From Special Report:
Platforms: To merge or not to merge
As the platform market continues to develop, could M&A activity be on the horizon?
The implementation of the RDR at the beginning of 2013 is helping drive more of advisers’ business through investment platforms. In particular, the FSA has highlighted when advisers may need to use more than one platform for their clients if they wish to retain their coveted independent status after the RDR comes into effect.
But with roughly 28 platforms already in the market, and total assets under administration (AUA) of £191.5bn at June 30 2012, advisers face an almost overwhelming choice, with more niche offerings complementing larger firms such as Skandia, Cofunds and Fidelity FundsNetwork.
This wide range of providers suggests the market is ripe for consolidation as it remains to be seen how many platforms the UK market can sustain. Yet the signs appear skewed more towards further expansion than an explosion of merger and acquisition (M&A) activity.
Holly Mackay, managing director of Platforum, points out that Aegon entered the adviser sector as recently as late 2011 in a partnership deal with Novia, while Zurich is expected to launch its platform later in 2012. Moreover, in spite of the increasing number of platforms in the market, she says consolidation in the industry is not a given.
“While we think there are ‘logically’ too many adviser platforms, it is not a given that the outcome will be M&A. Mergers involving two different IT systems are notoriously hard to manage,” she says.
“On the acquisitions front, it’s very hard to actually value a platform. Re-registration [of clients’ investments from one platform to another] is getting easier and easier and the acquisition of any platform may fundamentally change the make-up of the customer base and the asset pool. Put simply, advisers might just up and leave.
“Additionally, big global outsource providers are starting to look to the UK platform market, as evidenced by last year’s acquisition of Scottish Friendly by Citi. I think it’s less likely therefore that the primary driver of any platform acquisition would be getting your hands on the technology as this is easier to outsource than ever. So it’s complex.”
In corporate terms, Alastair Conway, sales and marketing director at Cofunds, suggests the industry should look forward to 2013 as key for platforms following the implementation of the RDR.
“I think you’re unlikely to see any major changes at the start of the year, but as the year progresses, if some of the promises and hopes and dreams are not being fulfilled, I’m sure some pressure will come onto those organisations. If it is then possible to buy them and absorb them into another organisation, or whether those platforms just look to exit the market, we’ll have to wait and see.”
The profitability hurdle
Another factor that might inhibit mergers and acquisitions in the sector is the state of platforms’ balance sheets. Profitability is a key indicator when assessing companies’ financial strength of a company, and on some measures many platforms are making a loss.
Guy Vanner, managing director of AKG Actuaries and Consultants, suggests it can be difficult to see where consolidation might take place based solely on financial strength data, “given that the market is both still relatively immature and there is such a spectrum of providers operating in it, [with] such a variance in ownership entities.”
According to AKG Actuaries and Consultants, Standard Life’s platform business recorded the highest loss among UK platforms analysed by AKG, with a retained loss of £40.7m in 2010. Cofunds topped the tables with a retained profit of £19.2m.
Interestingly, however, AKG has given both platforms a financial strength rating of B+, with Cofunds benefiting from a profitable performance in the past three years, a large market share and significant shareholders.
But in spite of continued losses, Standard Life’s platform offering, which includes a wrap and fund supermarket Fundzone, benefits from its close links with the wider Standard Life group. In particular, AKG highlights the parent company’s commitment to the platforms with significant financial resources.
This commitment looks set to continue as Dave McGovern, head of retail marketing at Standard Life, says: “The development of our platform proposition is an area we take very seriously and [we] have delivered 25 upgrades with more than 200 changes to the platform since we launched six years ago. We’ll soon be setting out our two-year roadmap and as part of this commitment we’ll work with advisers to define and design the changes and upgrades we make.”
But with AUA of approximately £10.8bn across its platform range in June 2011, the firm says it has no plans to move from its current strategy of organic growth.
Mr McGovern explains: “As with any M&A, you need to be mindful of how it enhances your proposition. There are many things to consider with an M&A, and it can’t be around just asset growth.
“There are lots of technologies that underpin platforms which make any M&A situation in that market more complicated. You have to consider how technologies of different platforms talk to each other, which often isn’t clear, and how easy it would be to integrate them. There are also other concerns such as how aligned the cultures of different organisations are. While intuitively there is a feeling of too many platforms supporting the market, I don’t think it’s as easy as saying this number will come down quickly.”
Hugo Thorman, managing director of Ascentric, which is owned by another insurance company, Royal London, says while there is a consensus that there should be some consolidation in the long term, there is still pressure to expand from within in the short term before firms resort to M&A.
