“The only constant is change.”- Isaac Asimov
This certainly rings true for fund administrators, which have had a busy year keeping up with the ever-changing scope and demands of the industry.
While fund administrators, which provide certain accounting and back office services to hedge funds, may not receive the same public recognition as hedge fund clients, they have been the subject of several media reports within the last year for their accelerated rate of consolidation. By that, we mean fund administrators have been acquiring and merging with competitors at an extraordinary rate.
Connecticut-based financial services software firm SS&C Technologies made headlines last June after it purchased London-based hedge fund administrator GlobeOp for $892 million. The deal was considered the largest acquisition in the history of SS&C, which became the highest bidder for GlobeOp after private equity firm TPG Capital opted out of buying the back office/technology services provider in April. Since then, the newly-named SS&C GlobeOp has gone on an “acquisition spree,” expanding its presence in the Southwest and Northeast with the purchases of Hedgemetrix and Gravity Financial, respectively.
Bill Stone, the chairman and CEO of SS&C, told eVestment that leading the fund administration industry plays a large factor in seeking out acquisitions.
“[SS&C Technologies] was the seventh largest administrator [in the industry], but combined [with GlobeOp], we became fourth,” Stone said. “Being fourth is a lot better than being seventh, right?”
With $434 billion in alternative assets under management as of the fourth quarter of 2012, SS&C came in at number six among 38 administrators reporting in the Q4 2012 eVestment Hedge Fund Administrator Survey.
eVestment also spoke to Christine Waldron, the senior vice president at Milwaukee-based U.S. Bancorp Fund Services, who agreed that increasing market share and scale played a large factor in the firm’s acquisition of AIS Fund Administration in November.
Founded as a practice focused on servicing traditional asset managers, Waldron said that USBFS was attracted to AIS’ “strong reputation among the alternative manager community.” She also said that AIS, which has offices in New Jersey, London and the Cayman Islands, would also expand USBFS’ “market share in a different geographic region.”
However, not all administrators share Stone and Waldron’s sentiment that “bigger is better.”
Ted Jasinski, the general manager of Admiral Administration, stressed to eVestment in a recent interview that “[providing] tremendous service to clients” is a priority for the firm, as opposed to “growing for the sake of growing.”
However, Jasinski added that acquisitions with a “regional and a strategic approach” are welcomed by Admiral. Luxembourg-based global fund administrator Maitland purchased Admiral in November, which Jasinski said was the “right partnership.”
Admiral, which had presence in the Cayman Islands, Dublin and Virginia, was looking to acquire a smaller firm that would give them an institutional brand and global presence, while granting access to up-to-date industry technology. While Admiral did not find the smaller firm it originally sought, it did find the discussed traits in Maitland. In turn, Maitland was able to utilize Admiral’s “long history and great presence in the U.S. and the Cayman Islands” to its advantage, according to Jasinski.
Maitland also had several offices in South Africa – a regional presence Admiral lacked— which helped expand and strengthen the combined firm’s global presence even further.
Jasinski commented that the partnership “saw benefits almost immediately.” The combined entity currently has about $145 billion in assets under administration.
Commenting on the general trend of the industry, Jasinski articulated that pricing pressure and increased demand has prompted many administrators to reposition, leading to the consolidation of the industry.
Kaufman Rossin Fund Services’ business development manager Christine Egan is another professional in the fund administration business who believes that quality service should be a firm’s primary focus, and disagrees with most firms’ expansion strategy of “bigger guys [buying] their competition.”
“That’s not organic,” Egan said. However, Egan added that that acquiring a firm with a different geographic presence “makes sense.”
The rapid rate of consolidation is just one of the major trends taking place in the fund administration business during the last year. Like a domino effect, the increasing number of institutions investing in hedge funds, as well as the introduction of new regulations to the industry aimed to protect investors, has affected how administrators operate their firms.
One such piece of regulation is the Form PF, an extensive application mandated by the Securities and Exchange Commission which firms with $150 million or more in assets under management must fill out. Jasinski explained that such regulation, which aims to increase transparency in the notoriously secretive industry, has pushed his firm to improve its reporting software in order to ensure that the process goes smoothly.
“We also had to [expand] our compliance and risk [personnel] as a result.”
Similarly, Waldron noted to eVestment that “hedge fund managers are adopting what traditional managers have been doing.” Transparency has historically been embedded in traditional investing strategies.
The changes seemed to be a positive push for the administration business. The Q4 2012 eVestment Hedge Fund Administrator Survey put hedge fund assets under administration at about $2.931 trillion. That represented a 5.6% increase over assets under administration from Q2 2012.
As Egan puts it, “Business is booming.”