Jonathan Smith, Partner at Wyvern Partners, examines how market listings are providing a viable alternative to private equity investment in fiduciary firms
The £310 million flotation or initial public offering (IPO) of JTC Group that completed in March this year is, by any measure, a landmark event in the evolution of the Channel Islands fiduciary sector.
Not only is it the latest development in the highly successful JTC story, but it also marks the first time that an openly private client trust administrator has been admitted to the Main Market in London.
Wyvern Partners has been advising on deals within the fiduciary sector since the early 2000s and has seen investment in it evolve greatly during this time. In the early days, there were very few outside investors prepared to invest.
Prior to regulation, third parties steered well clear of the sector and fiduciary businesses were owned almost exclusively by industry participants (such as professional services firms, banks or owner-managers). Regulation, however, changed all that.
In the 15 or so years since regulation, private equity has transformed many companies in the sector from small local players to major global groups. But with the passage of time and the evident success of private equity in the sector, other types of investor have begun ploughing their money in.
High-net-worth investors – often themselves users of fiduciary structures – have been behind a number of investments in the sector. The Ravenscroft Special Opportunities Fund, launched in 2016, was raised largely from high-net-worth investors and has been specifically targeting equity investments in trust companies.
Angel investors, often from a fund background themselves, have been involved in several successful fund administration businesses. These investors are often prepared to take a longer timescale for their investment and don’t need to see such high returns, preferring a lower-risk/lower-return investment.
Globally, however, the largest accessible sources of equity funding are from the listed capital markets. The story there with regard to the fiduciary sector has been gradual. Ten years ago, the ‘mantra’ was that the fiduciary market could never exist under the public gaze of the stock markets. In 2015, however, Sanne pulled off a spectacular listing when the private equity firm Inflexion launched it onto the main London market.
The runaway share price following the IPO demonstrated that the listed equity investor had a wholly different view of valuation to what had gone before.
This type of investor was prepared to value highly those companies that could demonstrate high-quality operations, strong growth, predictability and good margins and cashflow.
Intertrust soon followed on the Amsterdam market – and while there was a ‘hiccup’ in their share price on the back of one set of results, the business has since recovered.
Listed investors seek a different risk/reward profile than private equity investors. Whilst private equity investors seek internal rates of return of 25 to 30 per cent – often achieved in part through debt leverage and rapid growth through acquisitions – listed investors are less comfortable with such high debt levels and more highly value predictability and an ongoing dividend yield. It’s entirely natural, therefore, that as a sector develops, other equity investors are attracted.
These IPOs, however, failed to herald the opening of the floodgates, and private equity has remained the prime source of equity funding in the sector over the past three years. TMF courted the listed markets on a couple of occasions, but ultimately chose private equity for the third time.
Several Crown Dependency businesses have explored flotation only to be told another mantra that emerged following Sanne and Intertrust – ‘the listed markets will not accept companies that are too private client’.
But in the fully transparent, compliant, post-FATCA, post-CRS world, many industry practitioners point to the lack of logic in this view. Why is a private client business so different to a corporate business in its attractiveness to investors? Both operate in a world of transparency in fully compliant, regulated markets and have similar investment characteristics.
The listing of PraxisIFM on The International Stock Exchange last year was the first business to list setting out its stall as a balanced fiduciary business operating in private client, corporate and fund administration. JTC has successfully taken things a step further and set out its stall on the London Market. It won’t be the last.