When Peter Hargreaves and Stephen Lansdown launched an investment site in 1981, the aim was to unleash a retail investing boom by selling funds and stocks directly to customers, bypassing costly financial advisers.
Some four decades later and their site, Hargreaves Lansdown, is a FTSE 100 company managing £155bn of assets on behalf of about 1.9mn customers, making it the UK’s largest self-service investment platform.
But despite its success, recent share price weakness has meant Hargreaves Lansdown is now on track to be taken over by a group of private equity funds, less than two decades after it floated on the London Stock Exchange.
The company announced on Friday that it had agreed to a cash offer from CVC Capital Partners, Nordic Capital and Abu Dhabi Investment Authority of £11.40 per share, valuing it at £5.4bn. At its peak, in 2019, Hargreaves Lansdown shares were trading at £24.
Hargreaves is backing the bid and has agreed to sell half his 19.8 per cent stake for proceeds of £534mn, while keeping the remainder in the new unlisted company. Lansdown, who also backs the deal and plans to sell his entire 5.7 per cent stake — worth £309mn — told the Financial Times it was a “bittersweet” moment.
But the acquisition has raised questions over the future of Hargreaves Lansdown, which faces intense competition from a new generation of digital platforms that have put pressure on its fees. Analysts believe the site will be better placed to reduce its prices and invest more in its technology without a backlash from shareholders.
Some customers have doubts, though. “Even small investors have a bit of knowledge of private equity and may well not be happy about the change,” said one of them, Russell, who said he had an Isa and pension product with the company. “There are other platforms and it is not difficult to switch if there are concerns.”
The deal is the latest in a series of private equity takeovers in the UK retail investment and wealth management sector in recent years. Analysts say wealth managers have proved attractive targets, offering capital-light businesses and growth prospects at a time when valuations of UK stocks have fallen. The burden of increasingly tough regulation on the sector has also helped to drive consolidation.
Other recent deals include private equity firm Cinven taking a majority stake in wealth manager True Potential in 2021 and Pollen Street’s acquisition of Mattioli Woods earlier this year. Permira has also been on the acquisition trail over the past decade, buying wealth managers Tilney, Bestinvest, Towry, and the professional services firm Smith & Williamson.
“With over 25 private equity-backed wealth management firms in the UK, this move isn’t surprising,” said Christian Kent of investment bank Houlihan Lokey. “It wouldn’t surprise me if others follow in the future”.
The private equity firms snapping up Hargreaves Lansdown, which dominates about 40 per cent of the UK retail investment market, believe it offers a significant growth opportunity, as regulators and policymakers try to encourage more people to save into pensions and other tax-efficient products.
But the firms said Hargreaves Lansdown needed to be modernised. They will spend the next six months reviewing the business to see how it can improve the company’s technology and digital offering for customers — which could lead to a number of job cuts.
Fees, some of which are now more expensive than rivals, could also be reduced. The private equity firms said the sector was an “increasingly competitive environment where, in areas, competitors are now offering propositions approaching that currently offered by HL and at lower cost”.
Although Hargreaves Lansdown still controls the lion’s share of the market, rivals AJ Bell and Interactive Investor have piled on pressure since emerging in 1995. On Friday, Hargreaves Lansdown reported a 13 per cent drop in net new business to £4.2bn over the past year.
Andrew Lowe, analyst at Citi, said the bidders were “likely to pursue fee cuts” which would help Hargreaves Lansdown “become significantly more competitive under private ownership”.
Hargreaves Lansdown charges 0.45 per cent annually on balances of up to £250,000 across most of its accounts, compared with AJ Bell’s 0.25 per cent. Hargreaves Lansdown also levies a share trading fee of nearly £12 for clients dealing up to nine times a month compared with many of its peers which charge about £4-£5, Lowe said.
“We believe that HL must do more to simplify its pricing and demonstrate value to customers, by focusing on reducing these headline fees,” Lowe added.
Rich Mayor, a senior analyst at The Lang Cat, a platform consultancy, said Hargreaves Lansdown’s charges have been “middling-to-higher”.
“Platform charges clearly haven’t been a barrier to Hargreaves Lansdown historically, but it is fair to say there’s much more competition these days from the likes of AJ Bell, Interactive Investor and Vanguard to name a few,” he said.
Nordic Capital Partners, one of the private equity firms involved in the deal, has previously owned a similar business in Scandinavia, called Nordnet. It was taken private in 2016 by Nordic Capital and the founding family Öhman Group, before being relisted in 2020 on the Swedish stock exchange.
During its time under private ownership, Nordic invested about €100mn into Nordnet’s technology as well as its digital services for clients. The investment site had about 567,000 customers in 2016, which grew to 1.2mn when it was relisted. Its customer base had grown to over 1.8mn by the end of last year.
One analyst said that such growth potential meant Hargreaves Lansdown had probably been sold too cheaply.
“It is the leading platform and it has been sold at multiple lower than its peers despite its apparent bid premium,” he said. “Management has given an upbeat outlook. But it is going out for a whimper on the first approach — it is disgraceful.”
Hargreaves was also critical in June when the company’s board announced that it would support the takeover. “It’s a disgrace that it’s come to this,” he said at the time. “It was classified as one of the best-run companies in the UK 10 years ago.”
Other shareholders will miss out on the opportunity to reinvest in the private vehicle being offered in the deal, as they are unable to hold unlisted stock.
Earlier this year James Hanbury, a fund manager at Lancaster Investment Management, sent a letter to Alison Platt, the chair of Hargreaves Lansdown, debating the fairness of the proposed deal and noting that only “a small number of shareholders” would be able to remain invested.
Hargreaves Lansdown could come back to the market in the future, much like Nordnet. Other private equity firms have also sought sales, with JC Flowers selling Interactive Investor to asset manager Abrdn in 2021 for £1.5bn.
For now, Hargreaves Lansdown, a pioneer of selling public stock directly to individual investors, is on track to be the latest London-listed company to be taken private.
