Private equity firms’ targeting of the fund distribution platform market is likely to continue due to the prospect of further consolidation in the sector.
This is the conclusion of a report conducted by research firm Cerulli Associates which looked at the growing number of deals between private equity firms and UK-based platforms.
However, PE firms must be prepared to invest over a longer-term horizon than normal if they are to make a profit.
Private equity ownership of fund platforms has increased from 2% to 15% of the UK market in the last five years.
One of the most recent deals involved the sale of Standard Life Aberdeen’s Parmenion platform to Preservation Capital Partners for £102 million (€119.2 million).
According to Cerulli, this trend is likely to continue despite an apparent conflict between advisers’ focus on long-term returns and the private equity sector’s traditional pursuit of short-term gains.
The attraction is the prospect of further consolidation in the platform market as small and mid-sized players struggle to keep up with competition, regulatory requirements and the demand for scale, states Cerulli.
“With pricing under constant pressure, smaller players are increasingly becoming inefficient, making them targets for consolidation and creating potential for private equity to build scale through mergers and acquisitions,” said Justina Deveikyte, director of European institutional research at Cerulli.
Platforms also deliver relatively higher returns on capital than any other sectors thanks to high customer stickiness and low capital requirements. Cerulli’s report shows that a number of platforms managed to grow their assets under administration during 2020.
However, PE firms may have to look beyond their typical short-term investment horizon if they are to succeed in the advised platform space, states Cerulli, citing the day-to-day mechanics of operating the platforms and the dual challenge of technology and regulatory requirements.
“There is clearly a reward to be gained for private equity firms venturing into platforms, but they will need to be patient and prepared to commit,” said Deveikyte.
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