Cost and dissatisfaction with the quality of service are driving hedge fund managers to switch their fund administrators amid continuing merger and acquisition activity in the space, a new survey shows. And managers are also turning over other service provider relationships, according to the Preqin survey.
A quarter of hedge fund managers reported changing at least one service provider in the past year, with 39% changing their prime broker and 31% reporting they changed their fund administrator, according to a survey of over 270 hedge fund managers conducted at the end of 2016 by Preqin. The survey also tracked changes made to fund auditors, marketers, lawyers, and custodians.
Of the 31% of managers that chose to switch fund administrators, 38% cited cost as the leading factor, followed by 31% citing investor concerns about the fund administrator, and 25% voicing dissatisfaction with the quality of service, the Preqin survey found.
“Cost is the largest factor. Dissatisfaction at times can be related to cost,” says David Young, president at Gemini Hedge Fund Services. “I don’t think many people will admit it, but when you reduce cost, you might decrease the levels of reviews, and it does put pressure on the administrator to make sure they have the proper reviews in place.”
Managers evaluating and reevaluating their fund administration service providers comes at a moment of continued merger and acquisition activity. Yesterday, Apex Fund Services announced its acquisition of Equinoxe Alternative Investment Services, through the backing of private equity owner Genstar Capital, according to a press release. The acquisition, for which Apex owner Peter Hughes is also a main financer, will bring the funds under administration at the combined firm to nearly $80 billion as part of its goal to become “a top 5 global fund administrator within the next five years,” according to the release.
A larger Apex will still face competition from the current top five fund administrators servicing hedge funds, according to Preqin’s tally: SS&C GlobeOp, Citco Fund Services, State Street, BNY Mellon, and Morgan Stanley Fund Services.
Apex’s move follows a raft of merger and acquisition activity in 2016, with SS&C Technologies acquiring Conifer Financial Services, Wells Fargo Global Fund Services and Citigroup’s Alternative Investor Services, while Fundadministration was acquired by MainstreamBPO, as reported.
Service providers are under a lot of pressure to deliver as outsourcing continues to grow in both the hedge fund and private equity space, says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration market. With more merger and acquisition activity to come, managers should expect that if they select a smaller administrator, that firm could be sold or end up being involved in some type of a roll up, he says.
“Manager due diligence in looking for a service provider has to be a lot more thorough and exacting than it ever has been before,” he says. “You have to know the technology the provider is using, even the specific version… Are they developing their own technology? Do they have the budget? Why are they growing or why aren’t they growing?”
Possible disruptions caused by mergers and acquisitions to an administrator’s staff as well as concerns over the quality of service are driving fund managers to evaluate other options in their search for stability at a lower cost, Young says.
“If you have the A Team working on it, you’re very happy, but the A Team can only service so many clients. When an administrator is large enough you do have some fracturing of service offerings,” he says.
Despite the pressures of meeting the expectations of fund managers, new administrators are continuing to enter the space looking for niche areas, trying to carve out special market segments, or targeting a specific geography, Salus says. While the top 25 fund administrators control a significant portion of the market, those new entrants are also aware of the potential they will be acquired.
“The attraction of the merger and acquisition activity is attractive to new entrants. They are becoming administrators because they know they can sell or be acquired later,” he says. Read the full article here.