Bigger players are eyeing the acquisition of struggling smaller firms, but is there real consolidation activity taking place in the market?
According to Krishnan Ramachandran, the Dubai-based chief executive of long established Barjeel Geojit Securities, the reality is there is no major consolidation happening.
“At this juncture there is no major consolidation that is happening in the investment adviser space. There are a few transactions where acquisition or partnership is being considered in expanding to other related business verticals.
“For instance, an advisory business acquiring a strategic stake or a partnership with an insurance service provider or vice versa.”
He added: “Yes, the market is poised for consolidation, essentially to increase the range of product and services offering to their targeted customers. Considering the prevailing market conditions the valuations will also be attractive for the acquirer.”
Subhasish Roy, authorised consultant with Nexus Insurance Brokers, Dubai, would not term it consolidation, but would prefer to call it “stabilisation”.
“One would not say consolidation; rather you will see certain bigger companies are actually stabilising operations by gaining market share with the exit of the so-called smaller players. It is one kind of consolidation wherein certain entities which are not able to sustain themselves are just going off the market.”
Unprofitable smaller players
The smaller players are finding it unprofitable to continue business. Hiring and retaining staff, particularly marketing personnel, is quite expensive. The first challenge before them is to retain talent. And if they are not generating business, it is still unprofitable for them to employ more people, Roy said.
A typical consolidation will see stand-alone investment advisers vanishing from the market, though there are fewer stand-alone entities. They are either part of brokerages or bigger investment companies.
The authorities have been thinking of making a lot of regulatory changes with respect to how brokers and intermediaries operate. There can be a big shift in the industry and right now the situation is such that the authorities do not want to let another industry die down by bringing in such regulations, Roy said.
“In fact the regulatory framework does not permit independent investment advisory firms. The regulations stipulate stringent conditions such as separate compliance department and framework for accepting deposits,” Roy says as reasons for the fewer number of stand-alone investment advisory firms in a small market.
Survival in a small market
Can the small players survive in such a small market? Krishnan says in the affirmative. “If you are able to deliver value and proper advice to clients then there is enough opportunity for small players to survive.
“The problem with small players is that their choice and range of product offerings will be rather limited. For instance it will be rather difficult for a small player to offer leveraged or structured products. In order to do so they become obliged to sign up referral arrangements with large players. This is the prevalent practice in this region.”
Die out or get acquired
However, Roy says the option for small players is either die out or get merged or acquired. “If it is in the brokerage business, brokers who have substantial cash flow and can sustain themselves could look out to acquire other brokers or at least poach some key personnel from who is associated with some large accounts. In that case, they get some ready clients.”
Dubai-based Compass Insurance Brokers is taking the acquisition route. Says Navin Nihalani, founder and CEO: “With the fast paced regulatory changes that are coming in, we made a majority of changes. Over the past year we started acquiring other business and brokers and are in talks with a few entities about merging and looking at picking up a better, cleaner and long term broker business.”
