Gearing up for more M&A activity

Mergers and acquisitions played less of a driving role in the sector’s growth in the past year than at any time since margin lending started to take off in 1987, but this market calm is not expected to last.

There was only one merger during the year, the purchase by Adelaide Bank’s Leveraged Equities subsidiary of Goldman Sachs JBWere, in a sector that mergers have reduced from 19 to 12 lenders over the past few years.

St George margin loans head Andrew Black expects more mergers and acquisitions will “inevitably occur, because margin lending is very much around scale, it being a very high-volume, time-sensitive business”.

“So, unless you have got the scale to be able to support it, it can be quite marginal from a profit perspective. However, once you get past that it becomes very feasible and is a very good profitable growing business,” he adds.

Bassem Jammal, managing director of boutique lender Lift Capital, by contrast, sees “huge opportunity” emerging from continuing merger activity for both the industry and Lift .

There were only five or six lenders in the marketplace when Jammal set up the margin loans business for Citigroup in 1997, leaving about two years to set up Lift Capital.

There are a number of players that provide investment advice, construct model portfolios and provide gearing attached to these products, he says, but Lift is Australia’s “only truly independent boutique focusing solely on lending and delivering structured solutions”.

That Lift is also the “only lender that is not owned by the banks or investment houses, and that all the others are in the wealth management space”, are key points of difference for the lender.

“Independence can be defined in a number of ways and from our perspective it is in terms of demonstrating to our distributor intermediaries, which are financial planners and stock brokers, that we are not competing with them,” Jammal says.

“We are not in the business of providing advice in the wealth management space and therefore we are not seen as an entity that is going to be encroaching on their client franchise.

“This is very much appreciated by advisers, notably boutique advisers, who have been finding it difficult to protect their businesses against aggressive plays by the banks into the wealth management sector recently.

“They are willing to explore alternatives in providing their clients with products and services, where they won’t be encroached upon by banks, in particular.”

Another aspect that will ensure Lift’s future as a lender, according to Jammal, is that “we have the ability to manufacture new and innovative product, underpinned by our own proprietary technology platform”.

“By contrast, a lot of the other lenders actually use third-party platforms to run their businesses, and in addition are very much reliant on those third parties to develop their technology solutions.”