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Best intentions

Nicole Blackmore asks industry experts what the future holds for Bestinvest now that 3i has bought a majority stake in the company

The private equity group bought out a large chunk of founder John Spiers’ holding in the firm, which some commentators have estimated will net him about £100m.

It was set up to focus on the analysis of tax-efficient investments for higher-rate taxpayers, but during the 1990s the range of services was expanded to cover most types of investment as well as financial planning. Bestinvest now has more than £3.7bn assets under management.

Alongside the likes of Hargreaves Lansdown, Chelsea Financial Services and Chase de Vere, 3i built much of its business from off-the-page sales, with most of its income coming from trail commission from these sales.

It has also been forthright in its criticism of models used by other advisers, attacking their reliance on big up-front and indemnity commission.

Whether Spiers has made many friends among the fund managers, with its high-profile spot the dog fund guide or other advisers, may be a moot point. But the business is highly profitable with pre-tax profits of £6.1m in 2006.

But now that it has the backing of one of the most established names in British private equity, what’s next?

Bestinvest investment man-ager Hugo Shaw insists it is business as usual.

He says 3i has bought itself into the culture, ethos and the ideas that were already up and running and notes there will be no disruption to management.

He says: “It doesn’t want to upset all that, it’s a proven formula and we see no reason to disrupt it. It’s going to be a fairly continuous transition from the old Bestinvest to the new Bestinvest.”

Hargreaves Lansdown investment manager Ben Yearsley says 3i would be rash to change the culture of the company.

He says: “That’s how the company’s grown and succeeded in this sort of business, by keeping the people and culture intact. We obviously didn’t want private equity when we made the decision to float because Peter Hargreaves believed it would damage the culture long term. It has to ensure that does not happen.

“It’s going to be the job of Andrew Barnes, the chief executive at Bestinvest, to ensure that nothing changes. It will be difficult because I am assuming it has put lots of debt into the business, it bought out most of John Spiers’ holding and there will always be the constant pressure on cash flow to pay this debt down.”

Yearsley says there are not many businesses that are as well run in the industry as Bestinvest, adding it is not only very profitable, but also growing rapidly.

He says: “Private equity likes buying into two things – one is buying companies with good cash flow and two they like growth-orientated businesses. I think financial services in the UK exhibits both of those. It gives you cashflow and if the business is run well, which I think Bestinvest is, it also gives you growth opportunities. So it does fill both criteria.”

Homeowners Mortgages chief executive Mark Chilton believes this could be the start of a surge of private equity piling into the financial services industry.

He says a developing trend will emerge, with private equity getting involved in retail financial services distribution because it’s low risk and cash generative.

He says: “3i are one of the longest-standing private equity houses around, with a fantastic reputation both as investors and in terms of the performance it reaps out of it. It will probably use this as the focal point for some serious developments, so it is not going to keep it standing still. What it will tend to do is supply the finance to be able to support the much more rapid development of the business than it would be able to do in private hands.”

Chilton says few financial services businesses are set up by experienced businessmen, but have often grown from small advisers, who then merge on the way up. He says you can attribute a lot of the failures in the sector to that, however, it is in itself an opportunity because it has led to a situation where it’s difficult for people who have medium-sized businesses to find a successful exit.

“I think you will see Bestinvest, perhaps, become a cluster where it basically acquire further businesses which would not have otherwise had a route for the proprietors to exit. But one of the things that it will introduce is massive consistency of models, so I would expect any acquisitions made by Bestinvest would migrate to its business model.”

3i declined to comment, but its website states that companies providing consumer finance, insurance and asset and wealth management are of great interest.

It says: “Across the sector, one factor stands out as key to success – distribution capability. To combat the dominance of the big banks and insurance companies, it isn’t enough to identify a customer group and design an attractive product. Success or failure depends on finding distribution routes that bypass the mass market and target the specialist niche – creating engagement, while enabling the assessment and management of risk.”

It will be interesting to see if private equity comes to be as dominant a force in financial services distribution as it has been in some other business sectors. If it does, a few more heads of the leading businesses may be joining Spiers in the millionaires club.


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