Trusting in Private Equity?
Private equity has been a boon for many in the IFC’s, while for others it has strengthened their resolve to remain owner-managed. So after many years of the PE model, Citywealth invited key players in the industry to debate: What is the ongoing effect for the trust industry?
Horses for courses
“There is no doubt that private equity is the future of the industry”, according to Grant Barbour, global head of private client at Ocorian, a trust company backed by private equity firm Inflexion, the same private equity firm behind Sanne Group’s IPO in 2015. “The trust industry is a very lucrative sector for private equity. We’re going to see more investment and it’s going to get bigger”, he adds.
David Goar, a partner at Rawlinson & Hunter in Jersey, a global brand made up of independent partnerships working together to provide international advice, is betting on a different future: “We’re taking the alternative path. We’re a partnership with no intention to sell and it seems to be a rare commodity working well for us. We do not focus on short term profit and instead look to establish long-term client relationships.”
It’s ‘horses for courses’, as the old saying goes; while some clients will be drawn to the owner-managed model, others will seek the private equity-backed ‘one-stop shop’.
Fee hunt in corporate?
Research shows that there is an increasing focus among PE-backed trust companies on the corporate services side of the industry. This move is explained by the financials where profitability is higher because fees are higher by legacy. Paul Douglas, managing director at Accuro – an owner-managed trust company observes: “Among the PE-backed trust companies, we are seeing a shift to a focus on the corporate services side of the business and a move away from private client. We anticipate that private client divisions could break away or be sold”.
Yet Barbour thinks that despite the corporate side of the industry being a big fee generator that private equity-backed trust companies won’t be spinning off their private client teams anytime soon. “Private equity like a mix of disciplines. It’s beneficial for them to have a strong private client angle to the business, as it protects against unforeseen issues affecting corporate or funds. Some PE-backed trust companies are focusing on corporate as it is a big fee generator but certainly from our experience we know they like a balanced portfolio and are investing in private client as well” he says.
The regulatory hurdle
A further reason why we might not see too many spin offs or start-ups is the cost of dealing with the regulatory requirements. “This is something that shouldn’t be underestimated”, says Goar. He explains that Jersey is at the forefront of trust regulation which he perceives as a major benefit to the industry, as it enhances Jersey’s reputation internationally. However in his opinion the cost of compliance has created “a barrier to entry for new businesses”.
Douglas agrees, “It’s difficult to set up a trust company from scratch, you need infrastructure from day one due to the regulations. Breakaway teams might struggle unless they have an arrangement in place with their prior business. New players might be more likely in less regulated jurisdictions, but well-advised clients will seek well-regulated jurisdictions.”
Private equity aids consolidation
Despite the different business models, the industry is in agreement that more consolidation is to come. “The pace of consolidation is continuing, and I don’t expect a slowdown” says Douglas. It’s a further consequence of the rising cost of compliance. “The industry is becoming increasingly regulated and you need to be bigger to deal with the regulatory and reporting burdens”, says Barbour.
It’s also a reason to seek private equity investment, according to Barbour. “Our private equity backers assisted us greatly with M&A expertise” says Barbour. Ocorian has made a string of recent acquisitions including ABAX Corporate Services in Mauritius and Capco Trust in Jersey. “When you go into an acquisition with a PE-backer you go in with a tremendous amount of expertise enabling you to do smarter and better acquisitions which are good for the industry”.
Revisits from law firms and banks?
“We’re not yet seeing the banks come back, but I wouldn’t rule it out entirely. Although I don’t expect them to come back anytime soon!” says Douglas.
“The banks will be very aware of the onerous regulatory and reporting regimes in the fiduciary industry, not to mention the potential liability of not carrying out fiduciary duties correctly. Their core business is banking not fiduciary and they’ll need to weigh up the risk involved. It’s possible they’ll come back but I don’t think it’s as easy as it was in the past. There are big barriers to overcome and massive expense”, says Barbour.
Douglas says there is interest among law firms to re-enter the space, so whether that will bring more competition to the sector remains to be seen.
Published in Citywealth, November 2018