Funds are maturing. Due to mounting regulatory pressure and increasingly complex investment strategies, more and more funds are outsourcing a part of their administration operations in order to focus on generating returns. This trend is also driven by the market pressure on firms to deliver operational excellence, better reporting and tighter accounting processes with greater transparency.
As their key business partners, fund service providers are also under transformation. Globalization, regulatory change, cost containment, implementing new technology, preventing and fighting cyberattacks, maintaining service quality and pressure on fees are just some of the key challenges the fund servicing industry faces today. The recent Brexit has added more uncertainty: Luxembourg may be well positioned to attract new funds, but Dublin, Paris, Frankfort and the Netherlands will also claim their share.
Historically, the fund servicing market lacks homogeneity and service levels vary. Many fund service providers are owned by banks (e.g., BNY Mellon, BNP Paribas Securities Services and CACEIS) or prime brokers (e.g., Goldman Sachs Administrative Services and J.P. Morgan Hedge Fund Services), but independent players are gradually gaining their place by focusing on providing cost-efficient solutions and quality customer service. A report issued by Preqin in May 2016 reveals that 30% of surveyed hedge fund managers changed at least one service provider in 2015, largely due to dissatisfaction with the quality of service provided (40% of the respondents) and the cost of the service provider (31%).
The increasing maturity of the market is leading to the concentration of players, as witnessed by the chain of mergers related to fund services provider Amsterdam-based Vistra: acquired by Barings late 2015, it announced a merger with India’s largest independent corporate trust services provider IL&FS Trust Company in April 2016 and with Guernsey-based Orangefield Legis just one month later.
Depending on the client needs, service providers are also trying to differentiate by either providing a full-spectrum of comprehensive services or adopting a “best-in-breed” approach. Besides incorporation and domiciliation, fund administration administrative management of companies, depository services, financial reporting and regulatory services are also common services that are proposed.
Going forward, fund managers are seeking out more suitable and specialized service providers who offer a more collaborative approach, backed with superior service. According to Serge Krancenblum, CEO of the SGG Group, a Luxembourg-based fund service provider, the increasing complexity of regulations, such as FATCA, CRS (Common Reporting Standard), AIFMD or BEPS (Base Erosion and Profit Shifting), has also opened the doors to an environment of opportunity for fund service providers.
Jeanne Yizhen Yin
This is part of our series articles in the International Corporate Finance Report.