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'Private equity firms may get squeezed by higher interest rates'

'Private equity firms may get squeezed by higher interest rates'
(Raquel Baires/Unsplash)

The platform world has been rocked by an influx of private equity money over the past 12 months, with many businesses changing hands backed by private equity cash.

But David Ferguson, founder of Nucleus and now chief executive of Seccl, says rising interest rates may put their business models under stress.

He says: "I would worry about the situation where the private equity firms that have bought platforms with debt are faced with higher interest rates on the debt, and lower fees.” 

Adviser platform fees are going to fall by as much as half in the coming years, which is particularly challenging for those platforms that were bought using debt, he adds.

Ferguson is well placed to comment, having launched Nucleus as one of the earliest adviser platforms at the start of the millennium, before as chief executive, launching it on the stock exchange, and eventually selling it to private equity owners. 

 

 

 

 

 

He was one of a number of individuals, including Bill Vasilieff of Novia and Ian Taylor of Transact, who effectively created the modern platform industry. All have now departed from their original companies, though Ferguson is rare among them in continuing to be active in the market as chief executive of Seccl, a business that provides white label platforms to the advice market, but is also is a technology provider to companies outside the industry.

“One of the reasons I started up Nucleus was that I saw the crazy level of fees that were being charged by the incumbent [insurance companies] and wanted to do what is right.

"The fee level now on platforms is around 20 basis points, but the direction of travel on fees has been clear for years, and I can see them being lower by a third or a half within, say, five years."

The prevalence of private equity companies in the wider financial services industry has been driven by the cheap debt that has been central to the dynamics of the global economy since the global financial crisis.

Private equity funds have thus been able to build up substantial 'war chests' of capital in need of deployment. Highly valued public equity and bond markets meant private equity funds began to look to unquoted companies in search of returns.

Businesses in areas such as platforms, the advice market and asset management appeal to the private equity buyer because of the fee-based recurring revenues. 

This revenue can be used to pay the interest on the debt, and generate an income for investors in the fund, before the private equity company subsequently sells the platform to pay off the debt and return cash to investors. 

Higher interest rates on the debt refinancing means that the private equity businesses will face the prospect of either extracting a higher level of income from the platforms, at a time when AUMs may be falling as a result of the fall in equity and bond prices, or selling the businesses on quickly in order to raise the cash to pay off the debt.