A dream catch

Private equity’s love affair with offshore fiduciary services is hotting up as early investments start to deliver outsized returns 

The trust and  corporate services sector is a private equity dream. A high level of recurring revenues and long-term structures that are costly and difficult to move mean investors are effectively buying into an annuity business.

Ebitda margins are impressive – typically ranging from 20% to 40% – and cash conversion rates are exceptional, due to light capex and the attractive tax treatment of the offshore jurisdictions where these companies commonly reside.

“Businesses in the trust and corporate services space have all the features that private equity loves,” says Flor Kassai, Partner at Inflexion Private Equity, who led the firm’s investments in Jersey-headquartered Sanne and Ocorian. 

“Corporate structures are administered for seven years, funds for 10 years and private client structures for upwards of 13 years,” she adds. “The ‘sticky’ nature of the industry, combined with high recurring revenues, high margins and high cash conversion, makes this sector an attractive proposition.”

Indeed, offshore fiduciary businesses have been a private equity favourite ever since Know Your Customer regulation eased the worst of the reputational risk. 

But while activity used to be restricted to a handful of investments per year, carried out by early movers such as Candover, Hg and Inflexion, a management buyout frenzy has since ensued and private equity is now the dominant form of ownership.

In February this year, Palatine Private Equity made its debut appearance in the sector, acquiring Isle of Man-based SMP Partners. The deal has yet to officially close, but Palatine has already lined up a new CEO, David Hudson, who was formerly the group’s Business Development Director. 

In November 2018, meanwhile, financial services specialist Corsair Capital acquired a majority stake in Zedra Group. Just three years old, Zedra’s network already covers 13 jurisdictions, including both Jersey and Guernsey. 

Indeed, valuations are climbing as demand for these sought-after assets soars. According to Paul Joyce, Partner and Head of London M&A at Mazars, who has advised on a number of deals in the sector, companies that would have gone for between eight and 10 times earnings five years ago are now going for between 10 and 12. “The very best businesses are selling at north of 12 times EBITDA,” he says.

Blockbuster returns

This acceleration of private equity interest is due, in large part, to the superlative successes the industry has already delivered. When Silverfleet Capital sold TMF to Doughty Hanson just over a decade ago, it made six times its money. Doughty Hanson then pulled a planned float late in 2017, when it received a €1.75bn offer it couldn’t refuse from CVC Capital Partners, which has gone on to become the business’s third private equity owner.

Meanwhile, Sanne, and subsequently Intertrust and JTC, have opened up the IPO route and public markets are valuing the sector even more highly than their private equity counterparts. 

“Good cash generation, healthy margins and steady growth mean that these businesses are ideally suited to the public markets,” says Warren Power, Associate at Wyvern Partners. “However, the listed markets require proven performance. Private equity is bolder and came into the sector first, building scale.”    

Private equity interest in offshore fiduciary services has also been piqued by market growth. This growth is being driven by long-term structural trends, including the expansion of high-net-worth wealth, increased cross-border trade and the growth of one of the industry’s core client constituents, private equity itself. 

Not only are funds under management swelling, but private equity businesses, in common with other alternative asset classes, are increasingly outsourcing their fund administration as a result of labyrinthine regulation and expensive technology requirements.

“It’s what private equity would call a GDP++ sector in that it is growing faster than economic activity in general,” says Zedra Group Deputy Chairman Bart Deconinck – who was previously Chairman and CEO at Vistra, which was owned by IK Investment Partners before a sale to Baring Private Equity Asia in 2015. 

Deconinck adds that the sector has also been boosted by recent geopolitical dislocation. “Phenomena such as Brexit, trade wars between the US and China and the Arab Spring have had a lot of people and businesses reconsidering their domiciles. It’s not something we’ve seen since the 1980s and it all creates its own work.”

In addition to market growth and an attractive business model, private equity is drawn to offshore fiduciary services because of the value its interventions can create. Despite a decade of rampant M&A, the industry remains highly fragmented. Consolidation lies at the heart of most private equity investment theses. 

In particular, private equity firms are combining greenfield roll-out and acquisitions to extend trust and corporate services companies’ international footprint, as clients increasingly favour single providers able to handle their global needs. 

CBPE completed 10 acquisitions prior to listing JTC, expanding from six jurisdictions to 18 at the point of exit, according to Ian Moore, a Partner at the firm. Inflexion, meanwhile, completed two bolt-on deals at Sanne and four – to date – with Ocorian. 

Private equity is also focused on professionalising offshore fiduciary companies, which have typically been carved out from banking, accounting and legal parents, often without fully developed internal systems and resources. Firms will frequently supplement management teams, and investment in driving efficiency through technology is also important.

“Over the past 10 to 15 years, as a result of regulation and succession planning, a lot of these companies have suddenly become standalone businesses for the first time,” says Kassai. “One of the things we look to do is professionalise the sales capability, hiring a chief customer officer, implementing [customer management relationship systems such as] Salesforce and giving the appropriate training. We also help the companies become tech-enabled.”

The perfect partnership

For the management teams of offshore fiduciary businesses, private equity also makes perfect sense and can spell the difference between a global growth strategy – and being subsumed by a competitor.

Deconinck adds that companies in the sector are growing so fast that it can quickly become essential to take on outside funding. “Private equity firms are constantly knocking on our doors,” he says. “They understand the business model, they pay decent valuations for those looking to cash out and, crucially, they bring both expertise and contacts.”

This expertise specifically relates to structuring and financing acquisitions but extends to financial management, with a particular focus on working capital, as well as other activities that the management team may not have previously encountered. 

“You don’t want the private equity firm to run your business, that’s your job,” says Deconinck. “But when it comes to things like M&A, rebranding or restructuring exercises, their experience can be invaluable. Their relationships with advisers and their own investor base can also represent a real business opportunity.”

That’s not to say private equity ownership is without its frustrations for managers, who must grapple with a significant increase in the granularity of information demands, for example. There are also concerns about short-termism.

“When private equity first began investing in the sector, there was a temptation to put fees up and cut costs,” says Wyvern Managing Partner Jonathan Smith. “In the early days, a couple of private equity firms made the mistake of running the businesses from a spreadsheet. But while clients can’t up sticks and leave quickly in this industry, they can stop bringing new business. Short-termism damages reputations and long-term growth. These days private equity investors take a longer-term view.”

Indeed, private equity firms active in the industry today appear to have learnt from those that have gone before them. Investors are providing not only the capital, but the expertise required to transform small-scale offshore fiduciary businesses into sustainable, international, multi-disciplinary powerhouses. 

“Private equity firms bring a fresh perspective and the ability to support the growth ambitions of management,” concludes Stuart Layzell, Chief Executive of Ocorian. “They can provide expertise and funding around IT, compliance – whatever it is that your business requires – and when it comes to M&A, they bring not just capital, but sophistication. It’s a valuable partnership.”