Weekly Reports | Feb 18 2021
This story features PRAEMIUM LIMITED, and other companies. For more info SHARE ANALYSIS: PPS
What to look out for as the $800bn investment platform sector feeds on itself
By Tim Boreham, Editor, The New Criterion
The head of investment platform Praemium ((PPS)), Michael Ohanessian, sounds like he’s channelling the coronavirus when he says that “like any living organism, any organisation wants to survive.”
But in this case, he’s referring to the need for the $800bn a year adviser ‘platform’ sector to grow and diversify at a time when the banks’ stampede from the wealth management sector is also creating opportunities.
The banks’ exit has created what are dubbed as specialist platform providers – non-bank aligned providers that generally have more modern software and are genuinely independent.
With fees constantly under pressure, achieving economies of scale is also critical especially as most of the costs are fixed.
Praemium is leading the charge in a year that’s likely to see a further re-sculpting of the platforms, which act as a one-stop shop for financial advisers to access investments and services for their clients and hold the investments in the one place.
Crucially, they also ensure the advisers get paid in an era when product commissions are verboten.
After eight years of behind-the-scenes negotiations, Praemium last year moved on fellow listed platform Powerwrap ((PWL)), by way of a cash-scrip deal that culminated in a compulsory acquisition last November.
Powerwrap operates in the ‘off platform’ sector such as stockbroker accounts, which accounts for 22% of all wealth. Put another way, Powerwrap is the leading independent platform for private wealth clients.
The union played a key role in bolstering Praemium’s funds under administration to $34bn as at the end of December, 69% higher than a year previously.
The company last week also reported December half revenue of $31.7m and a $3m net profit, but the acquisition makes for murky comparisons and we won’t go there.
Ohanessian says it was always intended the two businesses would come together, given they used the same core technology.
“This is one of those rare cases where you do an acquisition … from a synergistic perspective this is about as good as it will ever be,” he says.
“We really are the platform for everything now, whether the investors are retail, high net worth individuals or on or off-platform. We think we could meet the needs of any financial adviser and their clients, wherever they may be.”
But the rest of the listed platform sector isn’t exactly cooling its heels, either: Hub24 ((HUB)) has bid for Xplore Wealth ((XPL)), formerly known as Managed Account Holdings. (Managed accounts are tailored investments run by wealth managers, as opposed to off-the-shelf managed funds).
Xplore shareholders overwhelmingly endorsed the offer at a scheme meeting on February 12, despite some key investors reportedly being unhappy with the price.
Late last year Hub24 also finalised the purchase of broker Ord Minnett’s Portfolio Administration Reporting Service (PARS).
At the start of calendar 2020, there were six listed platforms: Netwealth ((NWL)), Hub24, Praemium, Powerwrap, Xplore Wealth and OneVue.
Now the six has turned to four (with the Iress purchase a change of ownership, rather than consolidation).
In contrast to the Papa Bear platforms of the Big Four banks – Ohanessian’s description – the likes of Praemium are the Goldilocks of the sector.
“We have been around long enough that we have some established legacy software,” he says. “But not so much legacy that we can’t innovate.”
Hub24 in January highlighted the rise and rise of the challengers with an upbeat December quarter update: custodial funds under administration (FUA) rose 39% to $22bn (year on year).
The PARS purchase boosted Hub’s non-custodial FUA from almost nothing, to $9.3bn.
The platform has signed up 113 new advisers, taking the total to 2280 with 24 new licence agreements.
Hub has also arranged a partial takeover off for Easton Investments ((EAS)), formerly Hayes Knight, a listed provider of accounting and wealth management services to advisers and licensees.
The biggest listed exponent with a $4bn market valuation, Netwealth chimed in with a 33% surge in net inflows for the December quarter, to $2.6bn. Funds under administration grew 14% to $38.8bn – a performance that prompted a 12% share surge on the day.
In the meantime, the banks are stumbling to exit the sector after two decades of attempting to build their platforms.
Westpac ((WBC)) bought BT Wrap and Asgard Wrap with the intention of merging them. When this became harder than planned, the bank spent up to $1bn to build BT Panorama.
This left the red-liveried and red-faced bank with three platforms, rather than one.
Is Panorama now up for sale?
Last year the Commonwealth Bank ((CBA)) sold 55% of its Colonial First State wealth business to global investment firm KKR, for $1.7bn.
IOOF ((IOOF)) is in the process of buying MLC Wrap, owned by National Australia Bank ((NAB)), for $1.4bn.
Meanwhile, AMP ((AMP)) – these days never mentioned in terms other than ‘embattled’ – is mulling the future of its North platform as well as its AMP Capital business. And everything else for that matter.
One view is that AMP would retain North to service its still-impressive advisory workforce. The other is that it may be a gem of a business in the tarnished AMP empire, but everything has its price.
If it were to go on the sales block, North would evoke plenty of interest from the aforementioned ambitious up-and-comers.
As the Papa Bears of the sector retreat, the paw print is also being filled by an endless flow of challenger platforms based on clever modern software that can do a lot for advisers.
Ohanessian reckons there are at least 20, both locally and in Britain where Praemium also operates.
However they can’t be everything for everyone on day one and need time and capital to build up their functionality.
One of them, Spitfire, recently entered administration.
“It’s hard for new people to come along and disrupt,” he says. “Some start-ups will succeed though, those with a headstart and scale and can innovate.”
Since the Powerwrap merger, investors have taken a fresh look at Praemium shares, which lagged the market on valuation but have almost doubled since the Powerwrap takeover was announced in early July.
Over the last 12 months, Praemium, Netwealth and Hub20 shares have climbed 73%, 107% and 126% respectively.
“Before we did the takeover we traded at three times revenue which was ridiculously low,” Ohanessian says. I think it’s because of people’s perceptions of momentum and growth.”
Before subsuming Powerwrap, Praemium was perceived as a takeover target – and is still seen as such in some quarters.
Amid the radical realignment of the platform sector, the wealth industry continues to be engorged by the massive inflows stemming from the compulsory super levy.
No matter whether the increase in the levy to 12% is set in stone or not, that’s money in the bank for the platform operators that clip the ticket along the way.
Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense
Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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