Common misconceptions relating to private equity investment in fiduciary businesses

12 January 2017

The recent STEP Research Report entitled ‘Offshore Perceptions’, which was produced in association with First Names Group and published in November, drew out a number of key findings – including divided opinion among respondents over the merits of private equity (PE) investment. Just over half of respondents felt PE involvement was positive for the industry, with many feeling that clients have been reacting against PE firms, instead choosing independent firms with bespoke offerings and continuity of client service.

Negative perceptions are largely because intermediaries, and indeed clients, sometimes anticipate that fiduciary companies owned or backed by PE houses suffer from two main issues:

  • Lack of continuity in relationships due to high turnover of people
  • Increases in fees due to short-term focus on profitability

I have encountered both of these concerns first-hand, but my experience shows that PE investment in this sector can work extremely well if expectations are managed and roles clarified at the outset.

Combating the fears

In my view, a fiduciary business undergoing an ownership change needs to co-create a strategy with its new shareholder right at the beginning; one which recognises the importance of investing in people, infrastructure and locations. Ultimately, it’s about creating a dynamic culture where people want to stay, which will not only keep clients happy but will ensure the business continues to grow. Of course, additional incentives such as share-ownership schemes that are open to all staff (and not just a group of directors) should also be seriously considered to decrease the risk of attrition.

On the thorny issue of fees, the key is finding a PE partner that recognises that the capital value of the fiduciary business will increase without being ‘forced’. It would be naïve (and immoral) for any business to believe that it can increase fees for no good reason and avoid recrimination. It is about identifying a PE backer that has taken the time to get under the skin of the business prior to investment and, more importantly, buys into the strategy proposed by management. This helps to set and align expectations around realistic future growth targets.

The other aspect is third-party bank borrowing, which the fiduciary business may seek. It is essential that any borrowings are maintained at sensible levels in order to avoid pressure to drive revenue through whatever means possible.

Client concerns also need to be actively managed. The importance of maintaining deep relationships cannot be underestimated, and never more so than when there’s a change in ownership. It is crucial that the fiduciary business meets its clients regularly, carries out a comprehensive client visitation programme and communication plan, and considers engaging a third party to check in with clients in order to gain an independent assessment of how the business is delivering.

Recognising the benefits

It is certainly worth highlighting to clients the advantages that PE backing brings. For example, funding can be used to:

  • Secure a presence in multiple strategic locations (both on- and offshore), thereby providing a truly multi-jurisdictional offering with real substance in each location
  • Achieve a well-oiled and integrated operating platform

Given clients’ increasingly complex and international needs, these really are significant benefits.

Summing up

PE investment in a fiduciary business can act as a superb boost and allow it to deliver a strategy that meets the ever-increasing and changing needs of clients without compromising on service or fees. To achieve this, however, the collaboration must be with a PE investor that has taken the time to understand the business; there should be a cultural alignment between the business and the PE investor; and the level of investment in the business must be right.

(Kevin's thoughts on PE investment in fiduciary businesses originally appeared in STEP Journal, June 2015.)