Every once in a while, a deal comes along which could shake up not just a company, but a whole market.
After a string of rejected takeover bids, Hargreaves Lansdown has finally accepted an offer from private equity consortium owned by Harp Bidco, valuing it at around £5.4bn.
This is one of those deals.
The offer provides an immediate cash value to HL shareholders at a significant premium of 54.1% over the pre-announcement share price. This was part of the appeal of the deal for HL, whose chair Alison Platt said it was an “attractive opportunity” for shareholders to realise “substantial value immediately”.
In a lengthy statement published on the London Stock Exchange last week, HL laid out the reasons its management felt it was time to sell to private equity.
Firstly, its ongoing transformation strategy involves “significant” operational and technological changes, which require substantial investment and time – the likes of which a firm can get from a big private equity backer.
HL said the market environment it operates in has become more competitive, with new entrants and evolving client expectations driving the need for innovation and cost efficiency.
The business said that continued success in the increasingly competitive direct-to-consumer (D2C) investment platform market will require “ongoing and significant” investment in digital capabilities, client services, and operational efficiency. The consortium’s resources and expertise are seen as beneficial in addressing these needs.
On top of this, increasing regulatory requirements add to the complexity and cost of operating as a public company. The board believes that private ownership will allow HL to better navigate these pressures.
As a private company, HL will be able to focus on long-term strategic goals without the short-term performance pressures associated with being publicly listed. This would enable a more “effective and streamlined” execution of its transformation plan.
Valuation disconnect
The consortium backing the acquisition has a strong track record of investing in financial services and successfully managing complex transformations.
It is made up of Europe’s largest private equity firm CVC Private Equity Funds, Nordic Capital, which also owns consolidator Ascot Lloyd, and Platinum Ivy – a wholly owned subsidiary of the Abu Dhabi Investment Authority, which manages funds for the Abu Dhabi government.
Christian Kent, a managing director in Houlihan Lokey’s fintech group, says that, with more than 25 private equity-backed wealth management firms in the UK, the move is “not surprising”.
The acquisition, he says, underscores the “valuation disconnect” for wealth managers between public and private markets.
“Over time, we expect to see further consolidation among these firms,” he adds. “And with robust private equity backing, HL could emerge as a pivotal player in this consolidation through M&A activities.”
So, how might the management and strategic direction of Hargreaves Lansdown change under private equity ownership?
Kent believes the platform will likely experience strategic and managerial changes, addressing the structural challenges it has faced in recent years.
However, he says, HL possesses “substantial brand value” with nearly two million active customers.
Competitive pricing
“The private equity business model, with a longer-term focus and strategic expertise, could help HL drive necessary changes outside the constraints of the quarterly earnings cycle,” he adds.
“One area of potential development is the integration of advisory services into HL’s business model, aligning it more closely with other private equity-backed strategies in the sector.
“I’m confident there will also be a focus on improving technology and automation to facilitate a more competitive pricing structure for clients.”
HL currently holds a 29% share of the UK D2C market, considering the full range of D2C services, Platforum said in its recent UK D2C market update.
This is over twice the size of its next competitor, Interactive Investor. Meanwhile, newer competitors Nutmeg and Trading 212 each have only 1% market share.
Platforum head Jeremy Fawcett believes the strategic opportunity for HL “remains immense”.
AI future
“The small minority of people that pay for financial advice is static with regulation forcing the cost of provision ever higher,” he says.
“The megatrends of an ageing population and dwindling government support in retirement put the onus on a broader swathe of society to invest for themselves.”
He argues that new entrants geared to short-term speculation do not look like the answer any more than unfettered access to a vast array of funds.
“More sophisticated use of customer data to get people invested will surely be part of the artificial intelligence future.
“It is a coup for private equity to swoop on the company at the apex of the digitalisation of personal investing.”
Private equity is renowned for its short-termist view – often making investments which last just 3-5 years before deciding to sell on.
The new owners of HL may look for a quick return or take a more ambitious, patient approach.
Either way, Fawcett says, this deal hints at “hidden value” in the retail wealth sector.
Kent believes the deal could have a ripple effect on future PE activity in the wealth and asset management space.
“The listed market has fallen out of love with UK wealth managers,” he says, and PE could hold the key to the future success of the wealth management market.
“We have seen one-way traffic in terms of public market exits, including AFH, Harwood, Mattioli Woods, Nucleus, Curtis Banks, IFG, Charles Stanley and Brewin Dolphin.
“It wouldn’t surprise me if others follow in the future.”