It's a private affair

Written by: Dave Waller Posted: 06/07/2018

City_PE investPrivate equity investment in Channel Islands fiduciary firms shows no signs of abating, so will the positive sentiment it creates drive the industry to new heights? 

Business is no place for the faint of heart these days. Take a company like FitBit – having helped pioneer wearable health tech, with nifty wristbands and smartwatches, the American upstart has since had to face giants such as Apple and Samsung, who have waded in using their vast resources to claim much of its territory. 

Thanks to support from various private equity groups, however, FitBit was able to fight back – beefing up its coffers and acquiring other companies to take its own offering up a league. 

Its struggles are far from over, but without that private equity muscle in its corner, FitBit would have no doubt collapsed in a wheezing heap long ago. 

Private equity has often been a force stepping in to change a company’s fortunes. And one area in which it’s been prevalent is the offshore financial services sector. Over the past 15 years, deals have been inked everywhere, from fund administrators to corporate services companies and private client providers.

One deal partner, who has led a series of transactions in the space, describes the sector as a “private equity investor’s dream” – financial services offers a vast global market that’s steadily growing. 

It’s also heavily fragmented and crying out for consolidation. And it boasts the cash flows, high margins, sticky clients and predictable, recurring revenues that private equity loves. 

To cap it all, the Channel Islands have a reputation as a safe investment. “It began with the onset of regulation in the early 2000s,” says Jonathan Smith, Partner at Wyvern Partners.

“Before that, the system was too opaque and you couldn’t see who the clients were. No one would invest in the Channel Islands. But the introduction of Know Your Customer requirements took away that final barrier, and the Channel Islands’ fiduciary sector was suddenly open for investment.”

Deal makers

Indeed, in the past 15 years, private equity has been waving its wallet all over the financial services sector, and the deals are only getting bigger. When Candover bought Equity Trust from Insinger de Beaufort, the Anglo-Dutch private bank, for €182.5 million in 2003, it seemed ground-breaking. By 2017, when CVC Capital Partners was buying TMF Group for a whopping £1.75bn, it had become mainstream. 

In the Channel Islands, meanwhile, Vistra and JTC Group are just two of the companies that have been transformed by private equity, exploding from small bases to large global businesses in just a few years. The latter had its IPO on the London Stock Exchange earlier this year – something not likely to have happened without initial private equity backing.

It’s easy to see the appeal – private equity’s capital and guidance can help stimulate growth and expansion, allowing a business to become more professionalised through better systems, and better equipped to pursue acquisitions, allowing it to sell existing services to new jurisdictions or branch into new service areas.

Consolidation can also help a company navigate costly regulation, by providing economies of scale. Owner-managers, meanwhile, are often drawn to the idea of using someone else’s capital as a means of de-risking their business – or as an enticing way out when the time is right.  

“Private equity deals are leveraged by bank debt and loan notes. Management invest in the equity – if the company doubles in size, the management’s share will go up a lot more than twice,” says Smith. “Lots of people have made their fortunes on private equity deals.”

Yet mention of private equity may not elicit warm smiles everywhere. One common criticism is that private equity backers, for whom the lifecycle of a typical investment is a mere three-to-seven years, are too happy to risk pushing prices, margins and acquisition strategies hard, and may fail to integrate new acquisitions as well as they should – with a clear, negative impact on company culture and service levels. 

However, that’s changing. These days, private equity players are coming in with a better understanding of the businesses they’re buying.

“They realise that if they don’t invest in the people and allow management to do their job of running the business, they don’t get the benefit of key value drivers such as organic growth and that which comes from fully integrated acquisitions,” says Mark Pesco, CEO of First Names Group. “So they won’t be able to create and maximise value when it comes to exit.” 

Pesco should know. First Names was acquired by AnaCap in 2012, a deal which, according to Pesco, has helped put First Names in the strong position it’s in today. “Without private equity, we wouldn’t have been able to move to new premises, bring senior hires on board, develop our business, launch innovative training plans, or invest significant money in IT and other systems,” he says. 

“We wanted to demonstrate to the market that you can bring a private equity backer into a group and still have a business that’s totally focused on investing in people. And in five years we’ve completed 15 acquisitions but also had double-digit organic growth – because they’ve allowed us to be just that. Private equity has been really positive – allowing us to grow the business and safeguard it for the future.”

State of independence

First Names is now one of the largest players in the increasingly consolidated sector. But for all the consolidation among bigger businesses or regional players, there are those for whom private equity simply doesn’t suit their needs. In fact, it remains perfectly possible for boutique firms to thrive as independent businesses. 

