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Open sesame

Life industry analyst Ned Cazalet says Friends Provident could be seeking a door into the wrap market by buying Sesame. By Nicola York.

Standard Life said last week that it has acquired 25 per cent of IFA support service provider Threesixty.

Friends also has a 21 per cent stake in Tenet, 15.7 per cent in Intrinsic, 20 per cent in Assureweb and under 10 per cent each in Home of Choice, Lighthouse and Cavanagh.

Is this trend driven by the value that insurers see in investing in distribution or by other forces?

Aegon Scottish Equitable was one of the first insurers to buy an IFA firm with its acquisition of Wentworth Rose in 2002. Once Aegon had bought five IFAs, it merged them to create Origen. It also acquired a 60 per cent stake in Positive Solutions, which it bought out completely in 2005.

Aegon head of communications Lesley McPherson says: “The rationale for us investing in IFAs is because we believe that in the long term they will give a significant return on capital. We have no strategy or quotas to fulfil. They are very much run autonomously with the financial backing of Aegon.”

It is interesting to note that Aegon owns both Origen, a smaller IFA business concentrating on high-net-worth customers, and Positive Solutions, a national IFA aimed at all types of customer.

Friends’ purchase of the Sesame network and high-net-worth IFA Pantheon Financial seems in part to reflect this strategy but the similarities end there because Friends is developing a wrap proposition while Aegon has no plans to enter wrap and is sticking to the role of a traditional life office.

Life industry expert Ned Cazalet believes this is the reasoning behind Friends’ acquisition of Sesame. He says: “The future is all about open architecture which is a radically different approach for distribution. If you have got several hundred people in a subsidiary company, what are those people going to be doing five years from now? If you are a member of Friends Provident’s IFA firms, you are likely to use their wrap.

“Why would you use Fidelity’s if you are owned by Friends Provident when you have got the same amount of flexibility, access to the same number of funds and the same charges on both?”

But Friends Provident marketing and UK distribution managing director Simon Clamp says: “Sesame will be run on an autonomous basis with an independent board of directors. This board will choose the way they trade and will be independent.”

Standard Life insists that buying support services companies is simply an investment opportunity.

In addition to Threesixty, it has a 10.7 per cent stake in SimplyBiz, 20 per cent in Tenet and 15 per cent in start-up national IFA 2Plan but says it has no further acquisitions lined up.

Standard Life managing director of sales Nathan Parnaby says: “You have to divide these things by service companies and networks. With networks, you are potentially buying the liabilities of their past deals. We are buying support service companies because it is a good investment and to improve our services.”

Skandia has stakes in Lighthouse and Cavanagh and also owns Bankhall. It did not want to comment on why it owns distribution and would only say it is “comfortable” with Friends’ acquisition of Sesame.

One source at an insurer, who did not want to be named, said he cannot understand why Friends has bought Sesame because of the potential liability risk that networks represent.

Clamp says: “Sesame has had a number of issues with regulatory reviews in the past as has every other IFA firm. It is a market issue, not a Sesame issue. There have been recent reviews by the FSA and a number of these have been completed now. We would take on any responsibility for future liabilities.”

One of the biggest deals last year was Axa’s purchase of Thinc Group, which marked the insurer’s first foray into the UK distribution market and will cost up to £100m depending on Thinc’s future performance.

No one from Axa was available for comment on the Thinc deal but, at the time it was announced, Axa chief executive Paul Evans said he saw “enormous potential for growth” in Thinc.

He said: “I have said I would not invest in advisers to acquire a minority interest as I do not think that is in the best interests of the IFA or the provider. It is our intention to acquire this entire business which we see as having enormous potential for growth, either by acquisition or organically. We believe we can generate value for the shareholders and turn the business into a profitable one.”

One insider at an insurer says the problem with buying networks is that a lot of the value sits with the registered individuals and they are a very mobile form of distribution.

He says: “The challenge is to make sure the proposition is something that is truly valued and prove the financial stability around the firms is excellent.”

But some life offices are not interested in buying either minority or controlling stakes in distribution. Prudential has always maintained it has no interest or intent in this direction and still maintains this position.

Distribution director Dave Harris says: “There is not enough value for us to be interested.”

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