Bill Salus, CEO and Founder of Paddock Consultancy, James Wheatley, president for the Americas at Mainstream Fund Services, Spencer Hoffman, partner at Lovell Minnick Partners, Treabhor MacEochaidh, head of debt services at MUFG Investor Services, and Ryan Burns, head of global fund services for the Americas at Northern Trust speak with Tom Stabile from FundFire about their thoughts on a new, hybrid approach to outsourcing fund administration, called co-sourcing. Though still in its early stages, this “shared sourcing” model blends together the benefits of an independent fund administrator with those of managers keeping operations technology in-house.
Bill Salus, CEO and Founder of Paddock Consultancy, speaks with Terrance J. O’Malley in TJO Management’s most recent Operational Leaders podcast. Drawing on three decades working with asset, fund, and investment firms, Bill shares his deeply experienced perspective on the current state of the fund administration business, how he sees the business transforming, how firms are redefining and distinguishing themselves, and what M&A activity in the administration space could mean for managers in the future.
Alan Meaney, CEO of Fund Recs, and Bill Salus, CEO and Founder of Paddock Consultancy, discuss historical trends in Fund Administration M&A, as well as thoughts on the impact of today’s environment on the future.
Outsourcing fund administration is a big decision, and one that many fund managers have historically been reluctant to make. However, over the past few years, investor needs have driven increased administrative demand on funds of all sizes, and many GPs have begun to realize that in-house fund administration is often a misuse of precious resources.
The question remains: If you’re going to move to third-party fund administration, how do you do so securely and cost effectively? It should, in theory, be possible to outsource fund administration in a way that frees bandwidth, boosts investor satisfaction, and actually lowers your operating expenses… but the steps needed to get there aren’t always obvious.
In this free webinar recording, NES Financial hosted a panel of experts discussing crucial considerations in outsourcing private equity fund administration, and best practices to follow when choosing the nature, and extent, of the administrator’s role.
Here’s what we discuss in the recording:
- Why outsource at all?
- How to vet independent administration options (e.g., are they using the same off-the-shelf tech as everyone else?)
- How to leverage third-party administration to attract and keep investors
- The benefits of scale: why flexibility may be the most important attribute in a fund administrator
- The client’s perspective: a case study in adopting third-party administration
Who should watch?
- Fund managers and GPs
- Registered investment advisors
- Fund lawyers
Take advantage of our experts’ insights. Fill out the form to the right to watch the recording now.
Growing investor demands to make the most of all their data is speeding ahead, putting pressure on administrators and causing some hedge funds to re-evaluate their admin relationships.
That pressure for upgraded technology is mounting after the busiest year on record in merger and acquisition activity in the fund administration space.
Hedge fund managers are looking for middle office, trading, and onboarding support as well as fund reconciliation, asset level transparency, data operations work, and the ability to offer limited partners deeper insight into their holdings, says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration market.
“I think the new landscape is not fund administration as a lead core product but as part of a larger technology stack that addresses the broader needs of the manager,” he says.
The focus on data has only grown with the expectation that top tier admins should have a data offering and dashboards that give immediate access to status on fund net asset value (NAVs), reconciliation, and daily profit and loss (P&L), says Peter Sanchez, CEO of Northern Trust Hedge Fund Services.
“The big theme is the rush to have a data service and an expectation that you won’t take on a client without the ability to share the data and give informed context around it,” he says.
As the marketplace grows more competitive, many large hedge funds are also reviewing the long-term, existing relationships they have with administrators. “It’s the result of trying to squeeze out as many services as possible,” Sanchez says, as well as fee compression on the manager side and hedge fund clients looking for an enhanced experience.
Another trend is fintech companies increasingly offering components of services and technologies that administrators are also building up.
“You see standalone companies and fintech companies coming around pointed specifically at those different problems and capabilities,” Salus says.
Vendors will have to offer an attractive price, but it also puts pressure on admins to continue investing in their systems to stand the test of competition, Sanchez says.
One company offering standalone services is Arcesium, a post-trade tech and professional services firm, which was launched by hedge fund D.E. Shaw Group in 2015 as an independent company. Blackstone Alternative Asset Management (BAAM) provided equity backing and became the firm’s second client. Arcesium announced last week four parts of its tech platform are now being offered as standalone products for alts managers, including financial data stack tools, reconciliation, swaps management, and a treasury suite. The firm – which has over 700 employees and supports over $100 billion in assets – plans to hire over 100 employees in the next year with a focus on software engineers, according to a source familiar with the matter.
“The standalone offerings are a natural evolution of our business. We built our full technology platform to better support the most complex operational demands of some of the largest asset managers in the industry,” said David Nable, head of commercial strategy at Arcesium, in an email to FundFire. “This demand for innovative technology in the fund admin space will only increase, and, by offering portions of our technology platform á la carte, we’re responding to the challenges that managers face when it comes to operations and data management.”