“There are highly specific aspects of the financial services world where it’s possible for an entity to bring itself into the spotlight despite being quite small,” says Wayne Atkinson, Group Partner, Corporate and Commercial at Collas Crill. “You just need something that distinguishes you in the marketplace – dealing with IP rights for high-net-worth individuals, for example, or green investment expertise, or knowledge of aircraft or shipping. 

“There are firms that have yield in those areas that use it to become a significant proposition. And being more focused reduces the need to keep up to date with lots of areas of regulations.”

 Michael Betley is Chairman of Guernsey’s Trust Corporation International, which is currently celebrating 15 years of staunch independence, despite plenty of approaches over the years. 

He insists that his firm has won a significant amount of business precisely because it is independent, because many advisers and clients prefer the sense of security and familiarity it delivers. 

But, says Betley, forces will eventually conspire to make any company seek scale in order to compete with increasingly international rivals. “The business that wants to maintain control has to find patient capital providers,” he says.

“Whether that’s family offices, or even clients of private client firms who’ll lend or take a small stake because they want to support management and help it achieve its strategic aims. Independents don’t have to surrender to private equity, but it’s only a matter of time before the imperative issues reach the surface.” 

As Betley suggests, capital can be acquired in a variety of ways these days. Trust Corporation has favoured harmonious mergers with like-minded organisations operating in complementary jurisdictions or service lines. 

But there are other options, as demonstrated in 2015, when Jersey-based corporate and fund administration provider Sanne listed on the Main Market of the London Stock Exchange (LSE). Sanne’s example was soon followed by PraxisIFM on The International Stock Exchange and by JTC on the LSE, creating, in Betley’s words, a “new benchmark”. 

While an IPO still requires a certain scale, management can use it to inject capital into their business while keeping greater control than selling a majority stake to private equity. It is, therefore, an increasingly compelling option. 

“Four years ago, there weren’t really any listed trust companies,” says Jonathan Smith. “Now there are four. And the stock market takes a wholly different approach to valuation, which often means attributing far higher values than private equity does. There’s still a role for private equity, and many companies will still choose PE over an IPO, as TMF did. But now there are other alternatives.”

Consolidation trend 

While the means of raising capital may vary, one thing is for certain: we’re going to see further consolidation in what remains a fragmented sector. Guernsey has 150 trust companies, for example; Jersey more than that. These businesses – and their owners – are maturing and seeking strategic options or exits. 

And, while IPOs will become more commonplace, the volume and scale of private equity deals is only going to grow too – with independently owned businesses and larger groups already backed by private equity, appearing up for grabs by other, bigger players. 

“Private equity firms are already significantly leveraging the financial services sector,” says Wayne Atkinson. “And there will come a time when they need to exit and we’ll see an ongoing cycle of deals as a result. The interesting thing is what happens to those companies next? We may see some business manager-led or staff-led buyouts; we may see private equity firms coming in again.”

There are plenty of interested funds waiting in the wings to do deals, while other funds are coming up to exit, which means more companies returning to the market. Even seismic geopolitical shifts such as Brexit won’t stop the cycle, as it may simply provide more spoils for private equity, as management teams look to safeguard themselves against the uncertainty. 

With successful private equity players drawn back to the space, others coming in because it clearly works, and a handful of CVC-style giants performing mega-deals, the Channel Islands’ private equity merry-go-round looks set to keep turning.

The PE merry-go-round

Here are just some of the private equity highlights in the Channel Islands over the past 15 years.

• May 2003: Candover buys Equity Trust from Insinger de Beaufort for €182.5 million

• Aug 2009: IK Investment Partners acquires majority stake in Vistra

• Sept 2010: Candover sells Equity Trust to Doughty Hanson, to merge with Doughty Hanson subsidiary TMF Group 

• Mar 2012: CBPE Capital invests in JTC Group

• July 2012: AnaCap Financial Partners buys First Names Group 

• Sept 2013: LDC backs MBO of Equiom

• Feb 2014: Electra Partners buys Ogier Fiduciary Services for £180 million 

• May 2015: Baring Private Equity Asia acquires a majority stake in Vistra Group

• June 2016: Electra Partners sells Elian, formerly Ogier Fiduciary Services, to Intertrust for £435 million 

• Sept 2016: Inflexion Private Equity backs the management buyout of Bedell Trust, which rebrands as Ocorian 

• Oct 2017: TMF Group is acquired by CVC Capital Partners for €1.75bn

• Jan 2018: AnaCap sells First Names Group to SGG Group 

• March 2018: JTC lists on the Main Market of the LSE, with a market cap of £310 million

 


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