Acquisition activity continues apace this year, with key players in the platform market also taking bold steps towards public listings.
But as we close out 2018, one potentially huge deal still hangs in the balance: the rumoured sale of advice, investment and technology group True Potential.
Money Marketing understands that US private equity giant KKR – made famous for sealing the largest leveraged buyout deal in history at the time of the $25bn (£19.6bn) takeover of RJR Nabisco in 1988, as chronicled in the book and film Barbarians at the Gate – and at least one other are progressing a potential purchase of the firm.
Things are “moving pretty rapidly”, according to one source that is close to the deal.
Money Marketing also understands that KKR’s lead on the project is Daan Knottenbelt, who joined from Palamon Capital Partners in September, where he helped work on the firm’s investment in Towry.
The value, according to a source who has knowledge of the deal, looks to be around £700m. But what is there within the business to attract such a hefty price tag?
Crunching the numbers
True Potential brands itself as a “financial services and technology organisation” on its website, and that £700m looks pretty steep if True Potential is pitching itself as a pure adviser technology firm.
Compare that £700m to the roughly £200m back-office provider Intelliflo went for earlier this year and you need a compelling case for added value.
There is certainly a huge interest in the market right now over firms that have a finger in adviser technology, but who – like True Potential – also offer their own advice, platform, network or fund services too.
Take Schroders’ decision to increase its stake in Benchmark Capital, owners of the Fusion Wealth platform, IFA Aspect8 and network Best Practice, and to use its technology for its new advice joint venture with Lloyds Banking Group.
True Potential has also taken greater control over its own technology – and there has more flexibility and scalability – by ending its relationship with SEI in favour of developing its own in-house platform technology (the downside being that it would no longer fit with a potential buyer running off the same technology).
While this may turn out to be expensive, it could end up no less expensive than the decisions made by major providers to stick with back-end platform technology providers like IFDS amid spiralling bills to the outsourcers to manage replatforming.
A restricted advice force nearing 500 planners will certainly be a powerful driver into the firm’s in-house fund range too, which has accumulated nearly £5bn in assets – £3.8bn coming in 2017 alone.
Would £1bn really have been too high given all of this? Take Transact’s implied £1bn valuation after parent company IntegraFin floated this year. Transact has significantly less in total assets under administration when put next to True Potential: around £30bn for Transact and £52bn for True Potential.
A private equity buy rather than a trade sale certainly makes sense. Most businesses in the advice market that are large enough to afford True Potential either have their own advice arms or investment propositions already, or have publicly stated they have no intention of offering regulated advice, or owning any business that does so.
Flies in the ointment
But there are certainly headwinds afoot too. The FCA pledged further work on so-called “vertical integration” – how platforms, fund provision and advice all operated by the same group of companies – and how this could impact upon conflicts and client outcome in its recent asset management market study.
One source says: “You do hear that there are incentives to recommend in-house funds at planning firms these days. You’ve got to ask how billions came across so quickly.”
Another source, however, says that True Potential’s in-house offerings are “no better or worse than any other vertically integrated model”.
They say: “Like a lot of these things, they’re a bit mediocre, but they’re probably doing all right for the customer at the moment.”
Yet its vertically integrated structure is not necessarily a bad thing in and of itself when it comes to potential regulatory risks for a new buyer.
A firm the size of True Potential could increasingly leverage that scale to negotiate discount fund deals and segregated mandates, potential passing cost reductions on to clients or at least reducing the cost of client acquisition.
The platform puzzle
But while billions are also flowing into True Potential’s platform, a key question remains over what proportion of funds sit there compared with external platforms – something that any potential acquirer will surely have a keen eye on.
The latest data shows that around £7bn of that £50bn is on True Potential’s platform, but the rest sits elsewhere with the likes of Standard Life, Aegon, and Old Mutual Wealth.
While a prospective buyer may look at this and be sceptical about how much of the revenue is really baked into the True Potential proposition, the challenge of moving assets en masse to its own technology may be too great a hurdle to jump. Imagine if True Potential’s entire £52bn moved across – this would make it one of the largest platforms in the market, arguably without the infrastructure and pure platform credentials to cope with this.
Still, True Potential will be getting an advice charge, some investment charges, and commission through external platforms on legacy life products and pre-RDR business, which still account for around 20 per cent of all advice market revenue according to latest FCA data.
If it can keep clients happy with paying those, then there is no doubt that a potential new owner will be happy too.