Caledonia Investments’ decision to buy a majority stake in Seven Investment Management, Legal & General’s decision to sell the recently acquired Cofunds and the potential flotation of Transact are adding up to a queue of deals in the investment platform space.
So what should we read into the surge of potential M&A activity? Are we about to see a sharp rise in platform consolidation?
Informed Choice executive director Nick Bamford says this wave of deals is not “shocking” but a continuation of a general trend within the financial services sector. “There is a continuation of consolidation in the sector at large. Eventually there will be a relatively small number of successful scalable platforms.”
Tilney Bestinvest managing dir-ector Jason Hollands says recent launches in the sector have been accompanied by “an aggressive pricing proposition”. He says: “ A lot of these platforms will probably not be very profitable and it might well be the case that we start to see some consolidation as a result.”
However, CWC Research managing director Clive Waller does not see a surge of deals among platforms as the cost of re-registration of assets is too high. He says: “What’s happening with Cofunds is it is the biggest platform in the market and no other platforms would acquire it as it is. For example, FundsNetwork could buy Cofunds if they wanted to but at what price?”
Nucleus chief executive David Ferguson says the re-platforming project for the technology behind Cofunds may cost around £100m.
Waller adds: “There is no point in acquiring something unless it is going to make you richer. To make you richer there’s going to be economies of scale and because of the cost of moving from platform to platform these economies of scale appear not to exist. So it needs legislation and regulation to make it easier to re-register to move from platform to platform.”
Standard Life head of adviser and wealth manager propositions David Tiller says when considering a deal, platforms also have several other challenges to face. “Before entering a deal you have to think about disruption for your business, even if the technology behind it stays the same.
“It might take an 18-month journey for an integration, if not more, as the fee structures and tax wrappers also need to match up.”
Although Standard Life is not “actively” looking to grow through acquisitions, Tiller says the firm would consider buying a platform but only if it is a big player – larger than £7bn – because of “integration challenges”.
The business has seen strong organic growth, which would make the integration process more challenging if buying a much smaller platform, Tiller explains.
Many argue consolidation is likely among the new online DIY investment propositions.
Hollands says: “In the last four years you have seen some of these websites capture the DIY investors but over the next few years there will be a bit of a shake-out as some of those firms will not reach the scale that they need to break even.
“All these platforms are using third-party custodians so when you see a platform of 25 basis points or 45bps or in between, that is not all revenue for the platform because a chunk of that is going to the custodian.
“For the level of the assets to be viable it depends where you set your fees up and some of the pricing strategies look a little bit kamikaze.”
Tiller says: “When you are small you have a lot of non-standard and manual work. Smaller players would need to find a niche or turn into the wealth management space as well as buying adviser businesses as the need for scale is less critical in that space.”
However, AJ Bell chief executive Andy Bell, whose platform has more than £26bn in assets, says having scale is not enough.
He says: “You need to have modern IT systems that are scalable and robust. For us it’s just as important to keep that entrepreneurial spirit to keep things efficient and have control of what we do.
“If you are part of a bigger business is not always easy to keep control of the operating model and make it as efficient as it can be.”
Hollands says: “It is a crowded space and despite some quite aggressive pricing propositions coming in, actually it has been the established players like us or Hargreaves Lansdown who have continued to grow because most people underestimate the fact it isn’t just about pricing, it is about your service proposition, the tools you offer, it is about having a profile and
having marketing budget to reach potential clients.”
Bell adds: “You have some people saying price is not that imp-ortant. You have Hargreaves Lansdown who are definitely not the cheapest but they are market leaders. People don’t understand pricing in this market. To be a small player who is expensive, you’ve got no chance.”
From a client perspective, integration between platforms can also create disruption, adds Tiller.
Bamford, however, argues that deals among platforms could be “unsettling” rather than disruptive for clients.
He says: “From a client point of view there maybe some frustration in name changing or branding changes, but that is the role of the intermediaries to explain to customers what is going on and give them a reassurance that money is still going to be managed in an effective way.”
Platforum research director Heather Hopkins says customer loyalty may also act as a barrier to consolidation.
She says: “It is important for an acquirer to see what they are buying and that’s one of the reasons we haven’t seen Transact being bought, because their customer base is very loyal.”