Do you expect to see consolidation of the fund administration sector in the short/medium term?

Recently two of the industry’s biggest administrators, BNY Mellon and State Street, acquired sizeable alternative investment services business. State Street led the way in December 2009 with the acquisition of Mourant International Finance Administration from offshore law firm Mourant du Feu & Jeune. In early February 2010, BNY Mellon announced it was buying PNC’s global investment services business.

The deals are the first significant transactions in the industry since 2007, when BNY Mellon was created through the merger of the Mellon Financial Corporation and the Bank of New York Company.

Many are now asking whether the long-awaited consolidation of the industry is happening.

“The big are getting bigger both in the manager space and the in the service provider space, as scale and capability increase in importance for investors,” is the pithy comment from David Aldrich at BNY Mellon.

Deborah Yamin at State Street expects to see “further consolidation in the alternatives fund administration space over the next 12–18 months as hedge fund managers move from smaller administrators to more established providers and smaller administrators assess their long-term sustainability in an industry that requires a deep commitment and ongoing investments in operational infrastructure to keep pace with client needs.”

At Butterfield Fulcrum, Akshaya Bhargava is inclined to agree. “As fund administration companies battle for scale in a crowded marketplace, the likely effect will be that larger firms will buy business by acquiring smaller firms,” he says.

“We expect consolidation to continue as the larger players seek opportunities for acquisitions that complement their existing service platforms,” says Richard Ernesti at Citi.

Dermot Butler at Custom House takes a slightly different view. “Ironically, there has been consolidation over the past five to 10 years which has taken many of the competent hedge fund administrators under the umbrella of larger banks or financial institutions,” he says.

“This meant that there was a gap at the bottom end of the market for the smaller administrators servicing the smaller funds. The financial debacle over the last two and a half years has resulted in the decline in medium-sized funds, and surprisingly, an increase in smaller funds who, primarily for cost reasons, select the smaller/newer administrators,” Butler notes.

“As this market matures, I would expect to see a consolidation in the fund administration sector as all three sectors – small, medium and large – move up their respective ladders and the larger get consumed, a reverse of the ‘big fleas have little fleas… and so on, ad infinitum’,” he concludes.

Stephen Castree at Equinoxe expects consolidation “as some of the premium boutiques partner up to gain scale. We would also anticipate consolidation to allow organisations to provide a global solution to their client base.”

Consolidation is happening right now, according to Stuart Feffer at LaCrosse. “And it’s not just the big guys gobbling up boutiques. It’s the big guys gobbling up each other,” he adds.

“Based on the difficulties facing small administrators with insufficient budgets to develop strong technology offerings, we expect to see significant consolidation in the industry over the next couple of years,” says John Buckley at Omnium.

Jonathan White at Viteos Fund Services believes administrators who are “fighting a war of fees at the low end will find that this is an unsustainable business model. Even now there are administrators who are on their heels.”

White continues: “This creates opportunities for administrators looking to increase assets under administration through acquisition or partner with other firms to create more of a ‘one-stop shop’ through bundled services. The next 12 months are going to be very interesting.”

Institutionalisation of the alternative asset management industry will enhance the role of the large multi-service administrators, leaving the niche players to serve the start-ups and independent boutiques, according to John McCann at Trinity. “The niche players will be expected not only to survive, but to thrive. The industry will bifurcate,” he concludes.

“The big boys will continue to provide scale and will continue to prosper. The niche players will be nimble enough to react to the needs of the industry and the significant number of smaller managers not serviced by the large administrators (due to their smaller asset size). The medium-size players who can be neither will suffer. We expect consolidation to take place in this area,” states McCann.

SEI’s David Morrissey agrees. “Some of the smaller or more niche providers may face increasing challenges in this market if they don’t have the right level of infrastructure and technology to support the increasing transparency, reporting or regulatory requirements managers will be seeking,” he says.

Peter Hughes at Apex Fund Services also expects to see many of the larger institutions selling their administration divisions. “When times are good the additional profits and cross-selling of products is a bonus but in tough times these non-core activities are shed.”

He points out that Mourant has recently been purchased, Fortis is under due diligence and there will be more to follow. “I don’t expect many strong administration business models to be involved unless there is a compelling strategic benefit to be gained from a transaction,” he states.