The focus on technology comes after a record year in merger and acquisition activity that saw large players including Apex Group, State Street and SS&C Technologies all make moves. And the start of 2019 has already seen some activity with Apex Group and its private equity backer Genstar Capital announcing the acquisition of Link Group’s corporate and private client services and Throgmorton businesses at the end of January, according to a release.
And more acquisitions are likely to come as firms look to expand their geographical reach and product lineups, including in areas such as the private client space and corporate securities, Salus says.
“The momentum, the desire, the money is there. It’s just sifting through and finding the right opportunities to take advantage of,” he says.
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It’s full speed ahead for mergers and acquisitions activity in the alts fund administration space with Apex Group making the latest move, acquiring Custom House during a busy summer period that has 2018 already outpacing 2017 in the level of activity.
The Custom House acquisition – announced Monday and set to close at end of the fourth quarter – adds $24 billion in assets under administration, bringing Apex Group to $560 billion in assets under administration. Apex announced the deal along with its private equity backer, Genstar Capital, but did not disclose the terms of the deal. The Custom House acquisition adds to Apex’s hedge fund service arm, with both firms sharing “common hedge fund technology platforms,” according to a press release.
The deal, which increases Apex’s geographical footprint in Europe, Asia, and the U.S., will have Custom House CFO Helen Breen and COO David Barry remain with the firm but CEO Mark Hedderman leave, says Rosie Guest, global marketing director at Apex.
Apex is expecting to make another few acquisitions this year and into the first quarter of 2019, with two deals currently in negotiations, Guest says. “The target over the next five years is to break the trillion [dollar] mark,” she says.
The rate of acquisitions is likely to make 2018 one of the busiest years on record, with 11 transactions already clocked this year compared to 10 during 2017, according to a list tallied by Fund Recs, a cloud-based reconciliation software firm that works with fund adminstrators. That total list includes acquisitions of technology firms, but even the pace of acquiring fund administration players alone is up, with eight deals so far this year.
“The numbers are up more year to date than we have seen last year. One big trend is the technology side of it,” says Alan Meaney, CEO of Fund Recs, noting that technology deals have totaled $9.45 billion in value so far in 2018.
Apex’s latest move comes as the firm aims to become the largest independent fund administrator in the world. The firm has been on an acquisition spree, announcing in June its acquisition of private equity administrator Ipes, in January its acquisition of M.M. Warburg & Co.’s asset management and servicing business in Luxembourg, and in October 2017 its acquisition of Deutsche Bank’s alternative fund services business, as reported. The firm also added to its U.S. team with additional hires announced in July.
Other administrators are also making moves, both acquiring fund admin peers as well as technology companies. SS&C Technologies announced its acquisition of the North American business of CACEIS, aCrédit Agricole division in March, as well as several technology deals, including Eze Software in July and tech and business operations provider DST Systems in January. State Street acquired Charles River Development, a provider of investment management front office tools, in July.
It’s a positive buyer’s market in the fund administration space, with many firms looking to build up a U.S. presence or increase their private equity capabilities, says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration market.
“I think [consolidation] is going to continue at all points in the market,” he says. “Large admins, medium sized admins, and smaller… There continues to be a proliferation in admin firms coming to market. And while the overall market is growing, and there’s even more of a trend to outsourcing more of a manager’s middle and back office, the service providers struggle to keep up with that technology trend – and either face lower growth or don’t have enough scale to plow back into R&D and technology.”
And while summer has traditionally been a quieter period, there are more deals coming, Meaney says.
“I think it’s worth keeping an eye out for a couple more big deals to be done by the end of the year,” he says.
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The robots have arrived. They aren’t out of a sci-fi movie, but rather are working on the growing demands from hedge fund managers for their fund administrators to incorporate more technology, automation, and robotics into their processes.
Hedge fund managers are increasingly asking for a range of performance information and analytics, including daily net asset values (NAVs), data aggregation and transparency for limited partners, as well as data for regulatory and compliance reporting, says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration market. And that’s causing a “massive shift” in the technology that administrators have to offer clients.
The move to incorporate greater technology and automation comes as hedge fund assets under administration have continued to grow, hitting $4.3 trillion for the first time earlier this year, as reported.
Robotics process automation and back offices are a “marriage made in heaven,” says Jon Hugill, group information systems head at Maitland, a fund administrator.
“I think between robotics and blockchain, the fund administration industry is in for an enormous upheaval. There is so much work that is relatively low value but requires a person at present to be part of the process and robotics is going eliminate a huge amount of that,” he says, adding that it will allow for people to work on other problems and devote time to clients.
