The £5.4bn buyout of Hargreaves Lansdown (HL.), assuming the deal secures shareholder approval and there are no last-minute changes of heart (as per Bellway/Crest Nicholson), won’t complete for a few months yet. That leaves plenty of time for shareholders who plan to take cash – the sensible option – to consider how to fill the Hargreaves-shaped hole in their portfolios, and for the platform’s users to ponder the service alterations that lie ahead.
One thing the CVC-led consortium behind the deal has promised is an acceleration of the transformation plan launched by boss Dan Olley to build a vastly improved website and app and to automate processes.
Replacing legacy technology won’t come cheap – HL has estimated that the upgrade would cost £225mn, but the eventual bill may be higher. Ben Bathurst at RBC notes that “we are yet to establish how this could be funded”. HL clients may be concerned about the platform’s future financial security should it be loaded up with debt. But Hargreaves operates in a tightly regulated marketplace. Clients might even gain if the platform’s offering is made more competitive to help grow user numbers.
HL’s fall into private hands has repercussions beyond its shareholders and customers. The loss of Britain’s largest investment platform from the market is a blow, and it’s not the only financial services sector company that has been eyed up by predators.
The buyout, however, is not linked to London’s liquidity crisis. A range of factors have contributed to the company’s steep share price slide, most of them of HL’s own making. They include the Woodford crisis, pressure from regulators on platforms making money from client cash balances, agile and cheaper competitors and rising dissatisfaction with customer service. So this deal is not so much ‘opportunistic’ as a normal progression, but it is nonetheless another felling of a popular and widely held share.
Progress is being made in the battle to curb the clearing out of the London market. Changes have been made by the Financial Conduct Authority (FCA) to listing rules, for example, to turn the tide on companies excluding London as a venue. The new rules, which are much more in line with those of international peers and permit dual-class share structures and shorter track records, have attracted criticism, and the FCA itself warned that the onus is now on investors to do their own research, or to challenge companies using their existing rights. But the regulator also commented that a factor in its decision was that “investors already choose to put their money in companies listed outside the UK, where the costly obligations we are removing do not exist”. Most US tech companies utilise dual-class shares.
Several pension funds have made it clear they don’t like the rolling back of “investor protections”. But arguing that you are unhappy about rule updates in a market you have shunned, while happily investing heavily in less well protected ones, truly is having your cake and throwing it in the bin.
Pension funds are also unhappy about other proposals. The cry that goes up in response to being asked to invest more in the UK economy is that governments should not dictate where they invest. It is an argument with strong merit, but there is a counter. If you wish to benefit from generous tax breaks, then the government has the right to add conditions. Invest where you like, but if your returns are greatly enhanced by tax breaks paid for by UK taxpayers then you need to put something back into the economy.
Jobs, growth and higher tax revenues all depend on a thriving economy. Pension funds helped cause the fall in valuations in London by sucking many hundreds of billions of pounds from the stock market. Thus, in return for tax breaks, they should do their bit to help refill the deep capital pools, provide funding for small caps and ensure the survival of a market that means individuals can share in the rewards they help to deliver – rather than watch all of them disappear into the hands of the few.
A pensions review has been launched by chancellor Rachel Reeves aimed at persuading local government schemes to pool their funds and “fire up the economy” by investing in unlisted assets such as infrastructure projects. That will support her key objective of delivering growth and will be helped by the FCA’s new guidance on costs, but she must take care not to drop the other baton passed on by her predecessor – that of simply encouraging pension funds to back British listed companies.