Offshore fund administrators are being eyed for takeover, with keen interest from banks like JPMorgan and Citi, private equity firms and larger industry players, according to industry sources.
A raft of such administrators has been touted as potential sale candidates by industry sources, including the likes of Augentius; Butterfield Fulcrum Group; Saltgate and Moore Stephens Jersey.
Citi was recently mentioned by this news services as reportedly being interested in acquiring private equity administration group Augentius. Even though there have been "no real discussions between the two groups yet", they were described as being in close contact.
Augentius has received several approaches from banks and private equity players. Although the group is not actively looking to sell, it is understood to be considering offers. Private equity house RJD Partners backed an MBO of rival fund administrator Ipes in 2008. State Street purchased another fund administrator competitor Mourant late last year.
Fund administrator Butterfield Fulcrum Group, owned by private equity firms 3i and The Carlyle Group, recently announced it is ready to grow by acquiring peers and there is no lack of targets. The groups new CEO Michael Clark told the British financial press he had signed non-disclosure agreements with five different businesses which have approached Butterfield Fulcrum about merging with the company or being acquired by it. There should be no shortage of potential bidders for any company placing themselves on the market in this sector today, a sector banker said. They are largely cash generative and in terms of banks, a natural fit.
Saltgate is a prime target, according to one industry source. It is an independent group, fairly small in size, with about 20 to 30 people across Jersey and Luxembourg, but it has a good reputation and they have CVC as a key client, he said.
Moore Stephens Jersey is another company that was mentioned as a potential target by sources and a sector banker. It is the fund administration business of financial services company, Moore Stephens. The administration business is certainly something that could be seen as non-core by the parent company and divested, a financial services banker said. A sector source agreed that it would make a good target. It has enough clients for people to be interested in looking to approach it. It would possibly keep its traditional trust and corporate side and sell off the private equity side.
Neither Saltgate, nor Moore Stephens was available for comment.
JPMorgan Worldwide Securities Services (WSS), a provider of global custody and fund services, signed an agreement in April this year to acquire Schroders' private equity administration business, which is based in Guernsey and Bermuda, and has around USD 6.2bn in committed capital under administration. It also acquired Nordeas institutional custody business in the Nordic region last year. Acquisitions as well as organic growth are part of our growth strategy, a company spokesperson for JPMorgan WSS said.
Investment banks picking up administration business is becoming a more prominent trend, a sector banker said. A lot of banks are looking to enter the sector generally. There are strong returns and the synergies and connected clients already lie in place, as well as the infrastructure being set and established.
A London-based hedge fund manager agreed, saying that the use of such administrators is increasing within the sector, and they are becoming a far more attractive asset. "It is no secret that the sector is growing and we are seeing more investment banks looking to pick these up. And while we see the sector strengthening, we could also see a wave of consolidation to firm up the playing field," he said.
Augentius and Ipes are understood to be also frequently approached for opportunities to acquire smaller targets. Neither has gone ahead with acquisitions yet. For any acquisition by Augentius to work, there must be a very close operational and cultural fit between the two businesses to ensure the combined entity can flourish," J.P. Harrop, managing partner of Augentius, said. Ipes, on the other hand, is seen more as a target than a buyer, according to Justin Partington, commercial director of private equity administration group Ipes. We have not previously made any acquisitions and the buyers tend to be the large banks and other multinationals.
Many small trust fund providers have not seen any new business over the past two to three years, having branched out at the wrong time during the 2005 to 2007 peak, Partington said. They have not achieved the critical mass to invest in physical office locations in other jurisdictions, he noted. Some administrators attempt to rely on name-plate or warehoused operations; however, investors and clients often see through this for what is usually smoke and mirrors, he said.
The Jersey Financial Services Commission (JFSC) is adopting a tougher stance against administrators with poor corporate governance. It recently issued a statement about a formal investigation into the activities of Belgravia Asset Management (BAM), which failed to comply with its codes of practice.
While larger administration firms have invested six figure sums of money into IT platforms specialising in private equity administration, not all small investment trust companies have the resources to invest in a dedicated private equity system, Partington said. Within the private equity industry it has become standard practice for accounting systems to allow clients real-time access to their data; yet some generic platforms lack this capability, he added.
Smaller trust funds are not perceived as having sufficient cash to satisfy staffing needs, Partington noted. Large administrators like Ipes and its competitor Augentius both have more than 100 staff to service GBP 35bn and GBP 50bn of assets, respectively.
The private equity market is much more fragmented than the hedge fund industry and has fewer assets under administration. Private equity administration relationships are much stickier than hedge fund administration due to the customised fund structures and reporting, Partington said, pointing out this may lead to more growth by acquisition rather than organic growth. While hedge funds have seen consolidation partly by clients moving from small providers to the Top 10, for private equity those client switches will not happen in significant numbers and so growth will likely come via M&A activity, he added.
Profitability within the private equity administration industry comes through scale and efficiency by acquiring smaller players, according to Partington. The key factor is more fund managers and investors are looking to outsource the work due to regulatory hurdles, disclosure requirements increasing considerably and the significant IT investment required to do the work in-house, he said. The proportion of investment managers choosing to outsource the back office to a third-party has doubled from 15% to 30% over the past three years.
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