How to find smart capital for growth

Owners of successful financial advisory firms have a number of things in common. These include:

• A clear vision of the future for their business
• Ambition and drive to be successful
• An appetite for growth
• A desire to create a legacy for their clients and staff.

These are all positive forces that drive business owners, creating resilience to withstand hard times – a permanent breeze that blows at their backs.

There are however some practical limitations that tend to inhibit the rate of progress towards their goals. These include:

• Limited access to capital
• Limited time and resources.

Having a great idea or vision for a business is critical, however if a business owner has limited capital resources or time, a good idea will remain just that.

Many business owners go in search of capital to enable them to grow and improve efficiency. Typically business owners take on bank debt to fund growth. In doing so they put their personal assets on the line. This form of capital raising has its limits, as any banker will tell you. There is only so much a bank will lend you.

Some business owners bring in capital partners. These partners will typically be hands on, wanting to assist with the running of the firm. Like the bank there is normally a limit to how much capital is available with this method, and of course huge ‘social risk’. Will the new business partner work out? Are they truly aligned?

Even private equity firms have interestingly looked to invest in our sector. While there are still limits to capital with this approach, private equity firms will typically be able to provide enough funding to meet your objectives. There are two main issues with private equity capital. Firstly, return expectations are high, and immediate. This places pressure on owners to cut costs, or corners, to satisfy the investor – not an ideal scenario in our sector. Secondly, they are typically short term focused and seek a ‘liquidity event’. This presents an alignment problem and presents a greater capital requirement down the track.

Australian financial services companies such as banks, life insurance companies, dealer groups or fund managers are starting to provide capital to business owners. There is normally a limit to how much is available here. The biggest downfall with these opportunities, however, is the motive. Australian institutions still see financial planning as a means to an end. They want to ‘vertically integrate’ you. If you don’t support their products or systems, the relationship is doomed. I see large numbers of financial planning firms trying to buy their equity back from institutions because the parties’ motives are just too different.

The latest interest in Australian financial planning firms is coming from offshore. International firms see Australia as a well developed wealth management market and want a piece of the action. These opportunities are worth exploring because the international players appear to have no real capital limits, and longer term outlooks.

Good capital vs bad capital
Not all capital is created equal. Suppliers of capital have different timeframes and motives. When assessing a capital partner, give consideration to the following:

1. What is the capital partner’s timeframe? Do they align with mine?
2. Does the capital partner have access to enough capital to enable the business plan to be achieved?
3. What are the return expectations of the investor? Are they realistic?
4. Is the motive vertical integration?
5. What is the philosophy and culture of the capital partner? Are they supplying capital for the genuine business purposes or do they have their own view on how the capital should be used? Are they really supporting my plan?
6. What are the legal protections that enable the capital partner to allow me to do what I do? When will they get involved?
7. Is the supplier of capital credible? How did they attain their wealth?
8. Does the partner add more than just money? For example, can they help the business become more efficient? Can they assist with governance?

Of all of these issues, perhaps the single most important consideration is simply “Are we aligned?” Seek to understand the true motives of the supplier of capital. Seek to understand how incentives work, and what their end game is. Test them by asking what actions they will take when things aren’t going well. If there is genuine alignment, the capital partner will seek to add value beyond just money to help in tough times.

Co-operatives

It’s perhaps this last point that provides the answers to why most financial planning co-operatives have not been very successful. It is almost impossible to get true alignment across large numbers of business owners. Pooling your equity with others and looking to grow the pie is risky. Be very careful about swapping your life’s work with everyone else. Getting true alignment mixed in with the right leadership and execution ability is extremely rare.

We have a solution
AZ NGA was created with a vision to supply good capital to firms with growth ambitions. We sign up to your business plan (not the other way around). We make capital available to enable growth and solve succession. We also provide buying power to get a better deal from suppliers. We are able to provide know-how to improve efficiency, increase margins and plug the gaps in your business.

We have the backing of Milan-based Azimut Holdings, which is interested in handpicking Australia’s best financial planning firms and partnering with them for the long run.

AZ NGA was deliberately constructed as a ‘federated model’ enabling each firm to maintain independence, autonomy and control over its operations.

To find out more, contact Paul Barrett on +61419 402 319 or paul.barrett@aznga.com