Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Lower mid-market PE leaders canvas financial advice investment avenues
Global buyout kings like Bain Capital and KKR aren’t the only market players interested in taking a material investment position in the Australian financial advice market, with smaller private equity players just as keen on taking a significant – albeit smaller scale – punt on the industry.
Lower mid-market PE leaders Fortitude Investment Partners made the case for investment in the industry recently in a paper entitled Investing in digitisation of financial services, which laid out the thesis for allocating capital towards an industry buttressed by one of the largest retirement systems in the world.
“On its own, the Australia superannuation system is the fourth largest savings pool in the world, with $3.9 trillion under management,” the paper states, noting that only 11 per cent of Australian households currently receive personal financial advice.
Two big factors make the case for investment in a financial advice business – or one that supports the industry – compelling, Fortitude says. The shift towards personalised retirement savings management via the self-managed superannuation funds, and the broader development of technology being embedded into the financial ecosystem around retirement savings.
These two factors are intrinsically linked. In Australia we have a burgeoning retirement account, with a quarter of it already invested in SMSFs. Technology, Fortitude believes, is clearing the path for more of that $3.9 trillion pile to be directed towards the SMSF sector.
“SMSFs have historically been costly and complex to manage, and investors have been reticent to actively participate in their management,” the paper states. “Recent enhancements in technology are enabling more automated investment decisions, reporting and auditing for SMSFs and other investment vehicles in Australia. We at Fortitude believe organisations facilitating this increase in efficiency of advice and reporting will enhance the proportion of investors who can access more tailored investment strategies through SMSFs and similar.”
Despite only around 5 per cent of Australians being a member of an SMSF, the prudential regulator’s figures (see below chart) show that around $1 trillion of the money sitting in Australia’s superannuation pile is currently held in an SMSF. “This presents significant opportunities for an investor like Fortitude,” the paper states.
The investment opportunities that present through these dynamics can be broken down into three areas, Fortitude believes. The first is technology that will enable efficiency of access. “Technology can be used to enable more efficient allocations of portfolios, whilst enhancing reporting, auditing and compliance requirements,” the group notes.
The second is the opportunity to re-build scale in wealth management and financial planning after the exit of the “slow moving, large, often conflicted” major banks and the retreat of institutional providers like Insignia and AMP. “The industry is now more fragmented, with a large number of smaller providers of financial advice, despite the increasing benefits of scale of practices in uses of technology and profitability,” Fortitude says.
The third avenue for investment is the need for more tailored advice and product requirements.
“The proliferation of different types of advice requirements and the requirement for advice to be more personalised and tailored to each investors’ requirements,” Fortitude says. “New, often unique products are becoming more available, often outside of large superannuation funds, which may be more applicable to the uniqueness of investor circumstances.”
Behind all these technology drivers to the investment case is one crucial ingredient: regulatory change. The 2018 Hayne Royal Commission sparked eventually led to the Levy advice review, which the government distilled down into its Delivering Better Financial Outcomes legislative reform suite, which promises to free up access to advice by reducing red tape and compliance roadblocks.
While the implementation of that reform has stalled at different points, with the second tranche of legislative changes still in train, the full suite of reform has the potential to significantly improve the wealth management industry’s overall functionality. “We assess that as being positive to our themes,” Fortitude says.
