Hargreaves Lansdown investors go head-to-head for Mid England’s favorite broker

As time went on, they became addicted to the idea of ​​public ownership of shares; these were the high-octane years of Margaret Thatcher’s government, and Hargreaves and Lansdown capitalized on the ‘Big Bang’ in financial services and the creation of a new generation of ‘Sids’, named after an investor in adverts for the 1986 privatization of British Gas.

From these beginnings and later their breakthrough move to serving customers over the internet, their eponymous firm, Hargreaves Lansdown, became one of Britain’s entrepreneurial successes.

Having listed in 2007, it is now in the FTSE 100 and is the UK’s biggest financial ‘supermarket’, used by 1.8 million people to buy savings products, pensions, stocks and shares. Its roots remain in Bristol, where it is one of the largest employers in the city with 2,220 employees.

But now HL, as it is known in the industry, is facing its biggest shake-up in its four decades of existence after agreeing a £5.4 billion takeover deal with a private equity consortium last week. The bidders – private equity firm CVC, which owns a stake in the Six Nations Rugby Championship, Stockholm-based Nordic Capital and Platinum Ivy, part of the Abu Dhabi Investment Authority – brought HL to the negotiating table after increasing the initial offer from 985p per share to £11.40 .

The offer made the long-time founder of the city talk again. The size of their holdings means they hold the key to the company’s future, while City investors are drawing attention to the way the business is structured.

Hargreaves, with a 20 percent stake, and Lansdown, with 6 percent, have already made billions from the business they created. Hargreaves, 77, who described himself as “rich as Croesus”, is valued at £1.84bn, according to The Sunday Times Rich List. The son of a Lancaster baker insists he leads a modest lifestyle from his renovated seven-bedroom Georgian mansion outside Bristol. He admitted to one extravagance: an Embraer Legacy 500 jet.

He used his money to support Brexit – he gave Leave.EU a £3.2m donation – and the Conservatives (although he no longer does), as well as supporting charities, giving away £100m in 2020.

Lansdown, 71, grew up in Bristol but is now based in Guernsey. Worth £1.17 billion according to The Sunday Times Rich List, he still has strong ties to his home city, where he owns Bristol City FC and the Bristol Bears premiership rugby team.

As recently as five years ago, the fortunes of Hargreaves Lansdown itself seemed to be as high as those of its founders: it was a stock market darling worth more than £10bn. Since then, however, it has gone down a lot and the company has lost 40 percent of its value. So what went wrong and what does the future hold if private equity bidders take over?

The rot started to show around 2019, when the company was embroiled in a scandal surrounding the collapse of Neil Woodford’s investment funds. HL allegedly continued to recommend the flagship fund Woodford Equity Income until it was suspended, leaving its clients facing losses. Some are now taking legal action.

The Woodford crisis came just as younger, arguably more nimble, rival investment platforms were starting to snap at HL’s heels. Chief among these were AJ Bell, founded by Liverpool tycoon Andy Bell, and Interactive Investor, now part of FTSE 250 fund manager Abrdn. Both had better, younger versions of the technology that made HL so popular, allowing them to offer cheaper and sometimes faster service to customers.

Chris Hill, then CEO, decided to act. In 2022, at a capital markets day now famous among HL shareholders, he said the company needed to spend £175m on a five-year plan to bring its IT up to scratch.

As Rahim Karim, an analyst at Investec, recalled: “This has led people to question what they have done historically … and whether HL is really as good as it seems.”

Hill also cut a special dividend, further adding to downward pressure on the stock.

Peter Hargreaves – the biggest dividend recipient from the business – was not impressed. He began criticizing the company he founded, describing Hill as “useless” and accusing him of allowing costs to rise too quickly relative to revenues. Hargreaves also said he made a strategic mistake when he started offering “advice” to customers instead of sticking to HL’s traditional routine of offering them a way to buy and sell financial products.

President Deanna Oppenheimer could not survive the blast, and Hill left last year. His replacement, Dan Olley, who was already out of the running heading Tesco data provider Clubcard Dunnhumby, took over last August and the mood has since improved.

Olley wasted no time telling City that cost discipline was in his “DNA” and bringing in his own management team. “He’s been part of the share price recovery,” said Julian Roberts, an analyst at investment bank Jefferies.

