Another one bites the dust…

The events of the last fortnight have underlined the merit of taking your summer holiday far from 5G coverage if not the madding crowd.

First up was a global stock market rout where a sea of red enveloped equities as the Nasdaq plummeted by 10% in a single day, followed by the Nikkei suffering its largest one-day loss in almost 40 years. Mercifully for investors vacationing in the network voids of Salcombe and the rather-more-distant Solomon Islands, their investments might just be inching back into the black by the time they return (or marooned in a far-flung airport if they’re flying (or not flying) with BA).

We’d barely caught our breath before the spectacle of the inaugural (and, it transpired, final) Olympic breakdancing competition rewarded those of us keeping the office fires burning. It may have proved more divisive than Adam Peaty being dropped for the mixed relay final but brace yourself for b-girl-inspired head spins to grace a nightclub near you very soon (although I suspect the NHS will be quite rightly advising British clubbers to stick to the rather safer caterpillar).

With such excitement, one piece of big news may have flown somewhat under the radar and that was the £11.40-a-share offer for the largest direct-to-consumer investment platform in the UK. Hargreaves Lansdown initially rejected the first of four offers at £9.85 per share in May from a consortium comprising private equity firms CVC and Nordic Capital (and Abu Dhabi’s sovereign wealth fund) but the board has seen fit to recommend the current offer.

If approved, the transaction will mark another high-profile exit from the London Stock Exchange as private equity buyers continue to hoover up lowly-valued UK stalwarts (proving the point, the final offer was at a 50%-plus premium). While shareholders paying £1.60 a share on HL’s IPO in 2007 will still be sitting pretty, I suspect I’m not the only one that rues not cashing out when the share price topped £22 back in 2019.

The offer casts a spotlight on the DIY investment market which has become a hotbed of competition in recent years as a host of new entrants jostle for a piece of the estimated £500 billion of assets under management. With the meme stock craze of the pandemic creating a new generation of armchair traders, the mainstream platforms have faced stiff competition from zero-commission, fancy-pants app providers such as Freetrade, eToro and Trading 212.

This prompted AJ Bell and interactive investor to slash their trading fees, HL scrapped trading and platform fees on junior ISAs and several providers, including Bestinvest, played to the popularity of the magnificent seven by removing trading fees on US shares. Another battleground was the introduction of interest on uninvested cash in ISAs and SIPPs, seeking to appeal to investors wanting to use annual allowances but sit on their cash for the opportune time.

All of this is a positive for increasingly cost-conscious investors looking to avoid the erosion of value over time from seemingly small differences in fees. Although it’s been rather less positive for St James’s Place who faced criticism (and a punishing share price fall) over the transparency of their rather punitive exit penalties. Despite the headline fee cuts, the devil is often in the detail with a rise in the likes of foreign exchange and other fees in some instances. And, on that note, we’ll be running the rule over investment trading platforms in a special report later in the year.

While HL has historically justified its higher platform and trading fees on the back of a ‘premium’ customer service, it may decide to change tack away from the public glare by taking on the lower-cost providers. In recommending the offer, the HL board alluded to declining client and asset retention rates and a shiny new app may be on the way with the mention of substantial investment to compete in an ever-more digital world.

In the meantime, the HL offer could provide a payday for investment trusts such as Finsbury Growth & Income Trust (FGT) with the company accounting for 5.5% of FGT’s portfolio (as at 30/06/2024). Managed by high profile manager Nick Train, the trust is differentiated from its equity income peers by running a highly concentrated portfolio to generate capital returns (as well as income). FGT has significantly outperformed its benchmark since 2001 when Lindsell Train took the reins but more recent results have been disappointing.

Another interesting question is whether the HL take-private will precipitate a further wave of consolidation in the investment platform market. interactive investor joined the abrdn group in 2022 (but remains a whole-of-market platform), leaving FTSE-250 provider AJ Bell as the remaining listed provider amongst the big three.

AJ Bell has carved out a strong niche as a middle-of-the-road provider in terms of fees and boasts a 500,000-plus investor base. It was proactive in targeting the more fee-savvy investors with the launch of its Dodl app in 2022, which offers a low-cost but more limited selection of investments, and acts as a feeder for its main offering.

Although its share price has failed to make significant upwards momentum over a five-year period, it’s started this year strongly with a year-to-date rise of more than 45% (as at 13/08/2024), boosted by the HL takeover talks.

AJ Bell is a top-ten holding for Invesco Perpetual UK Smaller Companies (IPU) which holds a portfolio of quality, small-cap companies trading at attractive valuations with strong growth potential. Managers Robin West and Jonathan Brown look for companies with pricing power, experienced management teams and resilient balance sheets.

These types of businesses are also attractive to private equity and trade buyers and Robin spoke about the recent pick-up in M&A activity in our recent webinar series on small-caps. Robin also pointed to UK small-cap valuations being very attractive relative to historical levels and other global markets.

Takeovers have been a tailwind for the trust with video games maker Keywords Studios and financial consultancy Alpha Financial Markets Consulting being snapped up by private equity firms earlier this year at a premium of 69% and 51% respectively.

IPU is well-positioned to capitalise on these catalysts, alongside the recovery in the UK small-cap sector that has been building in recent months. The trust has achieved a NAV total return of 14% over the past year (as at 12/08/2024) and is currently trading on a discount of 11%, which could provide a kicker to returns if the discount narrows.

The number of companies disappearing into the private sphere may also prompt investors to look beyond public markets for exposure to high-growth companies. This trend is also evident in the US, where almost 90% of US companies are private, thanks to a halving in the number of publicly-held companies over the last 25 years.

NB Private Equity Partners (NBPE) looks to generate long-term capital growth by investing in a portfolio of around 80 or so private companies across a wide range of sectors, market cap and by co-investing alongside third-party private equity managers. Around three-quarters of the portfolio is currently invested in North America (followed by Europe), providing exposure to many of the trends that have been powering the magnificent seven.

Looking ahead, it will be interesting to see how the take-private of HL plays out on the wider sector. Scale remains a key driver of profitability, with Freetrade turning to another round of crowdfunding before finally hitting break-even earlier this year and Trading 212 revealing a fall in both revenue and profit in its latest accounts. As with the banking sector, the established providers may just have the last laugh after all…

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