When considering an investment for the Henderson EuroTrust portfolio, we tend not to focus on market noise or any technical factors; the main thing we are doing is trying to establish whether what we are looking at is a good company or not. This is a key part of the research process.

There tend to be many features that most good companies have in common, but there are myriad characteristics and features to analyse that will be unique to each and every business. By undertaking detailed analysis of the 50 or 60 companies we have on our radar (a portfolio of ~40 positions and a watch list of 10-20 names) we try to ascertain whether a business is a good business and if so, whether now is the right time to be invested or not. In this article, we will highlight aspects of our process using one of our portfolio companies, Allfunds, a European business-to-business (B-to-B) fund platform.

Allfunds is a B-to-B platform that links fund houses and fund distributors. The business has its origins within Santander’s private bank and was founded in 2000 by the current CEO Juan Alcaraz. The core business model works by charging the fund houses a percentage of assets-under-administration (AuA), whilst operating a ‘buy-free model’ from the point of view of the fund distributors. Allfunds also provides value-added data and analytics services (Allfunds Connect) paid for by both fund houses and fund distributors on a subscription basis. Allfunds has grown AuA exponentially from €2bn in 2000 to €1.2tn as of the end of 2020 – making it the largest fund platform globally.

Allfunds operates in a business area that clearly benefits from platform economics, where scale enhances the fundamentals of the business and value proposition for customers. From a fund house point of view, Allfunds offers a single agreement which gives access to the largest global distribution network of any fund platform. From a fund distributor point of view, Allfunds offers the largest open-architecture fund offering of any fund platform.

Allfunds has access to over 1,500 distributors and is adding more than 50 each year. They have relationships with nearly 2,000 fund houses (global distributions with over 1,000 of these) and are adding over 150 each year. This creates a powerful flywheel effect; the more distributors that they add, the more attractive it is for a fund house to form a relationship with Allfunds, and the more fund houses that sign up, the more attractive the proposition becomes for distributors. As Allfunds continues to add distributors and fund houses to the platform, their market position becomes more powerful and their barriers to entry stronger. This scale benefit also supports the ‘stickiness’ of Allfunds’ relationships with distributors. In 2020, Allfunds had a distributor retention rate of >98%.

For fund house and fund distributor customers, Allfunds presents an attractive value proposition in an increasingly stringent regulatory environment with ever-present fee pressure. For fund houses continuing to suffer from regulatory burden and fee pressure, outsourcing becomes a way to increase cost efficiency and to expand distribution reach. Distributors are also experiencing similar pressures, and face a growing demand for higher fee transparency and consequently a greater demand for lower-cost open architecture funds. As these pressures continue over the medium term, this should support Allfunds’ core value proposition.

Allfunds also benefits from several powerful economic growth drivers. Household wealth is expected to grow at a 2% compound annual growth rate (CAGR) from 2019-24 and financial assets are gaining share versus other assets as a portion of household wealth. This trend should be strongest in Europe (Allfunds’ largest market), with 43% of household wealth held in financial assets in Europe vs 70% in the US. Allfunds expects this ongoing shift to add a further 3-percentage points to market growth. In addition to broader market growth potential, Allfunds have been gaining significant market share, largely through organic growth (adding distributors and fund houses and benefitting from their net flows) but also, more recently, through mergers and acquisitions (M&A). Since 2012 and ignoring the positive impact of M&A; Allfunds has added fund houses at a 17% CAGR, added distributors at a 10% CAGR and has grown net revenues at a 19% CAGR.

Allfunds’ Data and Analytics business ‘Connect’ provides additional growth optionality outside of the core platform business. Connect provides a single platform for fund information, fund execution, investment solutions, data & analytics and digital wealth solutions. Of the existing >1,000 fund houses who have global distributor agreements (GDAs) with Allfunds, 19% are Connect subscribers. However, of the 170 fund houses that were onboarded under a GDA in 2020, 49% were Connect subscribers. This highlights both the growth potential and increasing need for data and analytics from fund houses (and distributors).

Allfunds generated EBITDA margins of 71% in 2020, and has targeted a margin of 75% by 2025, supported primarily by operating leverage from the business’ inherent scalability. A key challenge Allfunds faces in achieving this aim is preserving net platform margins, which management guides to be ‘stable’ over the medium term. This follows recent erosion of core margins during a shift to clean share classes and expansion into new markets (at lower initial margin) and ongoing pressure from the shift from active to passive fund management and higher regulatory pressure. We expect these dilutive pressures to be offset by rising margins in other asset pools (e.g., BNP Paribas), growing mix of smaller fund houses (higher margin) and the growth of mix positive sub-advisory business.

Allfunds has a good track record on M&A in its 20-year history prior to its IPO. M&A is likely to remain a key component of the equity story in the future, which comes with inherent risks. Allfunds also faces some ‘key person risk’. A number of the senior executives, including the founder and CEO, have been at Allfunds since it was founded in 2000. The departure of these executives could create business continuity risk.

Allfunds has contributed strongly to the fund since we initiated the position in Summer 2021. We remain positive on the company’s ability to grow AuA, expand net revenue margin and allocate capital effectively to M&A. Although the shares trade at a wide premium to traditional financials (banks, fund platforms), we think Allfunds sits in a class of its own given an entrenched market leading position, clear scale advantages and double-digit earnings growth expectations over the medium term.

 

Assets under administration (AUA) Expand

Assets under administration (AUA) is a measure of the total assets for which a financial institution provides administrative services and charges a fee for doing so.

Compound Annual Growth Rate (CAGR) Expand

The compound annual growth rate (CAGR) is the rate of return (RoR) that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.

EBITDA Expand

Earnings before interest, tax, depreciation, and amortisation is a metric used to measure a company’s operating performance that excludes how the company’s capital is structured (in terms of debt financing, depreciation, and taxes).

IPO Expand

Initial public offering: when shares in a private company are offered to the public for the first time.

Leverage Expand

The use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.

Mergers and Acquisitions Expand

Mergers and acquisitions (M&A) is a general term that describes the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.

Operating leverage Expand

Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.