Over the past few weeks, we have seen yet more private equity investment in the platform market, adding to the long list of firms who have been acquired completely or seen significant PE investment in the past 12 months – such as M&G acquiring Sandringham, True Potential being sold to Cinven, and a whole string of others.
So why is this happening? The notable acquisition of Nucleus by James Hay back in February created a platform business with £45bn of assets under administration, and technology was cited as one of the main reasons. So why has technology become such a key factor in these massive corporate deals?
In this first in a series of articles exploring changes in the advice and wealth management market, I’m going to cast my view on recent explosion of private equity investment in the platform space, and the opportunities and challenges it creates for both the platforms and the customers they serve…
Why the sudden rise in private equity investment?
Since the pandemic hit in early 2020, there has been a sharp rise in private equity (PE) firms stepping up to support their portfolios. Many firms – especially smaller ones – would possibly not have made it without these injections of capital. But what does the rise of private equity mean for the market?
The good news – consumer demand is increasing
The world is changing fast – so new generations of young investors are looking for increasingly sustainable and cost-efficient ways to build wealth. Young people have a rising interest in financial education and freedom, helped along by social media (the FinTok trend springs to mind) as well as open banking apps like Monzo, and investment apps like Chip and Wombat that are popular with Millennials and Gen Z users.
At the same time, older people typically have more time and money at their disposal – plus they’re living longer! This inevitably means they need more flexible pension and drawdown solutions to manage their retirement assets over a longer time period than generations gone by. Their needs might be slightly more complex than their younger counterparts, but there is certainly no shortage of demand.
These demographic and social changes have become catalysts for massive investment opportunities, which PE firms have seized upon.
The bad news – businesses are struggling to adapt
Investment platforms have had to adapt quickly to extreme shifts in lifestyles and business practices over the past 18 months – particularly in terms of their online offering. Most providers and wealth management firms are still reliant on traditional business practices, face-to-face sales, call centres and large, paper-driven admin teams. Many firms have suffered increased costs and low profit as a result of this inefficiency.
Many platforms still have low margin business models and massively disproportional technology costs – so it’s no wonder they’re struggling to deliver healthy profits.
So, the market is struggling to meet the demands of its consumers – partly because it’s still suffering the hangover of embedded inefficiency and clunky, outdated tech. Yet, demand for services is building, and will continue to build over the coming years…
Elaine Chim, head of private equity, Americas and APAC at Apex Group estimates firms around the world are sitting on a ‘mountain’ of nearly $2 trillion in dry powder (capital by investors that has not yet been invested).
All this creates the perfect storm for PE investors who see an opportunity to turn these firms around and capitalise on the growing demand – hence why firms are changing hands, with many cashing in and selling up.
So what’s the upshot?
I agree that this combination of factors creates a huge opportunity for firms across the platform market – as long as they’re smart enough to avoid the pitfalls of the past. If they want to win out, they’ll need to invest in technology that will allow them to thrive (not just survive!) over the coming years…
Consolidation can be a great way to ensure better economies of scale and increase profit, but it comes with massive amounts of risk and effort to achieve the migration of complex customer books from one system infrastructure to another. The examples of migration pain and delays are well documented and very costly for all involved.
I think it’s only right that we challenge the types of technology we are using as an industry. Tech may not be second nature to some of us, but it really is on our shoulders to ensure our industry is fit for the future, and not just the PE firms’ three-year horizon.
Is your firm keeping up?
Key questions to ask about your tech…
- Are your solutions using outdated software (i.e., is it more than 20 years old?)
- Are your systems cloud-based, which enables better scalability?
- Are you creating bespoke instances for each firm, which can be hugely inefficient?
- How often does your software release upgrades? If it isn’t updating at least weekly, you have a problem!
The greatest challenge for these firms will be to ensure that the desire for short-term growth doesn’t come at the cost of long-term scalable infrastructure which is built around client needs, and creates sustainability for all those involved.
This all depends on whether these private equity firms have fully understood the required investment levels needed to bring them up to the required standard so they can remain competitive.
After all, the market is not standing still. Competition is tougher than ever, and an online tool that allows investors to get moving quicker than with traditional methods is always going to win out in today’s fast-moving world. There is no longer a need for stakeholders to be in the same place at the same time to get deals moving. There is a need for efficiency, integration and online platforms that deliver everything in one place and in real-time.
Only time will tell if PE firms have bitten off more than they can chew. In the meantime, advisers must decide whether they’re going to rest on their laurels and wait for these firms to combine and re-group – or if they are going to break away from the past and move towards a brighter, more integrated future.