Failure to invest in systems will spur more M&A in fund admins, says Butterfield Fulcrum
The inability of boutique fund administrators to invest in systems and technology catering to hedge funds’ regulatory reporting requirements will facilitate a new surge in M&A activity, the COO at the recently acquired Butterfield Fulcrum has said.
This comes as a growing number of hedge funds have become heavily reliant on their fund administrators to collect and collate data for their regulatory reports. A number of fund administrators are offering services to help managers compile their Form PF, Form CPO-PQR, AIFMD reports and FATCA.
“Smaller fund administrators are going to struggle to invest in the necessary technology, quality staff and knowledge needed to keep pace with the growing demands of hedge funds, especially in areas such as regulatory reform. Many of these small fund administrators’ witnessed client assets and revenues shrink during and post financial crisis, and subsequently the asset return to the industry has predominantly been via institutional investment to larger, more established managers,” said Chris Mulhern, president and COO at Butterfield Fulcrum, which was acquired by Mitsubishi UFJ Financial Group in June 2013.
“This has not helped the smaller administrators whose clientele generally does not include these larger funds. With strained revenues and slow growth, it will be very difficult to make the necessary investments to help their clients, and that general theme I believe, will be a factor in more M&A activity down the line,” he added.
The last three years has seen a swathe of M&A activity in the highly saturated fund administration world. AIS, which had $25 billion in Assets under Administration (AuA) was sold to US Bancorp in November 2012, although the highest profile deals were SS&C’s purchase of GlobeOp and State Street AIS’s acquisition of Goldman Sachs Administration Services for $550 million.
Mulhern said he expects strong, independent fund administrators to try and offload themselves to banks, strategic buyers or private equity firms. “Selling to a bank is a positive for clients and for staff as it brings about scale, brand, balance sheet, additional products and services as well as the ability to bolster client service and investment in technologies,” he said.
The sale of Butterfield Fulcrum to Mitsubishi UFJ Financial Group will enable the firm to add banking, custody, trust, FX and securities lending to its suite of products, for example.
However, he conceded some banks might try to offload their fund administration arms which were high-cost and low revenue businesses, although he did not disclose which ones. “Some of the large banks view fund administration as a non-core business line, immaterial for the most part to the overall bank P&L, and I believe some more banks could try to shed their fund administration arms much like Goldman Sachs did,” he said.
Regulatory capital requirements under Basel III have also prompted some banks to scale down their administration arms, while some institutional investors are instructing hedge funds not use the same service provider as both prime broker and administrator.