Deal in Focus: JC Flowers backs MMC's Interactive Investor

Five years after its initial investment in financial media and online trading group Interactive Investor, MMC Ventures turned to US buyout house JC Flowers to support its growth strategy for the business. The new backer financed the acquisition of Toronto-Dominion Bank's (TD Bank) European direct investing companies, taking a majority stake in the consolidated group via the transaction.

MMC – which was previously the largest shareholder in Interactive Investor – will retain its existing shares in the company on completion, electing not to make an exit as it foresees considerable scope to increase the value of the business.

As MMC managing partner Bruce Macfarlane explains, the scale of the deal for TD Bank's assets led it to seek an investment partner with greater resources than a VC firm typically enjoys. "When it became evident there was a possibility for a combination play, we recognised we would need to raise the funding," says Macfarlane. "It's beyond the typical scale of venture capital. We got JC Flowers involved given their specialism in financial service investing – and a pretty impressive track record around the world."

An IPO is one possible exit [for Interactive Investor]. It's a very straightforward business to describe, being in the business of buying and selling shares on behalf of its customers. But it does also definitely qualify for a potential trade sale" – Bruce Macfarlane, MMC Ventures

Indeed, JC Flowers has made numerous investments in the European financial services sector. Most recently, the US-based firm led an €82.5m series-C for Kreditech, a German consumer finance technology company, in September 2015. A year earlier it sold Belgian insurer Fidea to Chinese insurance firm Anbang Insurance Group, bringing to an end a three-year holding period.

MMC initially provided Interactive Investor with £1.8m of growth capital funding in January 2011. At the time, the company focused primarily on its financial media operations, though the venture capital firm cited the retail brokerage market – in which Interactive Investor was also already active – as a key area for growth.

Macfarlane explains the company has undertaken organic growth since the VC's initial investment. However, during that period the business had been presented with bolt-on opportunities, as the sector undertook considerable consolidation around it. Though Interactive Investor explored many of these possibilities, the TD Bank carve-outs are its first successful acquisitions. The transaction is intended to create a considerably lower-cost challenger to Hargreaves Lansdown, which currently has a market cap of £5.8bn.

Launching the challenger
According to publicly available documents, Interactive Investor generated a turnover of £16.3m in the year ending June 2015 – up from £14m at the time of MMC's initial investment – and has grown its headcount from 81 to 143 during the same period. Following the deal, the combined group will have assets under management of £18bn compared to Hargreaves Lansdown's £61.7bn.

Under its new ownership model, the business will primarily focus on an organic growth strategy, aiming to capitalise on the increasing trend for retail investors taking a direct approach to their wealth management. It will also seek to expand its product range, says Macfarlane, with low-cost automated advisory services firmly on its radar. However, he also adds the owners have not ruled out the possibility of making further acquisitions, should the opportunities present themselves.

Despite the fact that Hargreaves Lansdown will be Interactive Investor's only larger competitor within its direct market, Macfarlane believes the company would prove attractive to corporate buyers. "An IPO is one possible exit," he says. "It's a very straightforward business to describe, being in the business of buying and selling shares on behalf of its customers. But it does also definitely qualify for a potential trade sale. You could see a large financial institution that wants access to what will be a very large pool of customers and may well want to buy the business."

It is somewhat unconventional for a venture capital firm to introduce a new majority shareholder into the equity structure of a portfolio company without making an exit. However, MMC is banking on JC Flowers' track record and considerably larger pool of capital to accelerate Interactive Investor's share of the UK's retail investment market. Should the strategy prove successful, it might lead to a number of MMC's peers following suit.

People
MMC Ventures – Bruce Macfarlane (managing partner).
Interactive Investor – Adam Seale (CEO); Hugo Van Vredenburch (chairperson); Barry Bicknell (chief financial officer).

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