Much has been written about the rising influence of private equity in the financial planning and platform sectors. In case you have not had enough, here is my take – as someone who has had various exposure to the sector over the years.
First up, it is probably worth saying that there is no ownership model that is universally right or wrong – whether that is for advice firms, platforms or indeed any business operating in any sector. All models can be good, bad or indifferent – and this can change over time.
Just as Prince had a good run before his relationship with Warner Bros broke down, so a platform may have a great run as a public company before things take a turn for the worse.
What, then, is the key driver of success, or failure? For me it all comes down to alignment. Where the interests of a company’s clients align with those of its shareholders – whoever they might me – good outcomes tend to flow. And vice versa.
If we frame the issue in this way, the question becomes to what extent PE owners have helped to foster – or hinder – this alignment. Let’s take the advice and platform sectors in turn.
PE has been an enthusiastic backer of financial planning firms in recent years, seemingly attracted by the recurring revenues that arise from a combination of the fee-based model and strong client loyalty.
Maintaining alignment between client outcomes, adviser experience and shareholder returns feels eminently achievable.Now, various versions of this story will emerge over the coming years, but it seems to me that having professional capital is a good thing in this sector.
Of course, some will push it too far, but for many businesses it seems a perfectly viable route to better governance, further growth capital and the many other benefits that can flow from being part of larger business.
The reason it tends to work? You guessed it – because maintaining alignment between client outcomes, adviser experience and shareholder returns feels eminently achievable.
That’s partly because there is substantial value to be created by squeezing others in the chain – most notably platforms and asset managers – all while delivering something better for clients. Everyone – or everyone that matters, anyway – can stand to win.
But there is probably a slightly different story in the platform space. Here, things are looking rather more tired.
Many of the PE owners who have entered the market seem, on reflection, to have done so at the top, with the pricing assumptions that underpinned their deals facing significant challenges.
Following our collective pandemic experience, clients’ digital expectations have gone through the roof. This creates a major investment challenge for platforms operating on legacy technology.
What might have looked like a one-way bet of recurring revenues, substantial sector growth and 30 per cent to 50 per cent margins now looks a lot less attractive.
Pricing is under massive pressure, many platforms are experiencing net outflows and the costs required to maintain relevance (or find new efficiencies) are rising.
In public markets, this results in the share price taking a bashing – the market-leading adviser platform now trades on about 1.5 per cent of assets under administration, which is down from 4 per cent – but the outcome is less clear for PE-owned firms.
Outcomes will vary, but with crashing inflows, lower forecast exit multiples (see Integrafin, AJ Bell and others) and squeezed margins (driven in part, as we have seen, by the flow of PE money in the adviser sector), much will depend on owners’ investment horizon – especially given the diminishing appetite for PE-to-PE deals.
Who knows how this all plays out. But whatever happens, alignment of interest (and incentives) will surely be the defining factor.
David Ferguson is chief executive of Seccl. He previously founded and led Nucleus since its launch in 2006 until its sale in 2021 to James Hay
