When Transact floats in March it will not just be its current shareholders looking closely at how the market receives the platform company.
Rivals in the wrap space will take the reception of the scheduled initial public offering (IPO) as a sign of where the market is going. It may also indicate whether they can achieve something similar.
‘The IPO will, for the first time, give a very visible sense of how the market views these companies,’ said Mark Polson, principal of the Lang Cat consultancy.
‘It will be absolutely fascinating and will certainly be watched very closely in lots of boardrooms up and down the industry. It is a watershed moment for the sector.’
For many years Transact has promised shareholders liquidity in the form of a float. Now those who have invested in Integrated Financial Arrangements, the holding company behind Transact, hope to be rewarded with a high valuation of their shares.
‘Since we started in 1999, the goal was always to let shareholders get their money back at some point,’ Transact chief executive Ian Taylor (pictured below) told New Model Adviser® earlier this month. ‘We decided an IPO was the best outcome for all parties involved.’
Rather than create new capital with the IPO, Integrated Financial Arrangements has spoken to its 35 largest shareholders to ensure that at least 25% of the existing company shareholdings will be made available on the market. And existing shareholders look set to benefit from a high valuation of the shares.
Early signs are good for these shareholders. Transact has built a reputation as a safe bet for growth over the past few years. In the year ending 30 September 2017 the platform made a pre-tax profit of £37 million and grew assets under administration to £29.7 billion. Add a policy of paying 65% of pre-tax earnings to investors in the form of dividends and Transact looks like it could be a popular pick for investors.
However there are currently few indicators of how a platform company will be valued in a public listing.
‘We bandy around ways of valuing these businesses but they do not fit squarely into the technology bucket, they do not fit squarely into an investment bucket or a custody bucket,’ said Polson.
Stuart Lucas (pictured below) was one of the original shareholders of Transact. He responded to earlier demand for liquidity by setting up Asset Match in 2012. The website allowed shares in Transact to be traded through online auctions, a process that has since expanded to some other non-listed companies.
Although Transact shares have traded on Asset Match for as much as £150 since 2016, Lucas said there was not really a good comparison for the platform company on the wider market.
‘It is a difficult company to put in a box of comparators but they will probably use Hargreaves Lansdown and Curtis Banks. [Trust and fund administration service provider] Sanne Group is actually one of the closest fits to Transact compared with the other two. I don’t want to see [Transact holding company] Integrafin sold at half the price of Sanne Group. That is just a giveaway,’ he said.
Despite the lack of comparability with other listed companies, Lucas did think Transact could learn from Hargreaves Lansdown in one aspect: how much of the company is offered in the IPO.
‘Initially the brokers proposed floating 35% of the company but, being reluctant to sell more than was necessary, I told them to go to hell,’ he said. ‘In Hargreaves Lansdown’s case it floated 25%, and that seems fair.’
Lucas said he expected the shares to be priced around £500 when the IPO takes place. But this could jump around 10% to 20% in value.
Putting down a marker
When the picture becomes clearer on Transact’s value, other platforms will consider what it means for them, Polson argued.
‘In terms of ramifications for the market, right now there is no particularly logical way of valuing these [platform] businesses,’ he said.
In 2016 two acquisitions suggested how the market values platform businesses. Standard Life bought Elevate from AXA for £31 million, and Aegon bought Cofunds from Legal & General (L&G) for £140 million.
Polson said neither deal was able to really set the value for a platform business though. Elevate was a ‘distressed sale’ after French insurer AXA made the decision to pull out of the UK life and savings market entirely. Meanwhile Cofunds was sold because it needed investment in its technology, which L&G was unwilling to offer. One analyst has suggested Aegon may need to put as much as £240 million into the platform to upgrade it.
‘The investment by Aegon in Cofunds could eventually be as much as the cost of purchase,’ Polson said.
Queueing for the exit
Independent platform consultant Stan Kirk (pictured below) said Transact’s IPO will put pressure on other platform companies whose shareholders will be watching and asking when they will be able to realise value.
‘It raises some difficult questions for the independent platform market about what the exit strategy is for the shareholders.
‘How do those Nucleus shareholder-IFAs ever exit for example? Nucleus is seven years younger, but the question will be asked.’
Kirk added that watching Transact events unfold will lead to questions about the profitability of other platforms.
‘There are a lot of questions for shareholders of other platforms: “how come our profits are so much lower and therefore why is our value so much lower?”
‘[The IPO] will highlight the fact that Transact is, and has for a long time been, very successful.’
Kirk said overspending on technology is holding back competitors, but companies that do not have this burden could feasibly follow suit and go public in the future.
‘I would have thought the IPO would raise questions that should have been asked a long time ago by platforms that are paying a fortune for their technology. This includes anyone using [technology providers] FNZ or Bravura.
‘Their answer [to the problem] is that is why they have gone into vertical integration, making money from the whole value chain, because they cannot make money just from the platform,’ he said.
Under no pressure
Novia is one platform company that has not committed huge amounts to technology and has begun to post a profit. Chief executive Bill Vasilieff, who previously told New Model Adviser® he would consider a float, said there was no rush to commit to this following Transact’s decision.
‘However you look at Transact it is a big success,’ he said. ‘We are still growing, our profits over the next few years look relatively healthy so we would still rather wait until we can get more value.’
Vasilieff added that a good result for Transact will encourage Novia shareholders to believe a good value can be realised on their investment.
AJ Bell is another comparable independent platform in the sense it is not owned by a life company or private equity.
However some of the largest institutions in fund management already hold stakes in AJ Bell. The biggest stake is held by Invesco Perpetual though, which has 37%. Neil Woodford’s Woodford Investment Management holds 8% and Seneca Investment Management holds 3% with the names of other shareholders not disclosed. Chief executive Andy Bell remains the second largest shareholder in the company with 28% of the shares.
A spokesman for AJ Bell said the company was not under pressure to float following the Transact announcement.
‘Our focus is on continuing our strong organic growth by providing high quality service to advisers and customers,’ he said.
‘Our senior team remains fully committed to the business and is under no pressure to consider exit strategies. But, naturally, it will always look at ways to develop and grow the business,’ he said.
Even if Transact is not followed immediately by others, a successful float will prove something about the platform market. Abraham Okusanya (pictured above), director of consultancy FinalytiQ, said it throws into question the argument that being owned by a large life company or asset manager is the best way to thrive as a platform.
‘This IPO by Transact is a positive thing not just for Transact but for the rest of the market,’ he said. ‘This is the first privately owned platform that has grown mature enough to go public. That is really good.
‘It goes to dispute much of the argument about deep pockets, and the argument only [platforms owned by huge parent companies] can scale up.’
Transact has not rushed into floating on the stock market. But waiting for the event to come around has not dampened interest in how it will pan out.
The event will set a precedent for how the market values independent platforms. If things go according to plan, it could be responsible for increasing pressure from shareholders in other platform companies looking to realise value in the same way.