M&A flurry reshapes Cayman fund administration sector

| 17/09/2015 | 0 Comments

CNS Business(CNS Business): A raft of mergers and acquisitions in the fund administration sector has had a major impact on the landscape of the Cayman financial services industry. As a result of market consolidation, the number of fund administrators operating in this jurisdiction has dropped by 28% since the financial crisis.

This change has taken place as many investment banks have exited the fund administration business in the last few years due to increased regulatory burdens and new capital requirements, which have sapped profitability.

The “unprecedented levels of M&A” in the global fund administration business is driving technological advancement in the sector, according to one industry leader, which results in better service for clients, it is claimed. Largely as a result of this activity, since 2008, the total number of fund administrators operating in the Cayman Islands has fallen from 155 to 112 in 2015.

The latest tie up to be announced took place in mid-August, when SS&C Technologies of the US, one of the world’s largest financial services software groups, and with an office locally in Camana Bay, acquired Citigroup’s Alternative Investor Services business, including their Hedge Fund Services and Private Equity Fund Services, for $425 million. According to industry watchers, the acquisition will have propelled SS&C, which builds its own proprietary systems to provide fund administration solutions for clients, into a market leading position for servicing hedge funds.

Citigroup is just the latest investment bank to back out of fund administration, following sweeping regulatory changes including the Volcker Rule in the US, plus Basel 3 and Mifid II globally. Earlier this summer, UBS agreed to sell its Alternative Fund Services business — including the UBS Fund Services operation in Cayman — to Mitsubishi UFG (MUFG), the Tokyo headquartered financial group, which is building up quite a presence now in Cayman. MUFG first moved into the spotlight through its Bermuda acquisitions of Butterfield Fulcrum in 2012 and Meridian Fund Services in 2014, both of which had offices in Cayman.

“The fund administration landscape is changing significantly reflecting the increased demands from regulators, managers and investors,” said Ken McCarney, CEO of Mitsubishi UFG (MUFG). “The cost of doing business has meant that fund administrators of all sizes are bowing out of the sector, leading others to consolidate as they seek the scale and services to satisfy the larger funds, who only want to be serviced by the largest fund administrators.  As administrators merge and grow, resources are pooled, resulting in better service for these large clients and a streamlining of expertise. This is a positive for the industry.”

By respectively bolting on Citigroup and UBS’ fund administration businesses, SS&C and MUFG are making a big impact on the market. A January 2015 sector report by industry research group Prequin, which showed that the top ten fund administrators provide services to 57% of the global hedge fund market, ranked SS&C ranked in second place with an 11% market share, behind Citco Fund Services with a reported 13% market share. Citigroup Fund Services, which had been up for sale since the start of 2015, was ranked in sixth spot by Prequin with a 4% market share, so by adding that, SS&C, which is more of a technology company than a bank, becomes the largest player globally for hedge fund administration. Notably, all of the top ten fund administrators maintain a presence in the Cayman Islands.

The New York-based hedge fund newsletter, Hedge Fund Alert also produces a ranking table for global hedge fund administrators. At the time MUFG announced its tie up with UBS, Hedge Fund Alert said that assuming that it retains all of UBS’s clients, MUFG would move from 10th place to eighth, with nearly $180 billion of gross hedge fund assets under administration. Hedge Fund Alert’s table had SS&C in third place, with $919.5 billion assets under management, which if you add Citigroup’s $202.8 billion, puts SS&C into first place with $1,122 billion.

Speaking about the firm’s expansion in the Cayman Islands and its agreement to acquire UBS, MUFG’s McCarney commented: “We have an established fund administration service – almost 200 strong in the office – for Cayman Islands structures, and recently launched a Trustee Services operation, targeting unit trusts. Our continued presence in Cayman is in response to strong demand from our clients globally.

“This is an ideal time to build upon the success of our business,” McCarney added. “With the backing of the Mitsubishi UFJ Financial Group (MUFG) we have been given the opportunity to develop our services for structures based in the region and we expect demand for these services to continue to increase. This is essential to being a successful administrator as fund managers see their admins not as another service provider relationship, but as an important partnership.”

This story of consolidation has been playing out across the globe. IFG Trust and Corporate Group agreed to buy Jersey-based Moore Group, in the first acquisition since its MBO. Fund administrator TMF Group, acquired Custom House and we have also seen Orangefield Group’s purchase of Jersey-based Legis Fund Services. US Bancorp has acquired both Quintillion and AIS Fund Administration Services in the past three years and BNP Paribas has acquired Credit Suisse’s fund administration unit.

“This phase is one of the reasons why some of the larger fund administrators are developing and implementing the advanced technology driven solutions needed to support managers throughout the investment lifecycle,” MUFG’s  McCarney added. “Access to these capabilities is crucial for mid-market and billion dollar hedge funds as well as start-up/emerging managers who are the lifeblood of the industry.”

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Category: Finance, Financial Services

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