The Business Interview: Mark Bourke, IFG Group Chief Executive
09 May 2010
FG has secured a strong foothold in the British market and is now likely to look for bolt-on acquisitions, its CEO tells Jon Ihle
IFG's Mark Bourke: 'Three years ago people would look at us and say, 'We're not interested'. Now it's a very different story'
Of the financial shares still listed on the Irish Stock Exchange, IFG Group is the only one that has either maintained or raised its dividend since the economic downturn began in late 2007. AIB, Bank of Ireland, Irish Life & Permanent and FBD – all growth stocks of the Celtic Tiger years – have all either cut pay-outs drastically or stopped them completely. But after delivering adjusted earnings on the upper end of expectations for last year at more than 20c per share, IFG kept its dividend at 3.63c.
The company, which provides fee-based financial advisory services in the UK and Ireland and trustee corporate services in several other European locations, has managed this feat while keeping net debt low and making several acquisitions, including the £35m purchase of the UK's biggest personal pensions provider, James Hay, from Banco Santander in March. In tough times, IFG has been a good story for investors, according to chief executive Mark Bourke.
"Within a two-year period we'll be de-geared to zero if we don't invest further, then it's a question of dividend pay-out," said Bourke. "Three years ago people would look at us and say, 'We're not interested.' Now it's a very different story. The whole tenor of the conversation with shareholders has changed completely."
Under the stewardship of Bourke since 2006, IFG has gone from boomtime struggler to recession winner. In the first half of the decade, when other firms were enjoying massive levels of capital appreciation, IFG was "massively overgeared", according to Bourke, who was chief financial officer at the time. The company spent years cleaning up the business structure and deleveraging. By 2005 the business consisted of corporate trustee services in locations such as the Isle of Man, Jersey and Switzerland, a pensions business in the UK and mortgage broking and related services, such as title insurance for switchers, in Ireland. By 2008 the Irish property business – which had delivered €5m in annual profits – "essentially imploded", leaving 60% of profits coming from corporate advisory and 40% from UK pensions.
"We had no concept at all of the scale [of the property crash]," said Bourke. "The business just evaporated. In a perfect world it would have gone from 30% to 20% to 10% of the overall business. The thing that is good, for reasons that aren't pleasant, in terms of clarity, we now have two things: pensions and advisory. That's much easier for a foreign investor to deal with."
Profits are even easier to understand. IFG has seen earnings decline in the last two years, but for 2009 beat expectations with EBITDA of more than €18m, down from nearly €23m the year before. This year is expected to be "neutral", said Bourke, but profit increases are expected to return in 2011.
"What you saw in '08/'09 was business models tested to an extreme level," he said. "Without doubt we had a rough two years but it proved the basic strength of the model. Hopefully now we'll see growth in 2011."
The big engine of that growth will be the James Hay business, which IFG snagged after months of tough negotiations over the second half of 2009. As one of the second-tier players in the UK self-invested personal pension (SIPP) market, buying the biggest incumbent was a dramatic move for IFG. But it was also the only way the group was going to be able to exceed its own internal organic growth capacity and become a consolidator rather than somebody else's acquisition, according to Bourke.
IFG's brand in the UK, IPS, had only a 5% market share while James Hay was the undisputed leader with 18%. Combined, the two dominate and are ideally positioned to gobble up some of the many smaller, less independently viable businesses in the SIPP market.
"James Hay was a complete game-changer for us," said Bourke. "This leapfrogged us into the number one position in a market traditionally growing by 20%-22%. For us it was the perfect target. We knew the business, we knew what we could do to it in terms of efficiencies. It is the highest-quality earning stream in all of our businesses – that's the argument for doing it."
If the business proposition for the merged business is simplification, the funding to get the deal done was a lot more complicated. According to Bourke, when IFG first approached Santander in July of last year, it was not a "credible" buyer. The Spanish bank was entertaining offers from large institutions and well-funded private equity houses. Bourke and his team ran through eight different options with partners and determined their best shot was to raise equity with a backer for a rights issue. Backed with a 45% placing from the Fiordland fund, IFG raised €50m in new equity.
"Looking at my share register it was obvious the markets were effectively shut to us," said Bourke. "Getting a rights issue away would have been considered cloud cuckooland, but once you have a backer who is going to take up 45%, that gave us a cornerstone. You could say to the seller: 'We have a backer who will do this.'"
From the shareholders' perspective, the pricing and potential made the deal look attractive.
"Effectively even if we never had new business, if we just ran it as a back book, it's a very profitable acquisition at £35m," said Bourke. "We buy this at net present value of current book, we're getting a brand free and a chance to really take back the market. Even if we do very average, that's a very attractive transaction. If we start to capture more market share, then the thing becomes unbelievably accretive in the coming years. That was the attraction for our backers and shareholders. Even in a market that was horrifically bad, that was the story which allowed us to raise the money."
Next is a move into east Asia, a vast economy where IFG lacks a notable presence, despite servicing a number of Asian corporate and personal clients out of its European locations. Singapore is the most likely location and Bourke expects to establish a representative office there soon to service Asian clients and learn the ropes of the local market before entering a joint venture or making an acquisition to build presence.
"You want to be in the top tier of providers so you are on the panel for PWC or Deloitte who are referring work," said Bourke. "It's the lawyers and accountants who are your principal relationship for corporate services."
Despite all this outward international focus – virtually all of IFG's profits are derived from outside Ireland – Bourke expects to keep the company headquartered in Ireland.
"It is how we are," said Bourke. "It wasn't a grand vision. Ireland is a very suitable headquarters. We'd never put our tax advantage at risk."
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