Who gains from the fund admin M&A boom?
Jason Bingham, Managing Director, Product Development
Given the wave of takeover activity among fund administrators, we sat down with Jason Bingham of SANNE to discuss what it means for GPs shopping for service providers and the future of his industry.
This article was published in the PEI Perspectives Dec/Jan issue, to download the PDF, click here.
Jason Bingham, Managing Director of Product Development at SANNE said, "SANNE's listing has brought greater transparency"
Nothing makes a fund administrator hap- pier than an overwhelmed CFO looking to get something off their desk, and given the increasing demands from LPs and regulators, plenty of service providers are probably giddy. It’s also created a boom in the industry and that’s translated into major M&A activity. Apex and SS&C alone acquired three companies each by August of this year already, and major private equity firms, including The Carlyle Group, have added fund administrators to their own portfolios.
But what does this mean for the quality of service? When a service provider merges with a peer or acquires another business, does it always mean clients get more bang for their buck? Or does it mean there will be hiccups, as the service provider hunts for those synergies? And how can a GP tell the service provider will be there when the boom ends?
We spoke with Jason Bingham, the Managing Director of Product Development at SANNE, a FTSE 250 fund administrator listed on the London Stock Exchange, to get some answers. And what he suggests is that GPs should pay attention to the ownership structure of their administrators. As service providers merge, acquire or find themselves with new owners, there will be an impact to their service capabilities, both positive and negative. But the current landscape suggests that in a few years, this industry could consolidate into a handful of larger, elite professional firms, which may end up a net positive for their clients.
How should GPs look at the wave of M&A activity in the fund administration business?
They should understand that a service provider's ownership structure matters. M&A in our industry dates back to 2006, when Bank of New York merged with Mellon Financial in a deal worth $16.5 billion. Fund administration offerings of big banking institutions are a complementary addition to their other core services. And it makes a certain amount of sense that a bank that’s already offering lines of credit and other banking products would offer fund administration as part of their one stop shop solution to access GPs.
But having worked in that large bank environment, the reality is that their offering comes with a fairly rigid service model that isn’t necessarily conducive to small to medium-sized fund managers. Some banks may have minimum criteria requirements that can be hard for them to meet, and if the GP needs something beyond their standard service offering, they'll be a price to pay for that.
The credibility of a big banking name for LPs can be attractive to GPs, but that brand and that big balance sheet can come with limitations, in terms of service offering, And some banks don’t have the risk appetite for some of the fiduciary requirements that are part of servicing private equity firms.
At the other end of the spectrum are the smaller local players that have real limits to the jurisdictions they serve and size of funds they can handle. Investment in technology and managing their own growth can prove challenging, which makes them prime tar- gets for acquisition.
Then there are offshore law firms that offer a fund administration component as a complementary service. Such work provides steady annuity income and sticky relationships that only strengthen their legal operations. But at some point, the size and complexity of that business can often exceed their appetite for investment in more people and improved technology. Which leads them to be targets for acquisition as well.
What about the fund administrators that are owned by private equity firms? GPs seem bullish on the space, at least as portfolio companies.
They are, and I believe they see an attractive market, where a buy-and-build strategy is able to generate value and increase their returns. But from a fund manager perspective, there’s the inevitable exit strategy. And that means making decisions based on a finite timeline and ways to drive performance in the near term. That may well mean reducing costs, which can result in a leaner organisation or less investment in new technology, which may reduce the overall quality of service.
The desired ownership structure for us is the listed one, which we are. We went public on the LSE in April 2015 and I have to admit, | had my doubts about competing with privately owned firms. Our competitors would know a lot more about us due to the transparency requirements that come with being a public company but that transparency has actually given our customers greater insight into our business, which is a good thing.
"This industry could consolidate into a handful of larger, elite professional firms, which may end up a net positive for their clients".
It provides comfort and credibility to LPs and GPs. In terms of governance, the standards for a listed company are very high, which is certainly an advantage to us. It’s a badge of honour to be on the LSE, and challenges our unlisted peers to find ways to match that. The access to capital markets also makes it easier to manage growth. Were able to attract more talent and have the capital to invest in our service offering.
Say a GP's service provider gets scooped up by a larger peer. What should they know about that transaction to understand if, and how, their service may change?
They need to understand the rationale for that transaction. Our acquisitions are around giving us a new jurisdictional presence, or a new product. For example, we acquired a hedge fund administration business in 2016, because we never had the capability in that area. However, if an administrator is acquiring a competitor in something more akin to a merger, that’s a different story. The commercial rationale for a merger involves the presumption of synergies, which can often mean lengthy integrations that potentially take the focus away from client service or require adaptation to a new system. And GPs rarely enjoy doing either.
Here’s a way to look at M&A activity in our space. Is the transaction driven by the priorities of the administrator's owner, or by the demands of clients? All our acquisitions are driven by what our clients need, which is high visibility in multiple jurisdictions, across several complementary product lines. And that means we've acquired businesses in new places or that cater to new products - this adds real value to clients.
"There will always be smaller niche providers, but the global players will be better placed to meet the increasing demands of an international client base."
How do you see the M&A landscape in your industry in five to 10 years? What does the future look like?
We are of the view that in a few years there may be a situation similar to the ‘Big Four’ accounting firms, where the industry consolidates into a handful of key elite professional players. There will always be smaller niche providers, but the global players will be better placed to meet the increasing demands of an international client base. Only the most innovative and customer led organisations will survive. All those PE firms will be looking to exit these investments in our industry, and that means a potential IPO or selling to a strategic buyer, which ends up feeding that consolidation trend.
But the upside is that clients will enjoy that competitive environment, as we'll be competing with each other to provide them with cutting edge technology, high standards of governance and solid, reliable relationships.
SANNE is a leading global provider of alternative asset and corporate business services to the world’s largest asset managers, global financial institutions and international corporates.