Major consolidation expected in fund administration space

Widespread merger & acquisition (M&A) activity in the hedge fund administration sector could result in there being just 10 major players in the market within a decade, according to BNP Paribas Securities Services.

Hedge fund administrators have undergone major consolidation since 2008. Data from Preqin found the top 10 administrators currently service around 57% of the hedge fund market.

“There has been major consolidation in the hedge fund administration industry, and it would not be rash to predict there could be 10 players dominating the fund administration industry within 10 years,” said Ian Lynch, global head of hedge fund services at BNP Paribas Securities Services.

The last few years has seen a spate of acquisitions. BNP Paribas Securities Services itself acquired the fund administration business of Credit Suisse. Meanwhile, Mitsubishi UFJ acquired UBS Alternative Fund Services in June 2015. SS&C GlobeOp acquired Citi Alternative Investor Services, having just bought Advent, the fund accounting technology provider, for $2.6 billion earlier in the year.

The Preqin paper, however, highlighted some regulators and investors had questioned whether it was appropriate for bank-owned administrators to be cross-selling other services such as prime brokerage. Bank-owned administrators, however, point out these service offerings have strict Chinese Walls separating them.

Lynch argued that increasingly managers were looking for a full-service offering as opposed to a plug and play solution. “I suspect that hedge fund administrators backed by large custodian banks will be able to navigate the landscape more seamlessly going forward. This is because they will be able to offer a diverse product set including custody and full-scope depositary as required under the Alternative Investment Fund Managers Directive (AIFMD),” said Lynch.

While offering full-service depositary is certainly an advantage for custody banks, a number of fund administrators are providing depositary-lite to EU managers of non-EU funds using national private placement regimes (NPPR) in certain member states or non-EU managers of non-EU funds marketing into EU jurisdictions such as Germany and Denmark. Depositary lites essentially provide the same services as full-scope depositary banks although they are not bound by AIFMD’s strict liability provisions for loss of financial instruments at sub-custodians.

The European Securities and Markets Authority (ESMA) is unlikely to scrap the provisions around NPPR anytime soon as it has yet to determine which non-EU jurisdictions meet regulatory equivalence to attain the pan-EU AIFMD marketing passport. This means some depositary-lites have been given breathing space.

However, Lynch argued NPPR would ultimately be withdrawn. “Our view is that NPPR will disappear over time meaning AIFMs or firms marketing into the EU will require a depositary that is subject to strict liability,” commented Lynch.