Multifonds
Implementing the regulatory change agenda, increased outsourcing and improving efficiency will be keeping Multifonds busy in the future, according to Keith Hale
We seem to be seeing more high-profile acquisitions and partnerships in the fund admin space. What does this mean for the market, and for the clients involved?
Mergers and acquisitions (M&As) seem to be an increasing trend, particularly over the last couple of years where the industry has seen large-scale consolidation in the administration space, with large global administrators increasing their coverage and offerings by acquiring smaller, niche providers.
This is driven by the need for fund administrators to reduce costs and maximise efficiency, essentially industrialising the asset servicing business. The regulatory agenda is also putting pressure on margins and adding costs that cannot be easily passed onto clients.
Many administrators are simply not as efficient as they need to be. While fund managers enjoy reasonable margins, often the administration activities of global service providers are subsidised by custody and depository services. Where custody automation rates are in the region of 80 percent and higher, equivalent rates in administration are less than 40 percent in some cases.
M&A activities can also lead, unless they are fully integrated, to an administrator having several platforms to service different parts of the business. The market is recognising the need for service providers to simplify their technology architecture and consolidate their operating models and systems as the way to reduce costs and increase efficiency.
As well as M&A activities between the administrators, there has been a good deal of activity in the vendor space with a number coming under new ownership, including ourselves—Multifonds is now owned by Temenos.
The acquisition activities of some vendors are having a particularly big impact on the market. There are vendors that have grown by acquiring other administrators, but they have also acquired a number of administration software products that are used by both competitor fund administrators and themselves.
This is a move that has raised a lot of debate, with vendors and competitors alike asking questions about vendor risk and for the administrators particularly, the risk of having their platform owned and maintained by a competitor.
Have you seen an increase in investment in alternatives?
Yes, a recent survey (Preqin Investor Outlook, 2015) showed that alternative assets, including hedge funds, private equity and real estate, have climbed to $6.9 trillion, an increase of about 10 percent in the last year.
Institutional investors are looking for diversified exposures and better returns in a low-interest rate environment, and so are increasing their asset allocation to alternatives, which is driving the institutionalisation of hedge funds. As a result, we continue to see evidence of the ongoing convergence between traditional and alternative funds.
New regulations in Europe, specifically the Alternative Investment Fund Managers Directive, are making structures that would traditionally have been thought of as hedge funds or alternative funds appear more traditional in their characteristics, such as complex instrument and performance fees, within a regulated structure.
As a result of this convergence, we are seeing polarisation between very large-scale brands, particularly in the passive space with exchange-traded funds, and at the other end of the spectrum, the niche funds that are performing well and achieving success with specialised strategies. However, ultimately it’s the middle-tier asset managers that are feeling the squeeze.
If you consider the world of traditional and alternatives as a Venn diagram, we see the overlap getting increasingly larger; at some point we will reach the stage where funds aren’t referred to as ‘alternative’ or ‘traditional’, they’re just funds.
How have administration and servicing processes evolved to manage these sorts of developments?
Again, convergence is the ongoing theme. Historically, for institutional investors, the expectation of UCITS structures was tight controls for daily liquidity and detailed due diligence on fund operations. Whereas for alternatives, investors didn’t have same expectation with regards to transparency—it was more about the jurisdiction and tax regime. Now, however, we are seeing alternative funds become much more long-only like, with daily liquidity and strict controls becoming more common.
The same is true the other way around. Retail investors are looking for other products and absolute returns, which is starting to bring onshore strategies into the more traditional UCITS-type world.
The outcome is that fund administrators increasingly have to be able to cater for both. Having completely different models and systems is increasingly uneconomic. This has caused some firms to divest alternative fund administration businesses.
Others have chosen to review and start to overhaul their global operations and IT strategy. It’s causing them to assess which markets they should be in and how they service those markets efficiently.
Simplifying their technology architecture and consolidating operating models across asset classes on a common platform is increasingly seen as a way to achieve this—a platform that can deliver the control and efficiency associated with the long-only world together with the flexibility and asset class coverage for alternatives.
How important is technology in the modern market? Where does tech and automation come in to it?
It’s absolutely critical. For fund administrators to service their clients efficiently they have to have the right technology in place, because technology is the enabler for automation. Administrators often have multiple legacy systems, as well as ancillary applications and spreadsheets filling functional gaps left by legacy systems.
The cost pressure of maintaining these makes it all about reducing the number of systems, especially the older legacy technology, and particularly in the current regulatory environment, which adds further cost pressures. Reducing the number of systems they have to maintain will lower their overall total cost of ownership and improve efficiency and control. Despite the advantages of this, we continue to see administrators investing in their existing technology. But older technology becomes less and less viable as reliability, ownership, flexibility, maintainability and upgradeability become more important.
Across the industry, financial technology is on the rise. What used to be a cottage industry a decade ago is now the one that everyone seems to be talking about. Even the governments of Luxembourg, the UK and Ireland are all talking about ‘fintech’ and the role that it can play in the future of our industry.
In an industry going through such significant changes, what are the biggest challenges facing fund administrators, and what challenges would you expect to emerge in the future?
The regulatory change agenda is still number one on the list. From Multifonds’s perspective, it’s not a matter of if we address regulation, it’s how and when. Some regulations have a bigger impact than others on operations and technology—in some cases, it provides an opportunity for the administrators to introduce a ‘product’ to meet these regulatory challenges, but equally, in some cases administrators are asked to meet these requirements without any additional fees and find it difficult to pass on the costs to their clients.
Having to change multiple systems to comply with each regulation is a timely and costly exercise, and one that is greatly reduced by having a common platform.
Efficiency and coverage across asset classes are game-changers as long-only and hedge funds continue to converge. We are also seeing a continuing trend to outsource more and more, to reduce fixed costs, deal with regulation cost-effectively and focus on core competencies. Once a firm successfully outsources, it rarely goes back in-house.
So, in summary, implementing the regulatory change agenda, increased outsourcing, and improving efficiency—those are what will be keeping us busy for the next five years.
