Prepare for fund platform mergers in coming years
Tough markets, capital needs and competition will force firms into hitherto rare mergers and acquisitions.
Many of you could probably not face reading yet another article debating the potential outcomes of the RDR. I for one could not face writing one.
The recent RDR paper on fund platforms is no exception. The debates around it are well rehearsed and understood. All platform pricing models will need to change, and the sticker annual charge for a platform will rapidly become 0.25 per cent. This is reasonably straightforward. Instead, I thought I would look more broadly at one of the biggest long-term issues which will face advisers – the future ownership of platforms.
It’s interesting to think what a combined business might look like, or what a current platform will look like with different owners. For an industry which has now been around for more than a decade, it is surprising to see the relative lack of mergers and acquisitions (M&A). To date, we have seen Old Mutual acquire Skandia and Fidelity acquire Egg, but few others of significance. You could argue that the market is starting to ripen to more M&A, and it’s interesting to consider what effect this will have.
In the future we will possibly see platforms merge to benefit from their combined scale - there is just not room for 30 platforms in the market
First, platforms are a growth market – few other areas of the market have grown as fast, or have the same outlook. This has attracted the 30 or so platforms already vying for shelf space. To date the majority of platforms have entered through the traditional start-up route, typically now by leveraging technology or services from external providers. The barriers to entry in the platform world are, however, rising, requiring investment and complex implementation programmes. Look at the number of new players delaying launches as a case in point.
Next is the issue of scale. Platforms generally have high operational gearing, and therefore anything which adds scale is attractive, if it can be done cost effectively. In the future we will possibly see platforms merge to benefit from their combined scale. There is just not room for 30 platforms in the market. There will be some organic consolidation, but there will also be some through M&A.
The platform market has seen a number of new start-ups, some from very small businesses. There’s been some interesting innovation from some firms, but risk lacking capital to really grow scale. In Australia we saw opportunistic start-ups launching platforms left, right and centre, purely to try and make a quick return. Many start-ups in the UK will be looking over a period of time to realise some value from their business and the likelihood is this will be from finding a buyer.