Warburg Pincus steps in to rescue £1.8bn wealth merger

The buyout firm Warburg Pincus will this week ride to the rescue of a £1.8bn merger of two leading wealth management groups, paving the way for the completion of one of the UK’s biggest corporate deals of the year.

Sky News has learnt that Warburg Pincus is to inject more than £250m into Tilney Smith & Williamson – a move that should secure regulatory approval for the tie-up.

Originally announced last September, the merger will create a privately owned wealth management and professional services group with £45bn of assets under management (AUM).

It would become the UK’s fourth-largest wealth manager by AUM, behind the likes of St James’s Place and Quilter.

The transaction is technically structured as an acquisition of S&W by Tilney and other funds owned by Permira, the financial planner’s controlling shareholder.

Scheduled to close in the spring, it ran into trouble with the Financial Conduct Authority (FCA), which objected to the proposed capital structure of the combined group.

According to one source, the City watchdog demanded that the two boards secure new equity of well over £200m before it would approve the tie-up.

That revised structure would substantially reduce the indebtedness of the merged group to approximately three times earnings before interest, tax, depreciation and amortisation, according to one insider.

Last month, the companies said the FCA had “indicated to Tilney and Permira that the original proposed transaction structure had not met with its approval”.

“Over the subsequent months, the parties have worked together constructively on developing a revised transaction structure to accommodate the feedback from the FCA.

“Significant progress has been made in this respect.

“Under the revised structure, there would be a material new equity investment and thus a significant reduction in the external debt levels of the post-combination combined group.”

One insider said that Warburg Pincus had been in discussions about injecting new equity into the deal for a number of months.

They added that the £1.8bn enterprise value of the combined group agreed last year would remain following the new capital investment.

It is likely to mean that Warburg Pincus will become the second-largest shareholder in Tilney Smith & Williamson, behind Permira.

Warburg Pincus’s addition as a shareholder will bolster the credibility of the enlarged Tilney Smith & Williamson business given its long track record of investing in financial services assets.

Earlier this year, it was reported by Bloomberg News to be assessing a takeover of Quilter, the listed wealth manager which was spun out of Old Mutual, the financial conglomerate.

Sources said this weekend that its investment in Tilney Smith & Williamson was being finalised this weekend, with an announcement likely as early as Monday morning.

The merger is designed to create a broader-based financial planning and professional services provider at a time when scale is becoming increasingly important in the sector.

The greater cost of regulatory compliance, including from Brussels, has also made it more difficult for smaller players to thrive.

Chris Woodhead, Tilney’s chief executive, described the tie-up as a “compelling combination”, while S&W’s joint bosses said it would create a group with “real scale, broader capabilities and complementary service offerings”.

“The investment management and professional services market is changing rapidly, with the evolution of client needs accelerating,” S&W’s joint chief executives, David Cobb and Kevin Stopps, said last autumn.

Assuming the Warburg Pincus investment is announced, the merger should complete in the second half of this year.

They warned last month, though, that “while all parties remain committed to the combination, given the COVID-19 situation and the fact that the revised structure has not yet been agreed, there can be no certainty that the transaction will proceed”.

Evercore is advising Tilney on the deal, while S&W is being advised by KBW.

Warburg Pincus, Permira and S&W declined to comment on Sunday, while Tilney could not be reached for comment.