This month Wells Fargo Global Fund Services (WFGFS) won its latest European mandate when it was selected by London-based East Lodge Capital to provide daily fund administration and a comprehensive outsourced middle and back office operations solution.
The appointment serves to strengthen the position of Wells Fargo’s administration arm and comes at a time when the US bank stands on the verge of becoming the most valuable US bank in history. As the Wall Street Journal reported on 15 June 2014, its shares are up more than 14 per cent for the year. It now has a stock market value of USD272.36bn, some USD10bn shy of the USD282bn achieved by Citigroup in 2001.
WFGFS was formerly the operations, administration and technology arm of Cargill Global Capital Markets (GCM). In 2003, Cargill GCM became Black River Asset Management LLC. Three years later, in 2006, LaCrosse Global Fund Services was created as a spinout of the existing middle- and back-office services that supported Black River Asset Management. In 2012, it was rebranded as Wells Fargo Global Fund Services.
One of the administrator’s core strengths is in servicing complex credit strategies.
“It’s an area in which we’ve always been strong: fixed income, credit, distressed; we really have a lot of that asset class expertise. Our clients trade CDS, high yield, ABS, bank debt, structured products, as well as loan origination (direct lending),” comments Stuart Feffer (pictured), co-head of Global Fund Services at Wells Fargo.
East Lodge Capital was founded in 2013 by Alistair Lumsden (who previously ran USD3.2bn for CQS) and specializes in asset-backed securities. The firm’s Chief Operating Officer, Shawn Wells, said “we were impressed by the ability of their operations team to handle the full post-trade lifecycle of both our liquid and our more complex investments, which will help to support the business as it grows,” when commenting on why it had chosen WFGFS.
In total, WFGFS administers USD250bn in alternative assets with Feffer confirming that approximately two-thirds of its AuA ia in fixed income and credit strategies. “We are best known for these strategies but we also handle all other hedge fund strategies – we have an equity long/short mandate currently in the pipeline which we’ll be announcing imminently,” confirms Feffer.
With investors looking for alternative sources of yield and more managers launching innovative strategies within the credit space in a bid to fill the breach as banks deleverage, this is a propitious time for an administrator with a strong credit heritage; especially in Europe where the market is set for a structural rebalance as SMEs turn to alternative sources of funding. Direct lending strategies are just one example of manager innovation and as Feffer states:
“In fact, the very first client of Lacrosse Global Fund Services (now known as Wells Fargo Global Fund Services) was a direct lending manager based out of Singapore back in 2007. It is a strategy and an asset class we have experience with since inception.”
Over the last two years, Feffer says much of the recent growth of its US operation has centred around mortgages: “Not necessarily MBS but managers who are buying up whole mortgage portfolios, in particular distressed mortgages, in addition to mortgage servicing rights. In Europe, recent growth has been focused more around distressed credit opportunities and activity is starting to pick up.
“The fact that we’re seeing managers like East Lodge launch is hugely encouraging. Our onboarding calendar is busier than it’s ever been. We have around 25 mandates pending globally,” says Feffer, noting that equity-oriented strategies, “especially long/short equity and event-driven”, account for nearly half of its on-boarding queue.
The role of administrator to credit strategies is more demanding than that of more plain vanilla equity-based strategies. Many of the assets involved are hard to value, contain numerous covenants (in the case of bank loans), different maturities and pricing methodologies. All of which requires the administrator to have a strong valuation, reconciliation and accounting infrastructure in place.
As Feffer says: “Our team understands the different nuances involved; one piece of credit is very different to the next. They have experience at handling special purpose vehicles (SPVs) as many of these strategies use complex fund structures.”
Feffer says that its middle and back-office capability is a key differentiator.
“The reality is there are only a small number of firms equipped to handle all of the requirements of a fixed income or credit manager. We offer an extensive cash and collateral management service and a full daily and intraday cash flow management solution.
“We offer standardized reporting templates which suffice for most clients but for large managers running multiple funds their reporting needs tend to be more complex and we provide more customized reporting as a result. Investors want these reports as a way of knowing that the manager is doing what they say they are doing. Some of it is performance-related but a lot of the data they want to see revolves around the fund’s counterparties, risk exposures. They want to know that the assets are being correctly valued,” says Feffer.
Investors are increasingly visiting counterparties to a fund manager as part of their DDQ; administrators are aware of this and understand how important those first impressions are. Needless to say, their operational infrastructure needs to be top-notch.
“Our capability is built to handle hedge funds that trade a lot of credit. It’s part of the firm’s DNA. We have a substantial operation here in Europe. We’re always seeking new clients and we continue to grow,” concludes Feffer.
