NucleusMar 30 2022

Nucleus CEO: Adviser concerns based on ‘ignorance’ of PE money

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Nucleus CEO: Adviser concerns based on ‘ignorance’ of PE money

Nucleus’s chief executive Richard Rowney has said the fears advisers have around the private equity ownership of the platform are based on “a bit of ignorance”, adding that "all businesses are owned by someone".

Yesterday (March 29), private equity firm HPS Investment Partners announced its acquisition of a majority stake in Nucleus, making Epiris - its previous private equity owner - a minority shareholder.

Advisers have since shared their concerns, which include the possibility of price hikes or operational changes as the new owner tries to turn a bigger profit before they sell it on again.

They also cited the danger of Nucleus becoming "too big" causing service levels to drop, and of HPS ultimately selling it to a product provider.

Unless the new owners share their objectives, there’s a danger IFAs won’t take the risk and go somewhere else.David Batchelor

FTAdviser put some of these concerns to Rowney today (March 30). Acknowledging advisers’ fears more broadly, Rowney said: “I’d put money on it that I speak to more clients and advisers than my peers in the large groups to understand their concerns and allay their fears.

“And a lot of this is, dare I say, a bit of ignorance. A bit of what they read in the press about PE ownership.” Rowney cited James Hay’s progress since Epiris bought it in 2019 to know PE ownership was not to be feared.

“Epiris originally bought the James Hay business three years ago because it did need sorting. It did need a new management team. It did need a restructure. It did need to make a decision on its technology,” the Nucleus boss explained.

“All of those have been done under my leadership,” he said, before quickly admitting; “We’ve still got some way to go on the service.”

Nucleus has a history of adviser ownership, having been formed in 2006 by a group of seven adviser firms but it floated on the London Stock Exchange in 2019.

Before it was sold to a private equity firm, one of Nucleus's owners was South African firm Sanlam which decided to sell as part to scale back its UK arm.

I don’t believe anyone has got service as a true differentiator.Richard Rowney

The James Hay platform is gearing for its move to FNZ technology at the back end of this year. Nucleus currently has a contract with Bravura until 2025 so the priority is to get James Hay’s clients onto the new platform first. 

Since Nucleus became part of the enlarged group, around £5mn has been invested into its service and £6mn committed to platform development for this year.

Rowney said in the past year working with Epiris, the private equity firm "dug deep" whenever he had asked for investment.

'All business are owned by somebody'

David Batchelor, a managing director of Wills and Trusts Wealth and founding board member of the Personal Financial Society, uses Nucleus for some of his firm’s legacy business. 

He said in his experience of venture capitalists, they only had one interest and that was “how much money they can make”.

“They’re only in it for money, and that’s right because it's their job,” he continued. 

“Of course they’re [Nucleus and its new owner] going to say people have got nothing to worry about. But no VC has bought something to hold a dividend value. They buy it to grow and then sell it.

“But unless the new owners share their objectives, there’s a danger IFAs won’t take the risk and go somewhere else.”

For that reason, Batchelor said advisers would be wary of the future uncertainty this new ownership could bring - be that margins changing, prices increasing, or clients increasing to a point where service is affected. “IFAs will always look at the potential downside,” said Batchelor. 

To this, Rowney said: “All businesses are owned by somebody, whether by private equity, by a mutual, or by a larger group. All of them present different sorts of shareholder objectives.

“My argument would be that those that are part of a larger group, if they're an insurance provider, have inherent conflicts. And that’s my point about being independent and solely focused.”

HPS is probably at the longer end of time frames of investment horizons…being five or seven years.Richard Rowney

Earlier this month, Succession - an independent advice business which includes a platform - was bought by insurance provider Aviva for £385mn.

Batchelor speculated it may have to be an insurance provider which can stomach the price of Nucleus once it’s back on the shelf - reports value it at around £700mn.

But some are not so sure even an insurance provider would pay this. “Who will buy the enlarged business in the future? An insurer that hasn’t got into the game yet; L&G comes to mind,” said Bella Caridade-Ferreira, chief executive of Fundscape.

“It has dabbled with platforms in the past and decided that it wasn’t a core part of its business, but it might change its mind when it sees how vertical integration is accelerating and spreading like wildfire. 

However, she doubts an insurer will pay the kind of price Epiris and HPS will be expecting in the future. “We are living through a PE bubble and I don’t think these crazy PE-driven, football-style prices will last.”

Rowney said if you look at the history of HPS’ investments, they tend to be “at the longer end of the investment horizon”, such as five to seven years. 

“They are both a private equity and debt provider. And therefore they're very used to time horizons being five or seven years, as long as the business is growing and paying them a dividend in return,” said Rowney.

No such thing as ‘too big’

Some advisers are concerned Nucleus could get “too big”. The value of James Hay and Nucleus combined sits at around £700mn. The group’s combined assets on the platform sit at around £50bn. It is now mulling acquisitions.

Pete Chadborn, an IFA at Plan Money, does not use Nucleus. But as a non-user considering the platform, he said: “Unless they offer something lower in cost or more additional services, then concern is this: Are they just going to fall into the ‘too big’ category? Big isn’t always best. The first indicator is always going to be service levels. If we see a dip in them, it’s the first sign things aren’t going so well and they’re losing their way.”

Rowney responded: “I don’t think we’ll become too big to deliver a good service. I think the opposite will happen. Of all the things we’re worrying about now, getting too big isn’t one of them.”

Nucleus’ plan is focused around growth. Him and the team believe the bigger they can get, the better they can service advisers and clients.

The sheer volume of transactions the biggest platforms have to process, according to Rowney, mean firms like Nucleus will need to spend a lot more money on “cutting edge” cybersecurity technology over the coming years.

We’ve got enough on our plate for the next year…But I’d be disappointed if we didn’t make any acquisitions in the next five years.Richard Rowney

“If I look at the big themes for platforms over the next three, four, five years, it’s operational resilience from a regulatory perspective. That's their biggest worry and concern. That if a platform were to fail, its cybersecurity needs to protect the volume of transactions and customers it has.

“Just the spend that's required to keep those things cutting edge. I'd much rather have £50bn of assets and a level of financial strength.”

In Rowney’s opinion, no provider has truly cracked customer service. “I don’t believe anyone has got service as a true differentiator. So I think there is a space here for players.”

“This is a market that is consolidating. People are struggling to make investments in technology. We suspect smaller players will decide they can’t keep operating how they are,” Rowney explained, pointing to Praemium’s sale to Morningstar after its Australian owners said it was too hard to scale the business.

On when Nucleus anticipates it will be ready for acquisitions, the platform boss said: “We’ve got enough on our plate for the next year. But I’d be disappointed if the firm didn’t make any acquisitions over the next five years.”

ruby.hinchliffe@ft.com