Stephen Lewis has worked at a number of bank owned fund administrators. Having made the transition to Maples Fund Services three years ago, he comments on the sale of Citi’s fund administration business to SS&C, the recent divestments of these businesses by banks, and what the ongoing consolidation theme means for the industry.
GC: What is your view on why more banks are selling their fund administration business?
SL: There are different types of banks so you cannot put them all into one bucket. State Street has a very different banking model than Citi.
The universal bank model is a term used to describe banks that do everything – investment banking, retail banking and fund management – and I think Citi is in that bucket rather than the some of the more wholesale banks like State Street or BNY Mellon.
State Street and BNY Mellon don’t have the same reasons to look at their transaction businesses in the same way as Citi. We have had some fund management clients come to us and say they’ve had a conversation with their existing administrator asking them to buy more of their services or else they’ll be forced to raise fees. But I don’t think that’s just the banks. I know everyone looks at their bottom line pretty regularly and at times you have to be quite ruthless about the funds you service. Every single time this conversation happens that administration business moves into the middle ground and that’s where we sit, amongst others. There are banks moving into this space but I’m slightly surprised that so many are interested in pursuing this particular line of business. I can see why it fits well into a custodian bank’s business, as long as they’re making money. But I’m not sure how it would fit into the investment bank’s,. I think they would argue they have a vertically integrated solution for their clients.
On the other hand you have Wells Fargo and Bancorp coming into the middle ground of $50-100 billion of assets under administration, and buying LaCrosse and Quintillion, respectively. In the middle ground you have also had Mitsubishi acquire UBS, BNP buying Credit Suisse, so there is still a lot of interest in trying to get over that $100 billion hurdle.
There has been a lot of consolidation. Some of the bigger bank owned administrators are divesting their businesses and you’ve also got some of the new entrants – who are coming in and acquiring. The mid tiers are taking advantage of that and the motivation of the number of independent fund services groups is to get to that point where there is a trade sale or IPO. Bancorp bought two administrators and its interesting SS&C bought GlobeOp and Advent Geneva as well. You get to the point where you satisfy your stakeholders and you become a serial acquirer.
GC: Why would universal banks not want to be in this space anymore?
SL: I think fund administration is a flawed model…even for custodial organisations. They’ve always had an advantage because they have a big custody business. Deutsche had that, Citi had that, State Street and BNY Mellon had that and they added foreign exchange and securities lending to it. On top of that they added some service business. Admittedly in the fund administration area hedge funds are the really difficult ones to service because a fund with one strategy will be very different from a fund with another strategy and they require different disciplines from their administrator. It’s hard work to maintain the same levels of service across all hedge fund strategies.
GC: How has the consolidation theme affected fund managers?
SL: There is a degree of uncertainty. There are two service providerss that the fund managers and the investors rely on: the fund administrator and the prime broker. The prime brokers have obviously, in the last few years, reviewed their relationships and a number of hedge funds have had to move to other providers.
On the fund administration side, we have had a lot of conversations with funds ranging from anywhere between $100 million to sub half a billion in size. Clearly we have been speaking to clients of UBS, Citiand SS&C. Every time an acquisition happens that’s when the phone starts to ring with the next set of fund managers who are feeling some uncertainty. We saw much more transition business this year than last year.
GC Perspective: Maples' Stephen Lewis on Consolidation in the Fund Administration Industry
Stephen Lewis has worked at a number of bank owned fund administrators. Having made the transition to Maples Fund Services three years ago, he comments on the sale of Citi’s fund administration business to SS&C, the recent divestments of these businesses by banks, and what the ongoing consolidation theme means for the industry.