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An arms race is taking shape among fund administrators. It’s taking form as expansion activity into new jurisdictions; as consolidation activity to keep pace with the asset-servicing giants; and as innovation through technology rollouts premised on differentiating fund administrators in a hyper competitive market.
Take SS&C GlobeOp, the no. 1 private capital fund administrator in Preqin’s latest ranking. The company has secured seven acquisitions of fund administrators since 2012. Meanwhile, State Street, the no. 3 fund administrator in the same league tables, has an IT budget that exceeds $2 billion annually, and has more recently leaned on acquisitions, such as its $2.6 billion deal for Charles River Development (CRD), to bolster its own technology offerings.
In this environment, independent fund administrators should be asking if their money is best spent trying to keep pace investing, and continually reinvesting, in “proprietary” technology or if their resources would be better spent blazing a trail into new markets and categories – destinations already on the growth roadmaps of their clients who need a guide to navigate the complex reporting and regulatory hurdles that accompany this growth.
Most fund administrators, for obvious reasons, see technology as a way to improve what they already do. Operational efficiencies, to be sure, usually translate into a better service offering and lower costs, while modern dashboards can reduce friction and make data more accessible. Fund managers, however, rarely perceive these advances as disruptive enough to endure the high switching costs and risks associated with onboarding onto a new platform. Moreover, whether or not these capabilities are proprietary in nature matters far less than whether the solutions are intuitive, interoperable and resilient.
Disruptive innovation is occurring, but it’s generally confined to the growing population of FinTechs and start-ups, who are incentivised to push the boundaries. Innovators in these circles aren’t merely trying to improve operations at the margins; they’re reimagining new solutions that will bring private capital to new audiences (think retail). Moreover, through direct integration with banking institutions and fund platforms, capital calls and distributions will be made instantaneously with documentation across the entire lifecycle of the assets, from commitment, to investment, to realisation. They’re also developing technology that brings efficiency and ease to core administrative functions.
The Competitive Spectrum
Innovation, to fund administrators, can often seem like a race with no end. In many ways, this traces back to the current competitive landscape. At one end of the spectrum are the larger asset-servicing giants, namely the global custodian banks like State Street or Northern Trust. This segment was the first to initiate consolidation among fund administrators. In recent years, they’ve poured billions into their technology, yet still struggle to meet the nuanced needs of private capital investment managers. At the other end of the spectrum are the publicly held technology companies like SS&C GlobeOp. One might assume they have a distinct advantage when it comes to innovation, but they’re just as beholden to shareholders, who view acquisitions of captive clients as a more certain path to value creation.
In between these two segments, though, is an expansive and diverse middle that characterises the bulk of the fund-administration universe. It’s comprised of independent operators, both newer admins and firms with long track records, all of whom leverage a deep specialisation serving a specific asset class or operate within certain jurisdictions. Among this cohort, most are confronting the technology question head on, trying to determine whether to build proprietary capabilities in house or, instead, expand the scope of their specialisation to attack new white space in complementary strategies, geographies or wrappers that investment managers, themselves, are keen to pursue.
Those in the latter category are generally content to leave technology to the FinTechs who themselves bring a deep specialisation to develop, test, rollout and maintain new capabilities, all without disruption. This expansive middle, however, can be further divided by those that built proprietary systems in the past and are now coping with technology debt, and those able to pick and choose from the most innovative vendors, without integration concerns or byzantine workarounds that create resiliency risk.
Rethinking the value of “proprietary”
To answer the technology question, though, fund administrators should scrutinise the extent to which such a large, recurring commitment – if they’re building a comprehensive solution in-house – addresses their near- and long-term business goals. For instance, will proprietary technology be viewed as a differentiator or ultimately pose a financial risk that eats into a fund administrator’s balance sheet? Bigger fund managers, for instance, are far more concerned about business continuity and the financial health of their business partners. And many view proprietary technology as a liability if it can’t easily integrate with their own front-office systems.
Efficiencies, too, often look better on paper. The promise that automation will deliver savings usually overlooks the cost of development and the potential for interruptions. Evidence can be found in the meandering digital journeys of the custodian banks. State Street’s Project Beacon, for instance, was billed as a five-year digital transformation that promised $550 million in annual cost savings. Yet, since the effort was first announced, total expenses at State Street have increased in each successive year. When the bank’s new CEO announced layoffs last year, he admitted the company’s “structural costs are still too high and our automation efforts have not moved fast enough.”
For fund administrators, who may service hundreds of different funds across multiple regulatory regimes, there’s no such thing as “fail fast and fail often.” Minimally viable products are not an option in such a mission-critical business environment. And rolling out an MVP to an expansive and diverse client, within an existing technology architecture, can make it challenging for fund administrators to pilot potential breakthroughs.
None of this is to say technology isn’t a differentiator. But a digital competency is often just as evident – and often more so – through an open-architecture strategy that curates and constructs a composite technology solution that meets the needs of a fickle and dynamic client base. For instance, onboarding and KYC documentation represent two of the biggest pain points and bottlenecks for fund administrators. Solutions are already available that can automate and improve the accuracy and speed of these processes. Why reinvent the wheel?
The curated approach also eliminates risks such as vendor lock-in or obsolescence. It also allows fund administrators – and by extension their clients – to incorporate new capabilities as technology becomes available and as needs arise. Consider just the rapid adoption of ESG reporting. Investment managers, themselves, are being pressed by their institutional investors to get up to speed and quickly, creating a distinct opportunity for service providers.
An open architecture approach of best-in-class vendors coupled with the most innovative startups allow new capabilities to be beta-tested among a small segment of the client base keen to leverage new capabilities and shape its development. The shift to open architecture also motivates tech vendors to focus as much on interoperability as creating solutions that fundamentally disrupt existing business models. The payoff for fund administrators is that a curated approach will position them to leverage the most innovative startups, who will bring true differentiation and help make their competitors with their own proprietary platforms quickly seem obsolete.
Fund administrators are well versed on the benefits of specialisation – it’s a sales pitch they’ve been making to investment managers since the industry took form. The caveat, however, is that as technology becomes a bigger part of their offering, it doesn’t mean they have to develop these skillsets on their own. Through working with FinTechs and a new generation of start-ups bringing disruptive innovations to bear, technology can provide the foundation upon which the administrators, themselves, add more value as a guide to their client’s growth rather than serving as the source of their client’s IT frustrations.