Cofunds up for sale: possible implications for advisers

Word on the street is, platform behemoth Cofunds is up for sale. The parent company Legal & General apparently appointed Fenchurch Advisory Partners to find a buyer for the platform.

for-sale-sign

Cofunds is the largest platform in the UK with over £76b of assets, presumably this makes it a crown jewel any provider serious about keeping a foothold on UK market would want to hang on to? So why is L&G, who paid £131m for 75% of the platform (valuing the business at £175m) just over two years ago looking to offload it?

The answer to that question may lie in something we’ve talked about before – replatforming! Cofunds runs on the IFDS  back office system – FAST, having abandoned its own proprietary back office system called Lisa in 2003. FAST was designed primarily for the fund supermarket world and not the wraps world. It is now officially a legacy technology – IFDS has a new generation platform back-office system called Bluedoor. Accordingly, Cofunds has little choice but to eventually migrate to a new technology system. Failure to do so means its already significant cost base will continue to spiral; margin will be further squeezed and technology/systems will eventually fall apart.

Last year, it was rumoured that Bravura was in the pole position to  win the bid for the new back office system but this appear to have stalled, apparently due in part to the fact that the cost of doing so will run into tens of millions of pound – between £40M to £60M according to some estimates! Clearly, L&G is having a rethink as to whether it is prepared to pony up that much additional capital, bearing in mind that;

  • The total dividends paid by Cofunds since its inception 15 years ago is …ehrr… zilch! Yup, it has never paid a penny in dividends to its shareholders.
  • Cofunds wrote down £117m of losses in 2011 by reducing its share capital. If we take that into account, it has actually yet to recoup its initial development cost of building the platform.
  • Latest accounts (Dec, 2014) show a pretax profit of £7.7M on a turnover of £79M – barely a 10% profit margin. At that rate, how long will it take L&G to recoup its current investment, let alone additional investment? Your guess is as good as mine.
  • This is happening while Cofunds is dealing with Sunset Clause – having to move around 40% of its assets from commission to fees. This is already having an impact on revenue – despite increasing AuA by £5billion in 2014, revenue pretty much stood still, although it did manage to increase profits!

So it’s completely understandable that folks at L&G’s padded City offices are looking for someone to take the behemoth off their hands!

So what does this mean for advisers?

Choose your platform friends very carefully. I’ve said it before and I’ll say it again:

If we accept that a platform is a key partner for an advisory business, rather than just a product sold to client, perhaps adviser would put their platform partners under greater scrutiny. A platform might be cheap but if technology isn’t up to par, advisers end chasing their tails just to get the platform to play its role in delivering the service promised to clients .

Enough said. I’ll now go and lie down quietly in a dark room, waiting for a very angry phone call from L&G/Cofunds PR.

 

 

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Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.
He holds a Master’s degree from Coventry University and an alphabet soup of qualifications, including the Investment Management Certificate, Chartered Financial Planner, CFP and Chartered Wealth Manager designations. He was one of 5 finalists for the Professional Advisers Personality of Year Award 2015 but the award went to a more deserving winner, obviously!

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  • stanleykirk

    Bullseye Abraham! Placing your trust in a cul-de-sac proposition has looked idiosyncratic for some time now – the hope was that L&G were prepared to pay a lot to sort it out just to keep a big market share (which is why they bought it cheap in the first place). Looks like the bean counters hold more sway than the marketeers at L&G. Good!

  • Phil Castle

    Makes you wonder who the idiot at L&G was who decided they should pay £131m for their 75% stake doesn’t it!

  • Eugen

    I believe there will be many buyers lined up. I hear that a few American custodians are paying an interest, probably Hargraves Lansdowne (HL) would have a look as well.
    With £76bln captive you could make a turnover of 30bps and earn £220m a year and get a decent profit margin of 40-50% as HL does. L&G would double their £131m investments straight away on the sale of Cofunds, they would be stupid to sell it under £250m. Good that I bought some more L&G shares the other day.

    • Eugen the Optimist! Actually, only about £35bil on Cofunds asset is advisory/retail, the rest is institutional! And NO ONE in the institutional space pays 30bps in platform fees, more like 5 -10pbs.
      There is no adviser platform with ‘40%-50% profit margin’, no one! AJ has the highest margin in our last report and it’s well below that figure.
      And why would a buyer spend £250m on a Cofunds, when they could spend that money on Transact, which is very profitable and doesn’t have all these issues Cofunds have?

      • Eugen

        Abraham
        I am an investor in HL, their profit margin is 72%. In 2014 on a £292 million revenue, they made £210 million profit before tax. If you do not believe me, please check their financial report for 2014 on the LSE website. The market cap for HL is £5.4 billion, so you can figure out now how cheap Cofunds at £250 millions is.
        We shall not forget that HL has its own trading systems, it could integrate Cofunds very quickly and no need to spend money on Bravura etc. Obviously like every merger, hard work is needed, off course.
        Transact is not for sale as a whole, there will be a few shares offered on a listing on the AIM.

      • Dattaraj Desai

        Shocking & Interesting!

        I am from India, having been a part of the platform industry, since its nascent stage.

        Cofunds was one of the platform I used to track, to take learnings of how to develop the platform business. So this news has come as a shock.

        Further shock is on knowing the financials. Compare this with that in India. The entire mutual fund assets in India is around £120 bn.

        The assets of the largest platform is around £3bn. But hold your breadth…their profits (3 years ago) was around £15m (a min of 0.50% margin on assets)

        Fidelity had entered Indian market in 2007 but quit a year later during global financial crisis. Last heard, they are about to enter again. There is just another international platform, which entered India in 2008 (I was a part of the set up team).

        There is a huge potential, for platforms to set up business in India. Anyone interested??

      • Eugen

        It seems that buyers came from other corners: AJ Bell and FNZ.

        And Axa Wealth seems to be put for sale soon. I liked Axa Wealth platform, but I did not like the owners, so I have not used. I may use it in the future if the owners change.

  • Dattaraj Desai

    Shocking & Interesting!

    I am from India, having been a part of the platform industry, since its nascent stage.

    Cofunds was one of the platform I used to track, to take learnings of how to develop the platform business. So this news has come as a shock.

    Further shock is on knowing the financials. Compare this with that in India. The entire mutual fund assets in India is around £120 bn.

    The assets of the largest platform is around £3bn. But hold your breadth…their profits (3 years ago) was around £15m (a min of 0.50% margin on assets)

    Fidelity had entered Indian market in 2007 but quit a year later during global financial crisis. Last heard, they are about to enter again. There is just another international platform, which entered India in 2008 (I was a part of the set up team).

    There is a huge potential, for platforms to set up business in India. Anyone interested?? I would be keen to discuss further.

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