Olley still has questions to answer. While HL has more than three times as many customers as AJ Bell and Interactive Investor, its customer retention rate has fallen from 94 percent to 92 percent over the past six years.

Olley acknowledged that HL was too focused on Isas and share-based products, which have fewer “independent customers” than those buying pensions.

Another question is how it will deal with the new excise duty rules, which require companies to think about “good outcomes” for their clients. The rules led to inevitable questions about whether HL could keep its notoriously high customer charges; the firm charges 0.45 percent on each investment, while AJ Bell charges 0.25 percent and Vanguard just 0.15 percent.

A cut in fees (and its profits) would likely go down badly with stock market investors. Some, including Peter Hargreaves, seem to suggest that this is precisely why HL should be taken private, away from the glare of the public markets. Incidentally, Hargreaves also claimed it needed to cut around 1,000 jobs.

However, while many in the city now seem to think that HL will be sold, a row is looming over the manner in which this is being done.

First, the price. One of the top 20 shareholders called it “disappointing”, while another said the decision to accept the offer was a “finely balanced one”. Another fund manager at a major shareholder said it was “probably a bit more upside” – City speak as “make us a better offer”. But the shareholder said it was “within the realms of acceptability”.

Vivek Raja, an analyst at broker Shore Capital, said the price for a “trophy asset” was too low.

Perhaps shareholders were more irritated by the unusual nature of the bidders’ offer. Instead of taking the cash outright, the CVC-led group created a structure where the sellers can keep 35 percent of the company.

Most in the City assume it is aimed at Hargreaves and Lansdown – although in principle neither Lansdown nor Hargreaves have said whether they intend to take cash or move to a private equity vehicle. But for many institutional shareholders, this is not an option because they are either prohibited from investing in companies that are not listed on the stock market or have a limited amount they can hold.

As one of the top 20 investors said, “It’s effectively a two-step deal.”

Lansdown’s comment a week ago – that the consideration should not only be about price – added to the confusion. His statements stunned other investors. As Investec’s Karim said: “I think most institutional investors have one priority, and that is to get their clients the maximum return on the investments they hold.”

Shareholders have requested a meeting with Alison Platt, the new chairwoman who previously ran estate agent Countrywide, to discuss their dissatisfaction.

In the meantime, there is hope that a rival bidder may come in with a better offer. Investors saw HL’s closing share price on Friday night — up more than 7 percent from a week ago — as evidence that the market thinks there’s more to come.

Some wonder if there will be other suitors. One source commented: “This is a good opportunity that doesn’t come around very often.”

Time is running out: the deadline for submitting a formal offer is 19 July. Raja at Shore Capital this weekend summed up the thoughts of many: “This is definitely not over yet.”

Customer view

In a world where fund managers once kept their distance from their clients and investment deals had to be done through stockbrokers, Hargreaves Lansdown stood out from the start, James Coney writes.

The engine behind its incredible rise – from a small office of Peter Hargreaves and Stephen Lansdown in 1981 to a FTSE 100 company – has always been excellent customer service. Its initial telephone service was familiar and practical, removing the stuffiness from the white-collar world of trading.

HL launched its own fund ranges and removed initial fees, meaning customers had more of their money invested from the start. However, the Internet proved a transformative moment for the company as HL realized the huge potential of creating a self-service investment platform.

His big idea was that savvy and well-informed customers didn’t have to pay financial advisors and insurance salespeople and could do it all themselves. It was revolutionary. Suddenly, customers could trade whenever they wanted in funds, stocks and markets around the world – and they loved it.

HL had become a dotcom giant, but it still invested in getting its phone lines answered quickly by real people, such was the focus on service.

Inevitably, cheaper rivals followed, copying its model, and soon HL’s influential lists of recommended funds – and its higher-than-average fees – became a regular source of justified criticism. But for well-off investors, the fees were worth it. Those who switched to cheaper rivals often grumbled about missing some of the goodies offered on the HL site.

However, in recent years, HL has fallen off the pace and its technology has come to seem clunky. The opponents from America were just as polished and polished; during the covid trading frenzy the HL platform got stuck.

Suddenly, the extra cost of this once premium service didn’t seem worth it.