Q&A: Consolidating factors

Many are predicting a consolidation of the fund administrator market, are they right?

For the most part, I would agree. It’s certainly been the trend of the past few years and clearly the market has been attaching great value to the fund administration space given the multiples some of the recent deals have traded at. Globally there are probably 80 or so hedge and private equity fund administrators and in the years ahead that figure should reduce as the importance of scale, industrial strength and domain expertise becomes more central.  Also because GPs are demanding more of a one-stop-shop for their increasingly complex fund administration needs.

Kamran Anwar

What’s fueling the trend?

A few important factors. Going forward the complexity and required skill that fund administration service providers will need is going to increase. The reasons are fairly simple: regulators asking the industry for more reporting, more frequently to more stakeholders coupled with the AIFM-led requirement for fiduciary oversight;  increased reporting demands from investors; more non-standard terms between GPs and LPs including tiered fee structures and side letters which increase the administrative burden. Finally, many private equity firms are diversifying their revenue streams into other asset classes (credit funds for example) that carry different and often complex service needs.

Will there be any disadvantages to GPs in light of this expected consolidation?

As consolidation continues to shape the industry, there will be a polarization of the market with top large players at one end and smaller, niche market players at the other. I believe this trend will be beneficial to GPs. The private equity services market is poised to grow as only 30 to 40 percent of fund managers currently outsource their administration. As the outsourcing trend picks up, the large fund administrators will offer more integrated solutions to help GPs manage complexity and make efficiency gains. On the other hand, GPs will continue to have local jurisdictional needs as well as continued requirements for SPVs and related vehicles. Therefore the opportunity for smaller or niche players should grow in tandem.  It’s the middle-level players that may be the toughest spot in the years to come.

Do GPs experience any headaches when their fund administration provider undergoes a merger?

M&A can be a disruptive exercise both at the dealmaking stage and during integration. The discipline and planning with which the process is handled is the key differentiator. Experienced acquirers and target businesses engage clients early in the game and actively solicit feedback on the end operating model, key priorities and challenges. They are walked through the transition plan, and provided details on how any disruptions would be kept to an absolute minimum.

What’s the next big thing to happen in the world of fund administration?

The next big thing in fund administration is the evolution of the role of the administrator to a true strategic partner for its clients and to engage with them across a variety of fronts (administrator, fiduciary, escrow provider, banker, cash manager, hedge provider and so on).  Secondly, the expected outsourcing from the bigger GPs will signal a paradigm shift in how fund administration is approached and the sheer scale required to manage it. Finally, the regulatory pressures on the industry, evolving private equity structures and product will lead to a creation of new domain expertise thereby creating a new pool of talent in the industry. This space is one to watch closely.