Hargreaves Lansdown buyout leaves some funds out in the cold

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Do-it-yourself is Peter Hargreaves’ speciality. The billionaire co-founder of investment business Hargreaves Lansdown may not be giving the bathroom a lick of paint anytime soon. What he will be doing is keeping an eye on how some new owners treat his baby.

Following a lengthy bidding process, the company’s board has agreed a final offer worth £5.4bn from a group of private equity buyers. As in other recent buyouts of similar businesses, the price of getting some influential founders on board is offering a choice of cash or private rollover shares.

That Hargreaves Lansdown will depart public markets is not a shock. Its business of providing DIY retail investment services is itself a disrupter. But the company isn’t immune to the pressures sweeping asset management: pressure on fees from cheaper competition and regulatory scrutiny. Those worries had wiped about 70 per cent from its share price in the five years before private equity showed up. Given the gloom, those that can may be tempted to take some unlisted equity.

For a start, the buyers led by CVC aren’t paying top dollar. The consortium is offering £11.40 per share, which includes the full-year dividend of 30p. Back in May when the deal first surfaced, Lex thought £12 per share would be a reasonable takeout price. 

Hence, perhaps, why Peter Hargreaves plans to stick around, accepting half in cash and half in shares for his 19.8 per cent stake. True, fellow co-founder Stephen Lansdown will take all cash for his 5.7 per cent stake. (The two stand to receive £535mn and £309mn respectively.) Including Hargreaves’ 10 per cent stake, rollover investors could end up with 35 per cent of the private business.

They probably won’t. Take-up of unlisted equity in such deals tends to be low — in part thanks to restrictions on what institutional funds can hold. Unlike the co-founder, they won’t stand to benefit as technology is updated in both the front and back office, or from an admittedly challenging strategic reset. The public market has fretted about slowing growth, with competition increasingly offering better tech and lower fees. Choosing to concede market share (or cut fees) may be easier away from the market’s gaze.

Assume the consortium can return net income growth closer to the 10 per cent annual average rate over the five years to 2019. The equity would then be worth £8bn by 2030 if valued on the same 19 times multiple the bidders are offering. Retail investors hold perhaps 6 per cent of the company. Those fellow DIYers may be tempted to join its founder for the ride.

andrew.whiffin@ft.com