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

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. 

I knew I had no interest in doing something that would not help solve the problems in the market.

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. 

I realised the industry treated its customers terribly, it really didn’t care about them.David Ferguson

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.

In March 2022, the private equity company that bought Nucleus, Epiris, sold its holding on to a rival private equity owner, around the time a market consensus had developed that monetary policy would be much tighter in future than it is now.  

Reading the label 

Ferguson is trying the capture the next trend in platform fees at Seccl. He says that the innovation of white-labelling – a term he dislikes as jargon – is specifically the ability to be digital first and not rely on “legacy technology systems”, which means Seccl can charge “less than half” the current fee of many platforms for its service. 

Ferguson says advice businesses are missing a trick with their current digital offering: “If you go into the office of an advice firm, they tend to be very nice, not flash but maybe like that of a boutique hotel.

"But the digital interface is not like that at all, it often looks much less attractive, and I think a client who sees the nice office also expects to have a nice digital experience.”

He speaks with something of a missionary zeal about the issues the industry faces; something that is arguably unusual for an individual who trained to be an actuary, a profession of facts and figures.

When the first platforms launched it was about improving transparency; there is more to do on that, and on fees, and treating clients better.

Ferguson says his experience as a trainee actuary and subsequently in marketing roles within the insurance and investment industries meant he “realised the industry treated its customers terribly, it really didn’t care about them.

"It took me seven years to raise the finance to start Nucleus, but in the end we had some advice firms who came on board as shareholders and clients, about 30 of them still use the platform now, and we had backing from the South African firm Sanlam. The day we floated on the stock exchange, that was an electric feeling."

It was the decision of Sanlam to largely withdraw from the UK market that spurred the sale of the business.

Several of Ferguson’s peers also sold their businesses at around the same time, but it is Ferguson who continues in the UK market. 

He says part of the reason he continues to be active is: “I am at a different stage of life to some of the other guys. But I knew I had no interest in doing something that would not help solve the problems in the market.

"I had thought it would be another start-up, but then Seccl came along. It is a firm at a relatively early stage of development, but it is still cutting perhaps the first three or four years off the time that it might have taken me to get a start-up to this stage.

"I am passionate about fixing issues in this industry, when the first platforms launched, including Nucelus, it was about improving transparency; there is more to do on that, and on fees, and treating clients better.”

The other route for exiting chief executives is to become non-executive directors, gliding from boardroom to boardroom dispensing advice and enjoying the ample lunches associated with the role.

Ferguson dabbled in a few such positions, but stepped away as soon as he joined Seccl, saying that, particularly in relation to financial services businesses, “I think you have to be more involved – the potential personal consequences are greater in our industry so I would want to be more actively involved in any firm than is usually the case for a non-executive.”

Right now Ferguson says his priority is to “make Seccl profitable". Seccl Technology lost more than £3mn in its most recent set of accounts, covering the period to the end of the 2021 financial year. 

Always based in Edinburgh, he is presently commuting between home and Bath, where Seccl is based, and London, where he has a desk at the office of Seccl's largest shareholder, Octopus Investments. 

He says: “I am 52-years-old, but joining Seccl has made me feel 35 again, even if I don’t look it. My son will finish school in 2033, and I hope I am here until then.”

david.thorpe@ft.com