By Jay Peller (pictured), Citco Fund Services – In recent years, established alternative fund managers have increasingly migrated business to fund administrators with a broad geographic footprint and extensive product expertise. The cost pressures faced by most managers in a low return environment have also been translated into continuing demands to improve efficiency.
The good news is that allocations to alternatives are growing globally with private equity seeing the most robust gains. The combination of rising assets, globalisation and increasing complexity has created a ripple effect for fund administrators. The need to deliver operational excellence to asset managers, while boosting efficiency and providing scale benefits is real.
One result is that mergers and acquisitions among fund administrators have continued at a robust pace. Leading deals have included MUFG Investor Services acquiring Rydex Fund Services, while SS&C GlobeOp acquired Conifer Financial Services and other asset servicing businesses.
Fund administrators often use mergers and acquisitions to bulk up and add scale to their existing business. This is usually designed to accomplish one or more objectives:
- Gain market share;
- Buy EBIT;
- Acquire a specific service to expand the client offering.
A deal can help an acquirer grow market share, scale or increase the breadth of its offering quickly. Sometimes, however, the consideration paid can be very high. This can result in the acquiring firm, perhaps faced with financial pressures arising from an acquisition, having to adjust budgets and capital spend for corporate reasons rather than for what will provide clients with the best service and platform capabilities.
Acquisitions can also create complex operational issues. Integrating different technologies, for example, can be time consuming and leave teams focused on internal challenges instead of client service demands. Drawing together different corporate cultures can also prove time consuming and difficult. In some cases, a merged company may look unified from the outside but still operate as a series of separate entities.
Citco has always taken a conservative view of M&A. Instead of growing by acquisition, Citco Fund Services has sought organic growth by investing in technology, facilities and service innovation. This has created many process and scale benefits which have been shared with clients.
In 2011, Citco struck a strategic alliance with OpHedge – the only such deal it has ever done. The attraction of OpHedge was that it had developed specific middle office services such as collateral management, settlements and treasury. These expanded upon capabilities Citco offered with reporting trade positions and cash breaks, desktop technology for real time P&L calculations as well as real time security masters and over-the-counter security set-ups. Moreover, the synergy created by the alliance helped to accelerate the rollout of enhanced services to clients.
Clearly, it is important for fund administrators to consider client needs and how the market is evolving. Although Citco’s focus continues to be on organic growth (and not acquiring market share), the firm – as it did with OpHedge – will always look at how to incorporate specific services to help clients.
In the last few years, Citco has built up its fund administration lines in private equity and real estate. We did this by focusing on bringing in the right people and the right technology. This has helped Citco achieve tremendous growth, while positioning the firm to deliver a range of valuable services to existing and new fund clients in the years ahead.