Maitland introduced its first “robot” named Eric in late April in its South African office. “It’s not R2-D2, it’s just a piece of software that runs in the background,” Hugill says, adding that it works on areas such as fund accounting and data capture and allows the firm to get work done outside of standard hours.
For hedge fund managers, the increasing use of technology across the space will mean that the quality and “the speed at which NAVs are struck will improve dramatically,” he adds.
New areas of the hedge fund landscape are also offering opportunities to build new interfaces. To manage the rise in cryptocurrency hedge funds and their often disparate and non-standardized data, Gemini Hedge Fund Services built a cryptohub to interface with all the major exchanges and to streamline data in order to more efficiently process funds, says president David Young.
“From a fund administration perspective, it always comes back to the quality of reporting. It’s depth of reporting [and] speed at which we report – and obviously automation is an important part of both,” he says.
The automation push is also changing the hiring landscape of the admin field, Young adds. “We do use more business analysts than ever before than just pure accountants to better analyze what we are doing with our data and better use and control the data.”
Overall, the fund admin industry is looking at faster, more efficient technology and better ways of looking at data so managers can understand how their businesses are doing, says Mike Megaw, managing director and global head of analytics and regulatory solutions at SS&C Technologies.
The next frontier for the fund administration space will be digging deeper into the possibilities of blockchain, he adds.
“I think there’s promise there. It’s hard to say when it’s going to have the impact. It’s obviously the buzzword – blockchain and [artificial intelligence] are married together… The timeframe of when [blockchain] actually plays out depends on how soon it finds the right problem to solve and the adoption of that,” he says.
The introduction of new technology and automation will continue to be an ongoing process of evolution and not an immediate revolution, Young says.
“It’s a lot different than it was 15 years ago in the fund administration space and the automation is reflected in the fees investors and managers pay to administrators today. It’s significantly less than it was… The cost savings has been passed on to the end user – the investors, which is where it should go,” he says.
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NES Financial Announced as a Sponsor at the Third Annual Privcap Game Change: Real Estate 2017 Event
Silicon Valley FinTech company showcases innovative fund administration solution for private equity real estate industry
Silicon Valley, CA, October 24, 2017 – NES Financial, a market innovator in fund administration solutions for the private equity real estate industry, will sponsor the third annual Privcap Game Change: Real Estate 2017 event on November 2nd at the Mid-America Club in Chicago, IL. NES Financial will be hosting a keynote event with industry leader Bill Salus and emerging markets veteran Tom Heneghan.
This conference is a learning and networking event focused on the trends that will shape the future of real estate. For investors, fund managers and their advisors, this conference will offer in-depth analysis of the game-changing trends affecting institutional private real estate investment.
Bill Salus, an NES Financial Advisory Board Member and Founder and CEO of Paddock Consultancy, will be conducting a keynote interview entitled Emerging Markets: It’s Time to Take a Fresh Look.
The 30-minute interview will feature industry veteran Tom Heneghan (CEO of Equity International), who will share his insights, analysis and approach to emerging markets investing; his outlook on regional opportunities around the globe; insights for Western investors to consider as they commit to developing markets; and the challenges of dealing with currency fluctuations and other risks. There will be a short Q&A with the audience following the interview.
In addition to hosting the keynote interview, NES Financial will be showcasing their latest suite of technology-enabled fund administration solutions for the private equity real estate industry.
About NES Financial
NES Financial is a Silicon Valley financial technology (FinTech) company providing technology-enabled solutions and services for the efficient back- and middle-office administration of complex financial transactions. Serving private equity, commercial real estate, and Fortune 1000 clientele, NES Financial offers industry-leading fund administration, loan servicing, specialized EB-5 administration, and 1031 tax-deferred exchange services. Our unwavering commitment to data security, operational redundancy, and compliance reporting is evidenced by 12 consecutive years of successful independent audits of our technology, processes, and financial controls. Today, NES Financial services over 190 funds, administers over $75B of 1031 assets annually, and has worked with over 550 EB-5 projects. For more information, visit nesfinancial.com.
About Bill Salus
Bill Salus is an NES Financial Advisory Board Member and Founder & CEO of Paddock Consultancy. Named in Global Custodian’s Securities Services Hall of Fame, Bill has over 30 years of experience in sales, management, and consulting in the global investment and financial services industry. Most recently, he served as Global Chief Executive Officer for Apex Fund Services, a leading fund services company. Bill has also held senior positions at BNY Mellon, PNC Global Investment Servicing, KeyCorp, and Bank of America. In addition to his industry work, Bill serves on the Finance Committee for the Ronald McDonald House of Wilmington, DE, and is a member of the 2017 Committee of Hearts, Hedge Funds Care. Connect with Bill on LinkedIn.
