M&A to continue in fund admin space but not all lost for smaller shops just yet, says State Street AIS
Ninety-five percent of hedge fund administration will be undertaken by between six and eight providers within several years, although standalone firms are likely to be given a short-term reprieve if hedge fund performance and capital inflows pick up in 2013.
“Consolidation is going to continue to be a major trend in the hedge fund administration space, particularly among the independent providers. Within three to five years, it is possible there will be six to eight providers carrying out 95% of the hedge fund administration work,” said Scott Carpenter, senior vice president and head of State Street’s Alternative Investment Solutions’ client relationship management and strategy group, speaking in Boston.
2012 bore witness to significant M&A activity in the fund administration space albeit at the higher end of the market. The first landmark deal was SS&C’s decision to buy GlobeOp for £572 million, while State Street purchased Goldman Sachs Administration Services for $550 million bringing its hedge fund Assets under Administration (AuA) to $700 billion making it the largest global fund administrator, leapfrogging previous incumbent Citco.
Carpenter predicted consolidation would be most noticeable among independent, non-bank affiliated administrators. “The investment required to successfully bring new products to market in a changing environment and to ensure high levels of end to end automation are significant. For example, regulatory compliance solutions have become a major part of fund administration services, and some of the independent firms do not have the resources to build up industrial strength regulatory compliance tools for their clients,” he said.
“Many managers are now required to submit Form PF and shortly the CFTC’s CPO PQR will be required as well. Building solutions to help managers meet these requirements is an expensive and complicated task,” he added.
Meanwhile, AIFMD is going to spell trouble for fund administrators lacking a banking license. Many of these firms will be required to find a depositary partner, something banks with fund administration arms are unlikely to acquiesce to.
“AIFMD and the depositary liability it entails certainly makes hedge fund administrators attached to custodians an attractive option. Furthermore, fund administrators which do not offer a multitude of solutions will struggle too. If fee compression intensifies, administrators which have a product suite that integrates with a managers’ needs completely from back to middle to front office - inclusive of custody, clearing, collateral management, credit, risk analytics, and trading - will be much better positioned to compete while continuing to invest in scalable solutions,” said Carpenter.
Nonetheless, the M&A will not just be immune to independent, standalone shops. “Some of the prime brokers with administration arms might consider selling,” he said, without alluding to any particular firms. There was widespread speculation earlier in the year Morgan Stanley intended to sell its fund administration business, which services $142 billion in AuA, although the bank issued a statement flatly denying the rumour.
However, Carpenter is not wholly bearish on the fate of smaller fund administrators in the immediate term. “The broad success of the fund administration sector is ultimately driven by hedge fund performance and AuM. There are indications that the macro environment in 2013 will be favourable towards hedge funds and we are seeing large capital inflows, particularly from pension funds and other institutional investors into alternatives. If this continues to be the case in 2013, I expect that in the short-term independent fund administrators will likely retain their niche, especially among smaller hedge funds,” he added.