Praemium merges with Powerwrap to become more competitive

While the market appears to be focused on all things Afterpay (ASX:APT) and the ‘Buy Now Pay Later’ phenomenon, the sector is a little too hot for us to dip our toes in, but “well done” to those that have. In this piece we look at a similar sector also doing well during the Covid-19 lockdown.

That space is wealth management platforms. Considered the original “fintechs,” these stocks were around long before Afterpay. The earliest platform, Asgard, has been around since 1985. The big banks each had their own platform – MLC (NAB), BT (Westpac), CFS (CBA) and OnePath (ANZ). Despite their clunkiness, they dominated the insurance/wealth industry and generated significant revenue through their vertically integrated distribution channel. Today, the $900 billion platform market is made up of 18 platforms, but is still dominated by the big banks. However, their stranglehold is nowhere near as tight as it once was, as a wave of new-generation platforms disrupt and alter the landscape.

Following on from the Banking Royal Commission, advisers started to work independently, or as part of a dealer group, to eliminate conflicted product-pushing incentives. This engendered a new generation of wealth platforms that had lower costs, less red tape, and which could offer products that the banks could not. This new generation of nimble platforms includes Netwealth (ASX:NWL), HUB24 (ASX:HUB), Praemium (ASX:PPS), Powerwrap (ASX:PWL), OneVue (ASX:OVH), Xplore Wealth (ASX:XPL) and Self Wealth (ASX:SWF). Four new unlisted start-ups – Centric, Spitfire, Finclear and Wealth02 – have also joined the space.

The platform world is all about funds under administration (FUA), inflows and outflows. Below are the main ASX listed platforms.

Surprisingly, the Covid-19 outbreak did not damage nor negatively impact the investment landscape despite isolation lockdown laws. Instead, it created an opportunity for the more nimble players to thrive. M&A is an effective survival option, if done right. Last week, Praemium announced a $55.6 million takeover of new generation fintech, Powerwrap.

The merger is no surprise. According to Powerwrap management, this deal was always on the cards, in fact it should have happened quite a while ago. Praemium and Powerwrap have had a longstanding father-and-son relationship because Powerwrap uses Praemium’s advanced global platform technology to service its strong customer base. Praemium, which has been around since 2001 and is considered a mature but innovative business, is the lowest-cost platform operator and has a unique global offering unlike its competitors. At its most recent quarterly report, the company announced a 26% increase in FUA to $20.3 billion, driven by its $11.4 billion VMA Administration Service (VMAAS), a 9% rise to $5.46 billion in its Australian arm, and a 5% rise to $3.2 billion by its International unit. Combine that with Powerwrap’s $8 billion – with $1.4 billion in alternative assets across 350 funds and a predominantly high/ultra-high-net-worth client base and its No 1 ranked Managed Accounts Product offering – Powerwrap is a natural fit for Praemium.

At present there is no ‘one size fits all’ platform that effectively accommodates all types of advisers/customers. While the bank platforms do accommodate ‘any’ type of customer, their approved product lists (APLs) are very limited, and focused on internal product. Powerwrap clients are independent financial advisers (IFAs), stockbrokers, private bankers, asset managers and specialist high-net-worth financial advisers. Their clients on average have a portfolio size of about $1.9 million and are investment-only. This has always been quite a difficult market to tap into. Praemium will now have an enviable client book, impressive sales growth, with double-digit profit growth expected in the next three years, no debt and much-needed scale and FUA to become a tough competitor to Netwealth and Hub24. The merger suddenly leapfrogs Praemium to the top of the platform rankings.

Brokers are also confident on the transaction with Baillieu posting a Buy rating (with a $0.55 target) for Praemium; Goldman Sachs a Buy rating (and $0.56 target) and Shaw Stockbroking also rating the stock a Buy, with a $0.65 target. Praemium already held a 14.7% stake in Powerwrap. Under the offer, Powerwrap shareholders will receive 7.5 cents in cash per Powerwrap share and one Praemium share for every two Powerwrap shares. This offer values Powerwrap at 26.44 cents a share. Shares in Powerwrap rose 60% to $0.28, while Praemium shares were up 22.16% to $0.45 by the day’s end. If accepted the takeover will give Praemium a FUA total of $27 billion, which is almost on par with Netwealth. The vote will be held next month.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.