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The impact of consolidation

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By Ashley Gunning (pictured) & Charlotte Beales-Hart – Commentators to the hedge fund industry agree that the fund administration landscape has been altered significantly by the mergers and acquisitions activity of the last few years. The consolidation of larger institutional services providers in this space, along with the exit of some smaller administration shops, has naturally flowed through to impact the industry in the Cayman Islands.

Recent notable consolidations include SS&C Technologies' acquisition of Citigroup's Alternative Investor Services hedge fund and private equity offerings and the agreement by UBS to sell its administration business, including the UBS operation in the Cayman Islands, to Mitsubishi UFG. 

These transactions appear at one end of the spectrum, where large institutions have been driven to shed their administration businesses, most likely due to increased regulation and a seismic shift in the risks and cost effectiveness of running such services. In addition to these changes, some mid-cap and smaller administrators have been forced either to enter into merger deals in order to be able to scale their businesses, or leave the space altogether. All of this has led to the view in the industry that the trend for increased institutionalisation is likely to continue and will further reduce the pool of administrators servicing Cayman Islands funds. 

Conversely, however, the exit of some of the larger players from the administration business has arguably created opportunity for smaller players to compete for the business of those hedge funds searching for a more bespoke service.

The changes have impacted both billion dollar funds and emerging managers alike. Predictably, top of the list of impacts is cost. 

Funds across the spectrum demand increasingly advanced, technologically driven services in view of an expanding regulatory regime that requires increased due diligence and reporting functions. As a result, funds are now demanding that their administrators provide such functions to ensure compliance with FATCA and, more recently, the Common Reporting Standard issued by the OECD (now implemented in the Cayman Islands).

These additional services are inevitably reflected in pricing and smaller managers and start-ups are likely to be forced to outsource in an environment with fewer administrators and increased fees.  

Fewer service providers are willing to provide services on competitive terms to sub US$100 million funds. The risk flowing from this is that talented emerging managers could be side-lined out of the market as entry barriers increase at a rate that only favours the institutional houses. 

Some existing smaller funds have also had to deal with being forced out by consolidated administration businesses and the subsequent struggle to engage a new administrator whilst simultaneously attempting to minimise expense and maintain good investor relations. 

Changing administrators requires legal advice

If regulated Cayman Islands funds are driven to find alternative administrators they will generally need to update their fund documentation. This includes updates to the disclosures relating to the administrator in their offering document, amendments to their Form MF1 and the filing of these, along with the new administrator's consent letter with the Cayman Islands Monetary Authority. 

Investment managers should contact their Cayman Islands counsel as early as possible in the process in order to obtain advice on the requisite documentation and steps to be taken to ensure compliance with the law and a smooth transition to their new service provider

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