Further consolidation in fund services
April 2015

Consolidation and restructuring in the fund services industry is continuing apace, with the latest news of Maitland acquiring Phoenix Fund Services, just a week after the announcement that Citigroup has found a buyer for its US transfer agency business. For many years now, custodian banks have built or bought fund administration businesses. Attracted by good margins, fund administration is a natural fit for them – being an extension of their valuation, depositary/trustee and associated services.

Recent transactions include Wells Fargo's acquisition of LaCrosse Global Fund Services from Cargill International, CACEIS' purchase of the third-party fund administration business of EFG International in French-speaking Switzerland and BNP Paribas Securities Services picking up the depositary bank businesses of Commerzbank in Germany and of Banco Popular in Spain.

Perhaps the most noteworthy example has been Citigroup stepping up to become a market-leading provider of hedge fund and mutual fund administration services through its August 2007 purchase of Bisys Group, Inc., for a net cost of $800 million. This was, fundamentally, strategically sound – but the choice of an all-cash transaction at the top of the market was unfortunate. Putting to one side possible difficulties in successfully integrating the two firms' cultures, the leap into traditional and hedge fund administration – and entering the under-served market for wealth management administration – were good ideas at the time.

Also in the mix from the Bisys acquisition was a transfer agency operation. Whose madcap idea was it to retain that? Unlike fund administration, transfer agency is not a natural extension of custody. Custodians' core product is facing a drive to commoditization and their raison d'Ítre is the provision of added-value services, so it seems unwise to take on processing which is a pure commodity function. The core transfer agency functionality surely sits best in a technology-driven utility – where scale advantages can be realized. With Citi deciding to exit the business, SunGard has leapt at the chance to buy the US transfer agency unit as a catalyst to expand its established operation into a full-service utility for transfer agency.

Fund administrators have also been on a spending spree over the past few years. The motive is often to add or grow a business servicing alternatives, such as with U.S. Bancorp Fund Services, LLC acquiring AIS Fund Administration and Mitsubishi UFJ Fund Services buying Meridian Fund Services Group. For Maitland, their purchase of Admiral Administration achieved this goal – and was also driven by the desire to expand their global reach, which was why they have now found UK-based Phoenix Fund Services an attractive partner.

Many small administrators have grown organically at a fast pace – through taking on more clients while also relying on the rapidly growing asset base of well-picked start-up fund manager clients. But they often face sharp growing pains. A large part of their revenue can be concentrated in just a few clients, which places all parties in an uncomfortable position. Without substantial equity investment, small firms face balance sheet constraints – with insufficient capital to give comfort to larger prospective clients and to allow for the investment needed to realize their ambitious growth plans. So there is a strong likelihood that many firms with client assets in the range of, broadly, $1bn to $100bn are likely to be scooped up by their larger rivals.

Beyond the growth challenges specific to small firms, fund administrators of all sizes have not had an easy ride in getting hold of new clients. In the traditional space, many fund managers are yet to outsource their own operations. For alternatives, a proliferation of suppliers has been chasing a relatively small number of funds. Compounding the problem for administrators is the fact that fund promoters and investors have come to pay more attention to expense ratios, leading to downward pressure on the fees charged by these providers.

For Citi, a little over seven years after the Bisys acquisition, two factors had combined to make hedge fund administration, wealth management administration and certain transfer agency operations unviable for achieving sustainable growth: a drop in returns and the significant banking regulations it faces.

Banks are shackled by intense regulatory demands – including Basel III capital requirements, by virtue of which business units are competing for capital and collateral assets, so that only those lines of business generating sufficient returns will survive. Non-bank fund administrators, while not as severely affected, still face a barrage of regulatory and commercial challenges.

To succeed, a provider needs to have the right people, technology and jurisdictional coverage. As firms look to build the capabilities to meet the increasing demands placed on them, we can expect a continuation of the steady wave of consolidation in both the traditional and alternative spaces.





