Private ownership of Hargreaves Lansdown would have its advantages

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UK wealth and asset managers are in the grip of consolidation. Under pressure from falling fees and growing regulation, roll-ups, integrations and cost-cutting are under way across the industry. Hargreaves Lansdown, itself a disrupter having gathered £150bn from do-it-yourself investors, now finds itself a target. It has rejected a £4.8bn approach from a private consortium led by buyout group CVC.

It should come as no surprise that Hargreaves’ board has batted away the 985p per share approach. True, the UK’s largest retail investor platform is particularly vulnerable to aggressive competition. Its shares were trading 60 per cent lower at the start of this year than in 2020, underperforming peers such as AJ Bell and IntegraFin. Valuations across the sector have also been under pressure as rising interest rates depress prices for financial assets.

Even so, CVC’s offer looks overly opportunistic. At a 28 per cent premium to the three-month average undisturbed price, it would only equate to about 15 times 2025 earnings. Hargreaves’ valuation peaked at about 40 times earnings in 2019 and has averaged 25 times over the past 15 years. Peers currently trade at between 18 and 20 times forward earnings.

The discount reflects Hargreaves’ incumbent position and outsized fee structure — both of which should diminish. Equity trades at Hargreaves cost £12 each versus £5 at AJ Bell and £4 at Interactive Investor. Its all-in annual fee is equal to 38bp compared with 27bp and 19bp respectively for the two competitors, thinks Citi.

Regulators are taking a hard look at wealth and asset managers as part of new Consumer Duty regulations. Platforms have attracted scrutiny for how much of the interest earnings on customer cash they choose to keep. This income supported earnings during the period of higher rates.

The question is how far and fast earnings from fees will fall. Say that earnings estimates today are overstated by 20 per cent, then CVC’s prospective offer looks a lot healthier at closer to 19 times — albeit still too low. An offer at £12 per share on the same earnings equates to a 23 times multiple and a substantial premium to peers as well.

A reset of fees would be less painful if done away from public markets. Also, its clean balance sheet could take on debt to enhance private equity returns via dividends. CVC executives may well have extolled those benefits to keep founder, and 20 per cent shareholder, Peter Hargreaves at the eponymous wealth manager.

andrew.whiffin@ft.com