UK wealth buyout requires elbow grease and luck

Fully stocked. $7 billion buyout of UK wealth manager Hargreaves Lansdown will require some heavy lifting to work. On Friday, a consortium including private equity group CVC Capital Partners and Abu Dhabi’s sovereign wealth fund clinched deal having spruced up an earlier offer. But with a higher outlay and risk from falling interest rates, making a decent return looks tricky.

Hargreaves Lansdown started out life in 1981, when it was founded by Peter Hargreaves and Stephen Lansdown. investment duo initially sent out newsletters to clients vising m on what y should be investing in. It has since modernised and created a digital platform where clients can tre shares and monitor ir pension wealth. Hargreaves has around 155 billion pounds of assets under management.

But in recent years its UK market dominance has been in jeopardy. New nimble entrants like AJ Bell have been growing rapidly and benefit from not having old IT systems that are costly to run. Hargreaves’ new owners need to transform business to allow it to compete more aggressively with rivals. That will require a steep investment in digital platform, cutting out need to hire expensive staff to cater for new clients. In ory, that would help it grow its top line by more than 3% analysts h pencilled in over next three years, as per LSEG data.

Still, math looks tricky. Assume Hargreaves can grow its current 765 million pounds of annual revenue by 5% over next five years and increased its EBITDA margin from 52% to 57% thanks to a digital transformation. If so, acquisition, worth 4.9 billion pounds once net cash is factored in, would yield a paltry 15% return. That’s well below 20% buyout firms typically target.

To deliver a juicier return, Hargreaves will have to boost sales growth to 10% per year AJ Bell is expected to deliver, as per LSEG forecasts. But that might be challenging. Hargreaves is alrey a dominant player and its smaller rival is charging lower fees, which explains why it operated with a 42% EBITDA margin last year. Falling interest rates may also reduce amount of money se players make managing clients’ cash. That suggests Hargreaves will need a heavy dollop of luck to make a reasonable return.