“I’m not sure that consolidation is going to happen yet, because it’s very difficult to understand what the mechanism would be, how that consolidation would take place,” he says.
“For example, institutions could grow up that would provide services to platforms, and they might be how they consolidate. We wouldn’t be thinking about taking other people over because it would be very difficult to see how we’d make any money out of it. The costs of integrating a new platform into one’s own platform would be more than the benefit you’d get from owning another platform.”
Why size doesn’t matter
Size is also not an easy guide to platforms’ profitability – or their vulnerability to predatory acquirers. Avalon, with approximately £250m of AUA in November 2010, turned a profit in 2010, while Axa Elevate and Skandia recorded a loss in 2010 of £18.8m and £7.5m respectively, according to AKG.
Mr Vanner adds: “There will undoubtedly be some consolidation, but also some companies will settle into niche areas. It may not always be the case that the smallest ones are the most likely to be acquired, as other factors will undoubtedly come into play and indeed some platform operations might be acquired from a position of strength rather than vulnerability.”
Harry Kerr, director of Avalon Investment Services, notes the past few years have seen more life companies move into the platform business as a defensive measure, and any new entrants could come from a life assurance company currently without their own offering or from an overseas firm. But he argues that it is a myth that a platform needs to be part of a large-scale business like an insurance company in order to survive.
“The big players have huge marketing and staff overheads, expensive IT and management teams and small margins. They need scale. The small platforms do not have all these huge costs, have established a loyal IFA client base and can do quite nicely. They tend to be much more nimble and flexible and able to establish business in niche areas.”
One option for smaller and more ambitious entrants into the sector is to make use of existing technology and expertise through a partnership rather than an acquisition, as demonstrated by the deal between Novia and Aegon.
Mr Conway takes the example of his own firm, Cofunds, now the largest in the market by AUA. He says the firm grew predominantly by building its own technology but then choosing expert partners to perform key functions.
“We’ve not looked to go and acquire other platforms. We’ve realised the theory of acquisition can often be an awful lot simpler than the actual execution. We don’t see that as a natural way of evolving, especially as we’re growing as quickly as we are.
“But I don’t think it’s something we’ll ever dismiss, bearing in mind that we’re about to enter a phase of the market that will probably see a number of the platforms come under stress as the market realises it can’t sustain nearly 30 platforms all in the same place. And we may see opportunities come up where it does make sense for us to get involved.”
He adds that for the smaller players, the challenge is how long they can stay unique. “They have to keep reinventing themselves to hold onto that slot, and that tends to make the market a better place for the end investor, to drive up quality and drive forward innovation.”
Some smaller platforms are thinking more aggressively, however. Bill Vasilieff, chief executive of Novia Financial, says: “We’re definitely interested in [acquisition] as a way to grow the business, and there are books of business up for sale, so I could see that happening in the market. We wouldn’t be interested in buying technology companies, we’re happy with the way the business is built, we outsource a lot of our tech to specialists, we think that saves us a huge amount of money and we’re very happy with that model. We’d be interested in buying up books of business.
“I think everything is a takeover target at the end of the day. But we’re not looking to be taken over. We’re looking to build this business up – and float it in due course.”
Proliferation now, consolidation later
Overall, however, acquisition hopefuls like Mr Vasilieff are currently fewer and further between than advisers might anticipate. Aside from the particular dynamics of the platform market, the financial crisis has generally made firms more wary of merging and acquiring, especially when the M&A requires financing from outside.
Ms Mackay remains sceptical of significant levels of M&A activity in the near future, instead suggesting that a few may struggle to turn a profit and so may choose to exit the business.
“I think that a few platforms may reinvent themselves and focus on becoming more marketing and adviser support businesses, rather than transactional or custodial beasts. But generally I think that there will be room for a good number of adviser platforms who are looking increasingly differentiated as they evolve to suit the very different sorts of adviser businesses out there.”
Graham Bentley, head of proposition at Skandia, points out barriers to entry in the industry remain low, and suggests investment distributors might even increasingly launch new platforms into the market. “What you might find is that you have more and more people who are currently distributing or currently asset managers, developing platform capability. So rather than necessarily seeing shrinking numbers you might see increasing numbers of platforms on that basis as people buy in the technology and so on.”
Mr Vasilieff adds that for the moment at least the market will wait and see what happens once the RDR is fully implemented. “A majority of business is still done off platform, so there are a lot of people still to move,” he says. “I’m certain no-one is interested in any corporate activity until the dust settles on that.”