Lancaster Investment Management has criticised the potential £5.4bn takeover of Hargreaves Lansdown by a private equity consortium.

Lancaster, which owns a relatively small holding of 1.9m shares in Hargreaves worth £21m, said it was “unconvinced that this offer is fair for all HL shareholders.”

In an open letter to HL chair Alison Platt, the firm questioned the fairness of the deal which it said would hit small shareholders.

It criticised the value of the offer as well as terms that would allow up to 35% of the shares to roll over into a new private company.

It urged Hargreaves to take more time to consider its options and take on board shareholder support for alternative outcomes.

Last week HL’s board confirmed that it has decided to engage with the consortium and provide due diligence access.

That was in response to the consortium increasing its bid by more than 10% following HL’s rejection of an earlier £5bn takeover bid in May.

The consortium raised its offer from 985p per share to 1,140p per share in cash.

The consortium will decide by 19 July whether to make a full offer. The consortium comprises CVC Advisers Limited, Nordic Capital XI Delta, SCSP (acting through its general partner Nordic Capital XI Delta GP SARL), and Platinum Ivy B 2018 RSC Limited, a wholly-owned subsidiary of the Abu Dhabi Investment Authority.

The Lancaster letter said: “We are not averse to private equity offers where there is also a ‘win-win’ along with public shareholders and other stakeholders. However, here we find it an unfortunate irony that HL, as a champion of open access to financial services, may itself now be close to exiting the public markets without full value offered to public shareholders in our opinion.

“We cannot help but perceive this as a two-tiered offer, and in our opinion, it does not seem equitable to those shareholders unable to go private.”

The letter included the following questions for the HL board:

• What timeline do existing shareholders view as acceptable for HL's recovery to growth as a listed company? 
• What proportion of existing shareholders would be able to take up the private "rollover equity alternative" which we view as central to this offer?
• Does the cash offer reflect fair value given the points made below on valuation and growth potential?
• Will the Board support smaller shareholders by offering a separate vote for those who are not able to take up the private "rollover equity alternative"?   

Lancaster concluded: “We also urge the board to give itself more time in its current form to assess HL's strategic options and to assess shareholder support for different outcomes.  If management can execute on the strategy as the board and we expect, then in our view there is plenty of growth and upside potential for this private equity consortium or others to come back at a very different price and valuation in the future. 

“We believe that path would create a far better outcome for HL's public shareholders, HL's clients, and indeed British savers.”

London-based Lancaster Investment Management was founded in 2007 by Matthew Wood and James Roycroft.