Is Transact an obvious private equity target?

Ruby Hinchliffe

Ruby Hinchliffe

When a company’s share price falls dramatically over the course of a year, particularly in markets preoccupied by mergers and acquisitions, it is not uncommon for murmurings to start about it being a potential acquisition target.

On the face of it, Transact fits this mould. Arguably one of the industry's greatest success stories, the company operates a profitable, platform-only business model and advisers love it – a rare feat in an industry so held back by bureaucracy.

But love rarely comes into stock market value. Over the past 12 months, following the exit of its founder Ian Taylor - who still holds a 3.5 per cent stake in the business – the share price of the platform's owner, IntegraFin, has fallen by around 50 per cent.

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The company floated on the stock exchange in March 2018, pricing shares at 196p. Towards the end of last year, the share price had sat at 600p. This week, those shares are now worth around 264p. 

Meanwhile, rivals such as Nucleus, Novia and True Potential have all ended up in the hands of private equity. In Nucleus' case changing hands not once, but twice.

So, at such a knockdown price, is Transact next in line to board the private equity bandwagon?

Looking in detail at the financials, I would suggest not.

Rising costs

In IntegraFin's latest accounts, the company projected total group staff costs to rise 16 per cent (£6.7mn) during 2022 and 2023, before dropping back down to 9 per cent in 2024.

By 2025 it expects hiring levels to start decreasing, before reaching immaterial levels in 2027.

The company’s regulatory and professional fees are also expected to increase by 28 per cent this year, pointing to a broader narrative of rising rather than decreasing platform costs.

The platform is investing now in new staff with the hope of being in a better position in three to five years.

“While long-term growth might present a great opportunity, investors – particularly private equity investors which aren’t in it for long-term ownership – don’t see this,” one analyst told me.

The average holding time of a private equity deal is usually anything from three to five years. Though if Epiris's exit as a majority shareholder from Nucleus after less than 12 months is anything to go by, this average could have shrunk significantly in recent markets.

Going by the general average, if a private equity firm swooped in to buy Transact now it would likely be gone before feeling the true benefits of its investment.

With Transact saying its revenue is likely to take a hit this year, a private equity buyer would want the platform to control costs rather than increase them. After all, it is costs that drive down private equity's big money maker – profit margins.

Speaking with Transact's chief executive, Jonathan Gunby, this week, he said the slow down in inflows across the market will have made private equity investors more cautious.