Why Independent Fund Administrators Are Like the Last Kings of the Wild Frontier

A founding father of one of the largest formerly independent fund administrators recently made Global Custodian headlines with the prediction that there will only be ten fund administrators left in a few years time.

A founding father of one of the largest formerly independent fund administrators recently made Global Custodian headlines with the prediction that there will only be ten fund administrators left in a few years time. Ron Tannenbaum of SS&C GlobeOp, previously GlobeOp before the acquisition of the fund administrator by the technology group, added that he would not be surprised if there are even fewer than ten in a few years.

His comments, while punchy, come as little surprise considering the extent of consolidation in the last few years. The increased regulatory burden on fund administrators and their clients is placing pressure on fees and costs, and only providers with the scale and ability to invest will survive. Impending regulations such as Solvency II have seen fund administrators taking as much cost out of their clients business as possible by scaling up and investing in technology so that their clients can outsource without losing too much control. Data management, price feeds, real-time Form PF and KIID provision are some of the ways they are meeting clients quest for transparency.

Taking the costs out of doing business, while still investing, has been the key to these fund administrators ability to do well as often burdensome regulation and growing investor pressure have spurred the outsourcing of functions such as the calculation of risk and NAV to external providers. Those providers with the scale to do this are being sought after by other securities services providers, corporates and private equity firms. A notable recent example of M&A activity in the fund administration space is SS&Cs acquisition of GlobeOp in May, which was followed up by the acquisition of Goldman Sachs hedge fund administration arm by State Street in July. On a much smaller scale, but worth mentioning, SS&C GlobeOp acquired U.S.-based fund administrator Gravity Financial last week.

This spate of acquisitions means there are only a handful of independent fund administrators left. HedgeServ, Credit Suisse’s fund administration division and Citco are being talked about as the next targets for acquisition. Despite the attraction, these independent administrators have had their share of ups and downs. Citco has had a particularly challenging year and appears to have scaled back instead of scaled up. The fund administrator recently confirmed it will make redundancies at its Bahamas operations, with a spokesperson saying it is reorganizing to “improve operational effectiveness” by moving most functions that are carried out in the jurisdiction to other parts of the world over the coming months. Then, last week, the group’s back-office and data-processing subsidiary in Ireland reported a pre-tax loss of €1.49 million in 2011, compared to a pre-tax profit of €1.17 million in 2010, largely due to redundancies that will follow the company’s restructuring. This news is yet another reminder of the costs involved in staying in the fund administration business.

Nonetheless, fund administrators’ capabilities could provide a would-be acquirer with substantial scale and a large client book. State Street is still on the lookout for acquisitions that will add more clients to its already sizeable platform.

But these would-be acquisitions should be looked at in tandem with various changes in the fund administration space. At the event at which Tannenbaum spoke, it was noted by two industry participants what the fund administrators of the future would look like. “The fund administrator of the future is likely to use cloud computing, said one. It will also pay more attention to exceptions in reporting, rather than spending more time analyzing entire reports presented to them. I see smarter working it will be a case of better technology that is able to determine the exceptions that need checking and verifying.”

Another added: Our image is changing, we are forward thinking, we need greater skills and we need to use our existing systems to the best effect. In the future, leaner and meaner will be the way to go.

In many ways the remaining independent fund administrators are seen as the last kings of the Wild Frontier, with that frontier being securities services. While the cutting of NAVs might be regarded as simple and mundane, the investment and the technology required to do that, given the recent convergence in the hedge fund and long-only space, for example, and the requirement on independent fund administration platforms to respond, puts them at the forefront of innovative thought and makes them masters of reinvention. Tannenbaum may be on the money with his prediction, but it’s perhaps not a case of how many will be left but who is left and what becomes of them in a rapidly changing fund space thats more important. Similarly, the question is will their new owners, be they custodian or corporate, be up to the challenge of ensuring the innovation and creativity of the acquired remains.

– Janet Du Chenne