A platform market focused on long-term returns may not present obvious opportunities for private equity firms. Yet the U.K. has seen a raft of deals and, with the advised platform sector ripe for consolidation, more are likely, according to the latest issue of The Cerulli Edge―Global Edition.

Private equity ownership of platforms has increased from just 2% of the market in the U.K. five years ago to around 15% today. The focus has been on acquiring mid-sized advised platforms—a trend that looks set to continue, according to the research.

Private equity has been active in both the advised and non-advised platform markets, but the latter is relatively concentrated. “Non-advised platform markets represent more interest from private equity because it is more fragmented and diversely advised,” notes Justina Deveikyte, director of European institutional research at Cerulli.

The opportunity for private equity firms lies in sector consolidation—there are a high proportion of small firms that have decent customer books but are struggling to achieve profitability in the face of regulatory and technological demands.

“With pricing under constant pressure, smaller players are increasingly becoming inefficient, making them targets for consolidation and creating potential for private equity to build scale through mergers and acquisitions,” says Deveikyte.

In addition, investment platforms can deliver relatively high returns on capital, especially when compared to other areas of the financial sector. Platforms are relatively capital light and direct investment customers in particular tend to stick around even if service levels fluctuate or they experience poor investment performance, providing a recurring and predictable long-term source of revenue. In 2020, a number of platforms managed to grow their customer numbers and assets under administration.

However, the objective of private equity investors is to exit positions at a profit, with European private equity holding periods averaging around six years. In contrast, advice firms in particular tend to look for long-term partnerships with the platforms they work with—as one might expect, given the length of the average client lifecycle and the desire to keep disruption to a minimum. The short-term modus operandi of private equity clearly does not sit comfortably with that, especially when an acquisition raises the prospect of migration and replatforming exercises.

Successful replatforming takes a lot of time, money, and commitment. Advisors are less sticky and loyal than direct investors. Anything that affects platforms can have implications for the service that advisors provide clients and the suitability of the chosen platforms for an advice firm’s client book.

“The day-to-day mechanics of platforms and the ability to navigate the twin challenges of regulation and technology will determine the real impact of private equity’s forays into the market. There is clearly a reward to be gained for private equity firms venturing into platforms, but they will need to be patient and prepared to commit,” says Deveikyte.

Other Findings:

• Private bank and trust companies in the U.S. have the lowest share of clients’ total assets among high-net-worth channels. Cerulli research shows that the most effective methods to gain client walletshare include an integrated solutions/advisory model across channels, a unified investment/managed account platform, and a broad range of digital capabilities.

• Although major sovereign wealth funds in Asia are increasing their internal capabilities, they find that co-investing makes business sense; investment outsourcing is still vital to help them diversify and seek higher returns amid current market volatility. With collaborative outsourcing relationships becoming more common, managers need to be agile in their approaches and continuously build and maintain rapport with their institutional clients, as well as explore opportunities in areas such as co-investments.