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Consolidation and restructuring in the fund services industry is continuing apace, with the latest news of Maitland acquiring Phoenix Fund Services, just a week after the announcement that Citigroup has found a buyer for its US transfer agency business. For many years now, custodian banks have built or bought fund administration businesses. Attracted by good margins, fund administration is a natural fit for them – being an extension of their valuation, depositary/trustee and associated services.

Recent transactions include Wells Fargo's acquisition of LaCrosse Global Fund Services from Cargill International, CACEIS' purchase of the third-party fund administration business of EFG International in French-speaking Switzerland and BNP Paribas Securities Services picking up the depositary bank businesses of Commerzbank in Germany and of Banco Popular in Spain.

Perhaps the most noteworthy example has been Citigroup stepping up to become a market-leading provider of hedge fund and mutual fund administration services through its August 2007 purchase of Bisys Group, Inc., for a net cost of $800 million. This was, fundamentally, strategically sound – but the choice of an all-cash transaction at the top of the market was unfortunate. Putting to one side possible difficulties in successfully integrating the two firms' cultures, the leap into traditional and hedge fund administration – and entering the under-served market for wealth management administration – were good ideas at the time.

Also in the mix from the Bisys acquisition was a transfer agency operation. Whose madcap idea was it to retain that? Unlike fund administration, transfer agency is not a natural extension of custody. Custodians' core product is facing a drive to commoditization and their raison d'Ítre is the provision of added-value services, so it seems unwise to take on processing which is a pure commodity function. The core transfer agency functionality surely sits best in a technology-driven utility – where scale advantages can be realized. With Citi deciding to exit the business, SunGard has leapt at the chance to buy the US transfer agency unit as a catalyst to expand its established operation into a full-service utility for transfer agency.

Fund administrators have also been on a spending spree over the past few years. The motive is often to add or grow a business servicing alternatives, such as with U.S. Bancorp Fund Services, LLC acquiring AIS Fund Administration and Mitsubishi UFJ Fund Services buying Meridian Fund Services Group. For Maitland, their purchase of Admiral Administration achieved this goal – and was also driven by the desire to expand their global reach, which was why they have now found UK-based Phoenix Fund Services an attractive partner.

Many small administrators have grown organically at a fast pace – through taking on more clients while also relying on the rapidly growing asset base of well-picked start-up fund manager clients. But they often face sharp growing pains. A large part of their revenue can be concentrated in just a few clients, which places all parties in an uncomfortable position. Without substantial equity investment, small firms face balance sheet constraints – with insufficient capital to give comfort to larger prospective clients and to allow for the investment needed to realize their ambitious growth plans. So there is a strong likelihood that many firms with client assets in the range of, broadly, $1bn to $100bn are likely to be scooped up by their larger rivals.

Beyond the growth challenges specific to small firms, fund administrators of all sizes have not had an easy ride in getting hold of new clients. In the traditional space, many fund managers are yet to outsource their own operations. For alternatives, a proliferation of suppliers has been chasing a relatively small number of funds. Compounding the problem for administrators is the fact that fund promoters and investors have come to pay more attention to expense ratios, leading to downward pressure on the fees charged by these providers.

For Citi, a little over seven years after the Bisys acquisition, two factors had combined to make hedge fund administration, wealth management administration and certain transfer agency operations unviable for achieving sustainable growth: a drop in returns and the significant banking regulations it faces.

Banks are shackled by intense regulatory demands – including Basel III capital requirements, by virtue of which business units are competing for capital and collateral assets, so that only those lines of business generating sufficient returns will survive. Non-bank fund administrators, while not as severely affected, still face a barrage of regulatory and commercial challenges.

To succeed, a provider needs to have the right people, technology and jurisdictional coverage. As firms look to build the capabilities to meet the increasing demands placed on them, we can expect a continuation of the steady wave of consolidation in both the traditional and alternative spaces.