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Campbell Macpherson: Cofunds deal exposes platform pressures

Campbell Macpherson MM blog

Platform businesses will need deep pockets if they wish to survive, and the bigger they are, the deeper their pockets will need to be. This is why L&G’s long-awaited and oft-denied acquisition of Cofunds is the best thing for the business.

Even though assets under administration on platforms is estimated to be well in excess of £200bn and rising rapidly, platform margins have been coming under extreme pressure for some time due to increased competition from other platforms along with other parts of the value chain (esp. wealth managers, distributors and fund managers).

Plus costs have been rising in line with revenues, leaving the industry struggling vainly to make a collective profit.

And of course Cofunds, whilst they have been posting profits for some years now, has been experiencing all three of these strangely counter-intuitive market forces (massive growth, reducing margins and rising costs). Compared to some of their main peers, they have fared rather well. According to accounts filed with Companies House, Skandia’s platform lost £11m in 2011 and it was reported to be on track for a similarly-sized loss in 2012 until significant cost-cutting measures were introduced mid-way through last year.

To stay relevant and viable into the future, the majority of platform businesses have no choice but to significantly reduce their operating costs. This will require completely re-engineering processes throughout the entire business; automating the customer experience and removing as much paper as possible. To achieve this, a large number will need to replace their ageing technology with configurable admin systems that will simultaneously increase their flexibility and decrease time-to-market for new propositions.

The investment required to streamline these businesses requires shareholders with deep pockets and a long term interest in the viability of the business. Few independent shareholders would entertain making significant capital investment in low-profit, “utility” platform businesses. For Cofunds to remain strong into the future, it was inevitable that L&G would have to step up and take control.

I assume L&G had a stark choice to make – either remove the £8 or £9 billion of L&G client money from Cofunds and build their own “next generation” platform, or acquire the whole of Cofunds from their fellow investors.

Evidently, they had always favoured the latter path and it was a decision which they seem to have put off for many years until the purchase price was as right as possible.

The first “nuclear” option above would have been a severe body blow to Cofunds and would have ultimately required L&G to write off the value of its share of Cofunds and build a new L&G platform from scratch. Even though this would have cost a great deal less than £131m, it would have carried a significant amount of reputation and execution risk.

The full-acquisition option now gives L&G increased access to “distribution” and will not affect its large clients like Nationwide. However, the £131m purchase price can not the end of the investment. L&G will need to streamline the operations as outlined above and invest in enhancing the functionality and usability of the Cofunds platform. As Karen Carpenter once sung, “It’s only just begun.”

The good news for Cofunds customers – and it is very good news – is that their chosen platform now has the capital it will need to maintain its position as industry front-runner.

While questions are bound to be asked in Number One Coleman St about the strategic fit of the Cofunds Institutional business, both the D2C and adviser parts of the Cofunds’ business should now be able to receive the investment they need to compete with the best that the industry has to offer.

I can’t imagine L&G reversing the recent decision to offer an open-architecture bond on Cofunds. Surely the future involves more open-architecture rather than less. In my humble opinion, the future of investment platforms involves simplicity, automation and transparency. But to deliver this requires a great deal of effort – and money. With the full backing of L&G, the future could be bright for Cofunds and its customers.

Campbell Macpherson is MD of consultancy Campbell Macpherson & Associates. He has been a senior executive with the likes of Zurich, Openwork and Sesame and now works for a variety of platform, life and investment companies.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I am sorry Campbell but I disagree on one of your major points – in my view, platforms do not need deep pockets. Do you think some of the smaller platforms who are generating profits have deep pockets?

    I have been fortunate enough to work at Selestia, Skandia and Cofunds and it amuses me how people still talk about platforms in the sense of LifeCo terminolgy.The concept of a platform back ten years ago was that that they would run effeciently and work on scale. Platforms are not like Life Co’s – they do not need billions of reserves as they don’t offer guarantees. Why would they need deep pockets? Why was it inevitable that Cofunds could not continue on its own when it is making profits?

    Like any industry that is expanding, you will get competition and price pressure as new entrants come in and fight for market share. This is the standard model for any successful industry.

  2. It’s all about the business model & the cost base. Legacy-minded platforms are nowhere near where they need to be on either.

    Which is too bad. But also pretty cool.

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