What’s the going rate for a platform these days?
This week Interactive Investor bought Alliance Trust Savings, adding oomph to the UK’s second largest investing platform which will now look after £35 billion for 400,000 customers. Its combined market share will be about 15% of all non-advised investment assets. The summary view is – whatever you can get away with! But read on for some detail.
The deal was struck for £40 million (or £35 million excluding a property which changed hands as part of the bigger deal). A price tag of £35 million represents about 1.3 times revenue. Arguably and on paper that looks like quite a good deal. Let’s look at some other platform models out there.
In September, Nucleus reported first half revenues of £21.6 million on assets of £14.4 billion. The revenue margin is 31.5bps. Nucleus has a market cap of £123 million today – so that’s roughly 3 times revenue.
Hargreaves Lansdown has reported revenues as at June this year of £448 million on assets of £92 billion. Hargreaves Lansdown has a market cap of £8.3 billion today – so that’s about 16 times revenues.
Interactive Investor has of course been in acquisition mode for a while now, elevating its status from former D2C tiddler with just £3.5bn AUA to second rung heavyweight when they bought TD Wealth for £65 million in October 2016. Sounds like a lot but according to Companies House, that included £61m of cash in the net tangible assets.
So what’s the secret sauce?
With valuations varying so much, it appears that beauty is in the eye of the beholder. We see some robos posting revenues of about £500,000 and costs of £15 million still gaining funding and backing. People buy the potential. More traditional platforms are valued anywhere between about 1 and 16 times revenues. And PE ratios where quoted, typically lie around the punchy 25 – 35 mark.
What makes for such differences in valuations from “cash plus” to “whopping”? The slightly hard-to-specify “customer satisfaction” has to be a key metric here. Hargreaves Lansdown has a retention rate of 95% and offers a very good service. Boring but true. (The other giant St James Place also has high retention rates but my personal view is that’s all about unsustainable handcuffs and opacity. But that’s another story.)
Looking ahead, it seems fairly obvious that the potential for Interactive Investor to dial up valuations beyond 1.3 times revenues is strong – but not a given. It will take a lot of work on technology, integration, damn good people on the phones and clear, consistent, engaging content delivery.
And that is not easy to do.
What will investors think?
The Alliance Trust Savings customer base was historically a professional bunch of accountant/solicitor types who liked investment trusts. The average age is 50 and rather surprisingly 45% of customers are women, making them one of the most balanced in the country. But they’re an erudite, academic and enthusiastic investor type in the main.
Will they move? Unlikely. People tend to move platforms because they get fed up about the cost. Or they experience rubbish service.
The cost box should be ticked. The flat fee model will placate and Interactive Investor will typically be a little cheaper. As for service, I don’t see any major issues there either. Alliance Trust Savings has been on the market for a while and arguably starved of innovation and new developments. So it’s been a fairly bare bones experience for customers. Nope. These people are Interactive Investor’s to lose.
Whilst replatforming has been like a Freddie Krueger film for many a platform boss, the integration which blended Interactive with TD Direct was pretty well delivered and this experience will be valuable in the months ahead.
My question mark would be less around the Alliance Trust Savings customers and integration. And more on how you evolve what was a £3.5 billion proposition in 2016 to a £35 billion one just two years later. You can run a business called Interactive Investor with £3.5 billion when it’s a niche hobbyist play. I don’t think you can continue to run one in the same style when you’re looking for growth to develop your £35 billion baby. There are not that many investors in the UK who want to be interactive.
This business is a bit like a (very nice) snake eating an (equally nice) elephant. It won’t be comfortable! But there is strong potential there if it can accommodate the expansion and evolve.