About Tom Heneghan
Tom Heneghan is CEO of Equity International (EI), a Sam Zell controlled entity investing outside of the US, primarily Emerging Markets. Recent investments include companies in warehouse, hospitality, self-storage, parking and telestructure segments throughout LatAm, India, China and Japan. Previously, he was CEO of the Zell sponsored Equity LifeStyle Properties, Inc. (NYSE:ELS). From 1990 to 1995, he was with EGI, the investment company founded by Mr. Zell. Mr. Heneghan is Vice Chairman of ELS and is a board member of Home Partners of America, a single-family rental business and is a board member and a member of the Investment Strategy Committee of Chai Trust, a trust company overseeing trusts for the benefit of Mr. Zell and his family.
A wave of merger and acquisition activity shows no signs of slowing down in the fund administration space, with Apex Fund Services just last week announcing its acquisition of Deutsche Bank’s alternative fund services business. That’s after SS&C Technologies had its own latest addition earlier in the month.
Such deals are creating a bifurcation as industry giants keep growing and smaller providers look for niches in order to survive, industry watchers say.
In the next five years, there will only be a handful of banks offering fund administration, along with large players above the $300 billion mark and smaller players below $50 billion, says Peter Hughes, founder and CEO of Apex.
The Apex transaction, expected to close in the second quarter of 2018, will open up 18 additional investment jurisdictions for the firm and add $170 billion in assets under administration, which would bring it to over $300 billion in assets under administration and make it the eighth largest admin firm in the world, according to a press release. The terms of the transaction were not disclosed.
“The important thing is to integrate these businesses that we are buying well, that quality isn’t compromised and that [clients] see quality is getting better as we get bigger,” Hughes says.
The merger will enable Apex to offer bank custody and depository services and push out sophisticated middle office products, Hughes says. The Deutsche lift out also helps Apex pursue its goal to become a top five global fund admin in assets serviced. “We need to double our size again to get in the top five, which is where we are targeting to be,” Hughes says, noting that Apex is looking at a range of options to grow via acquisitions, from single country firms to the potential of more bank lifts outs. Its other recent acquisitions include Equinoxe Alternative Investment Services and Pinnacle Fund Administration, as reported.
SS&C Technologies has also been driving merger activity, having acquired $8 billion Canadian administrator CommonWealth Fund Services earlier this month. “The acquisition strengthens our presence in the Canadian fund services market and furthers our strategy to expand our international business,” CEO Bill Stone said in a press release. The move follows a raft of acquisitions by SS&C, including acquiring Conifer Financial Services, Wells Fargo Global Fund Services and Citigroup’s Alternative Investor Services business.
“I think the acquisition or corporate activity in the alternative fund admin space is going to continue. As you saw with [the Apex and SS&C] deals, the activity is global with global firms and even local firms,” says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration market. “As administrators begin to reevaluate their model and their own internal economics… fund admins are going to evaluate their own models and look at all options for growth, including taking on new capital or looking to acquire or even divest or sell to larger alternatives.”
Acquisitions aren’t just about purchasing revenue streams but also can add capabilities administrators did not have before, says Scott Price, head of business development and client management for North America at Maitland. Growth for administrators is “on fire” in the close-end fund world, including private equity, as outsourcing continues to grow in popularity, and as the hedge fund side remains focused on technology growth.
“It’s still very much a scale business. Businesses… need to have products that go through multiple jurisdictions. An admin can’t just be doing U.S. products,” he says.
Maitland itself recently acquired R&H Fund Services, giving it a foothold in Guernsey, and remains “on the hunt to grow” organically or through acquisitions, he adds. Read the full article here.
Private equity fund administrators are moving beyond core accounting tasks toward becoming critical hubs for systems and functions firm-wide as their fund manager clients face increasingly complex data demands from investors, regulators, and new product initiatives.
The march is on to take basic fund and investor account data and use it as a foundation for larger, centralized databases directly flowing into other business purposes as varied as valuation, performance analytics, fee calculations, risk management, forecasting, custody, taxes, and deal management. And the expectation is that any one piece of data will flow cleanly through all functions – and be updated and linked through each transaction and step – in an effort to maximize efficiency and make these systems less of a business headache, says Bill Salus, CEO at Paddock Consultancy.
“Managers are facing mounting costs to build more creative strategies and comply with regulations and manage their infrastructure,” he says. “It’s cutting into their margins and limiting their effectiveness – and their profitability and competitiveness.”
Fund managers will now look to administrators to solve not just for the accounting needs around a particular investment product, but for their larger business information management needs, Salus says. It’s logical that the search starts at the initial data around capital coming in from investors that is invested in assets, he says.
“The trend is to manage that data in a way to have integrity across a platform and deliver across any functionality and capability you need it to do,” he says. “For the modern administrator, that’s where the puck is going.” Read More