and EIP share options and JSOP shares outstanding in total, representing roughly 8.53% of the issued share capital of the company.
Euan Fraser, CEO, holds 855,372 MIP/JSOP and 563,485 ordinary shares, representing 0.5% of the company's total voting rights. John Paton holds 352,713 MIP options and JSOP shares and he and his immediate family are beneficially interested in 37,639 ordinary shares representing 0.03% of the company's total voting rights.
Executive team
Euan Fraser — global 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 — global 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 — global chief commercial officer
Fienber 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 — global chief operating officer (COO)
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.
Nina Spencer — global head — Alpha Data Solutions
Spencer is the global head of Alpha Data Solutions. She joined Alpha in 2006 and has over 15 years of experience in consulting to the asset management industry. She was appointed to the role in April 2019 with a remit to extend and build Alpha’s product and solution capabilities, having previously served as Alpha’s global COO.
Luc Baqué — global 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 — global 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.
Non-executives
Ken Fry — 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 (NYSE:CS.) 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 — 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 chairman of Plus500 Ltd (LSE:PLUS) and 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 — 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.
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, including a record number of deals in 2020. 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 most of its client business from the UK, France and the US, with the remaining proportion of work 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 23.9%
Valuation
The group has attractive financials with low capital investment, positive working capital movements in recent years and growing/stable profitability margins. Cash conversion is strong and the group generated an adjusted free cash flow of £20.8mln in FY21. This equates to a simple free cash flow (FCF) yield of 5.4% at the current share price, before making any adjustments for the capital structure. Based on consensus forecasts for net fee income, and assuming operating cash flow margins slightly lower at 20.0%, this would suggest a FCF yield of around 6.1% in the current financial year to March 2022 rising to 6.8% in FY23. These numbers look appealing given the track record and growth strategy. Further, the group's return on capital employed (ROCE) is also highly attractive at 23.9%.
Valuation metrics
Source: Alpha Financial Markets Consulting accounts
*Interest amounts paid of £1,431k in FY17 and £5,469k in FY18 were not included in the adjusted profit.
Peer analysis
The stock trades broadly its UK professional services peers, when excluding Sanne, and broadly in line with global consultancies, in terms of earnings. Alpha trades at a large discount to Accenture, which is the only significant direct competitor in the peer table below, though Accenture is clearly a substantially larger and much broader business.
We note that Sanne, the specialist alternative asset fund and corporate administrator, and a UK professional services peer to Alpha, has been the subject of a bidding war. On the 2nd of August, Sanne said it was in advanced discussions with Apex regarding a possible offer at 920 pence per share. Meanwhile, Sanne is still in talks with Cinven regarding a potential rival offer. The proposed Apex pricing of 920p values Sanne at around 8.4x current year's revenues and 34x earnings. A similar valuation in terms of EV (enterprise value)/sales equates to about 950p for Alpha FMC shares. A similar valuation for Alpha on an earnings basis would equate to around 570p, or 65% above the current share price. We note that Sanne operates in a different area and has higher margins than Alpha, with operating margins of 28.3% in FY20. Sanne generated organic revenue growth of 5.8% in the year to December 2020, compared with 8% for Alpha in the year to March 2021.
Peer analysis
Source: regulatory news, company websites and market sources