Fund admin mergers and closures to continue, warns HedgeServ
Fund administrators, regardless of size, are going to continue to merge, while smaller outfits will shut their doors completely as the hedge fund industry becomes increasingly institutional, experts at HedgeServ, an administrator with $135 billion AuA (assets under administration) have said.
“The days when a fund manager utilised a small administrator who merely performed the month end net asset value (NAV) is over. Due to ever-increasing business, investor, and regulatory reporting requirements such as Form PF and FATCA, managers need institutional-quality infrastructure. The majority of smaller administrators just don’t have the capital to invest in developing such infrastructure. We already see smaller firms excluded from the sizeable new manager launches, as well as transition mandates from existing managers,” said Leo LaForce, managing director at HedgeServ in New York.
The fund administration market, much like the mini-prime space, is very saturated. Like the mini primes, several fund administrators have shut their doors since the crisis. “There are roughly 68 administrators out there but it will only be the top 20 who eventually thrive. A few years ago, we spoke of the big eight audit firms and now we refer to the big four. The same is going to happen in fund administration. A lot of these small shops simply lack the bandwidth and scale to flexibly support managers, which is not going to be acceptable as the hedge fund industry matures and evolves,” commented Charles Carter, senior managing director at HedgeServ.
While smaller administrators appear to be shutting their doors, the bigger players appear to be getting bigger. SS&C Technologies ($228 billion AuA) is currently in talks to acquire GlobeOp ($174 billion AuA). Meanwhile Goldman Sachs Administration Services, the fourth largest administrator with northwards of $200 billion AuA, was put on the market by its parent company as the firm strives to shed costs.
“Many administrators historically have operated factory-like models focused on lowest-cost-of-production. The costs of re-tooling these models to meet the current expectations of managers and investors may no longer be attractive to an administrator, hence the uptick in M&A discussions,” said LaForce.
Creating such behemoths carries risks nevertheless, according to Carter. “Several of the largest administrators may spend a lot on technology – something which the smaller shops cannot do. However, the challenge for the larger companies is that invariably legacy bureaucracy translates into legacy technology. Oftentimes, when the largest administrators try to make technological or infrastructural changes, it is a slow and cumbersome process, rather like steering an oil tanker” said Carter.
Carter and LaForce also criticised those administrators which failed to take responsibility for the work they do. “The bar is currently set too low for administrators. Valuation is a great example where there is a gap in administration capabilities,” LaForce added.
Written by Owen Dickson