Since 2008 the fund administration sector has undergone change as rapid as anywhere in the financial world and has again entered a phase of upheaval, with consolidation taking place across the industry. 

The wave of regulation that followed the crisis was a boon for administrators, with investors and regulators alike demanding that fund managers outsource their back office functions to enhance transparency and clarity. However, the rush has now slowed and providers face a more challenging outlook. 

M&A activity has increased, with multiple well-publicised deals shrinking the number of providers. In March, Citi completed the sale of its Alternative Investor Services Business to SS&C, making the latter’s GlobeOp service the world’s second largest hedge fund and private equity administrator with AuM of more than $1trn. 

The sale came a year after Citi announced it would exit, citing increased costs and narrow margins. Small administrators have been particularly susceptible to buyouts as their already thin margins are under pressure from increasing regulatory costs and price competition. For example, on 3 June the Sanne Group completed its acquisition of IDS Fund Services, a South African administrator. 

“Low margins, coupled with the increasing complexity of assets to service characterise this sector, so volume is necessary to make it sustainable,” says Cath Rawcliffe, global account director, SimCorp. “This naturally results in the attraction, or necessity, of selling to bigger entities.” 

Small managers abandoned 

A few months before Citi’s declaration, BNP Paribas announced that it would no longer provide services to small asset managers for similar reasons. Indeed, it is a move that has been quietly repeated across the industry and left many seeking new partners in a shrinking pool of providers. 

This has come at a particularly inopportune time for asset managers, coinciding with an influx of regulation that has narrowed margins and put pressure on them to outsource across the middle and back office. Asset managers had been seeking to refocus on their core function, not least in response to competition from low-cost ETFs, and offload nondifferentiating functions. 

The most common approach to outsourcing is for a set of functions to be mandated to a single one-stop-shop provider. However, a new wave of smaller administrators are offering specialised services and covering specific segments, fitting with a best-of-breed approach. 

Such firms claim to be able to offer more bespoke functions and specialist services such as real-time reconciliation of cash flows, risk analytics, collateral management and performance attribution via an application platform utilising up-to-date systems – whereas a larger administrator may be hamstrung by its reliance on legacy platforms. 

Splitting mandates may have another advantage for asset managers. By isolating middle office utilities in a specialist provider, a fund manager could keep down the potential cost of transferring to another administrator, only needing to mandate back office functions. Also, by not relying on a single provider the fund manager minimises the risk that their administrator decides to focus on more profitable accounts. 

Some bespoke services have experienced rapid uptake, such as data vendors utilising their position to provide ancillary services. The DTCC-owned Clarient Entity Hub, which allows access to DTCC data for KYC and due diligence purposes, passed 100 users early this year after two years in operation. 

“Buy-side firms face additional operational challenges. They must respond to their bank and broker-dealer counterparties with multiple requests for information, from initial on-boarding through to account refresh – all while successfully on-boarding new clients and carrying out due diligence on their own institutional clients whose funds they manage,” says Clarient CEO Matthew Stauffer. 

There are two broad business models that are viable for existing administrators, which were identified back in August 2014 by PwC and are now shaping the industry: offering a specialised services for a specific market and taking a diversified approach. 

Specialised approach 

The fit between administrator and fund manager is becoming more important as funds are diverging in their requirements. Those taking the specialised approach aim to offer a better fit than can be achieved using the traditional universal business model. 

“We are seeing administrators seize on the opportunities smaller asset managers represent,” said Joe Docker, director at Alpha FMC, a consultancy catering to asset and wealth managers. “Finding the right partnerships gives a great opportunity to support the growth of the manager and its AuM.” 

“Innovative propositions include Societe Generale’s offering for smaller asset managers and those managers that combine wealth and fund management.” Societe Generale’s offering is aimed at small-cap managers and is targeted at securing mandates abandoned by established participants backing away from the market. 

Small and focused administrators can also offer value by specialising in growing and under-represented areas, according to Docker. 

“We see opportunities for providers who can offer a range of additional value-add services as well as the more standard commoditised services – for example derivatives administration, data management and front office services. One niche area is alternatives and we have seen smaller alternatives-focused administrators winning business over the larger more traditional players.” 

Diversified approach 

The second model highlighted by PwC, the diversified approach, is only viable for fund administrators of a certain size. It entails expanding the range of services to access new client segments. 

This strategy involves directly working to mitigate the major costs facing fund managers. “A key driver for outsourcing is risk reduction and sharing the burden of implementing regulation is a key benefit to smaller managers,” said Docker. “Operating model efficiency and scale are the keys to reducing the cost of regulatory change.” 

The diversified approach also includes branching into more markets, a trend that has already begun in the alternatives fund market, as traditional administrators work to broaden their client base. 

Docker commented: “Alternatives outsourcing is more immature than traditional outsourcing but we are seeing good propositions in the industry from niche and traditional fund administrators and increasing innovation in this space. There has been significant investment from the global service providers in their alternatives models, which has come at a time of much greater inflows into these asset classes.” 

With these two paths open to fund administrators, the industry’s current turbulence may be set to continue. 

Divergence and innovation will play central roles in shaping the administration landscape over the next few years, rather than M&A activity, according to Alpha FMC’s Docker: “The success of any provider will be dictated by their ability offer a broad service proposition, achieve a level of scale and to develop the right strategic partnerships.”