A Season of Change and Consolidation Reigns

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John Bohan, Managing Director Europe and Chairman Apex IrelandApex Fund Services’ John Bohan speaks to Finance Dublin:

 

“2017 has been a transformational year for Apex Fund Services Group and one that has signalled the company’s clear intent to become one of the largest fund administration companies globally whilst retaining the culture that has driven it to this point”

 

In May of this year we announced that Genstar Capital completed the recapitalisation of Apex Fund Services and the subsequent acquisition of Equinoxe Alternative Investment Services bringing the combined assets to $80bn servicing its client base through 35 offices and 720 staff worldwide.

 

Apex group are 14 years in business and long had a global presence before setting up in Ireland. In July of this year we hosted a 10 year anniversary event to celebrate our time in Ireland which began with what was clearly a difficult time to begin business in 2007 through to the success that we have enjoyed to date in 2017.

The recession years 2008-2010 cemented our approach to growth and client services. In a difficult market only those companies that understand their client needs – timing and accuracy of the information, responsiveness to clients and investors and possibly most importantly a technology platform that can meet the demands of today’s regulatory environment and constant demand for data in it’s many reporting forms will survive and thrive.

 

At that 10 year anniversary event in July we signalled that it was our ambitions to be one of the top 5 largest fund administration companies globally which in asset terms would be in the $600-700bn under administration, a far cry from the $80bn announced in May. Having established a unique global jurisdictional platform with 35 offices in 24 jurisdictions the time was now opportune to build upon and leverage off of that truly global presence.

 

True to form on the 20th of October of this year Apex announced the acquisition of Deutsche Bank’s Alternative Fund Services (AFS) business, a deal that adds USD170 BN in AUA making Apex the 8th largest fund administrator in the world.

 

In addition to the asset growth key to the DB deal is the ability to provide depositary and custody services out of Ireland and Luxembourg the two key EU centres for regulated fund growth. It is that ability that is getting our combined staff very excited all over the world with the prospect that approaching our larger PE or AI clients to offer a global product offering all under one roof.

 

One of the key strengths of Apex group over the years has been that diversity in jurisdictional offering and the ability to offer the global PE houses and global alternative asset firms a multi – product offering across each of the key domiciles or regions that they wish to have product or fund strategy. The ability to custody these products for these global clients is particularly attractive.

 

It has been a period of transformational change for Apex and there is a feeling internally that we are merely on the beginning of this journey. There is no doubt that 2016/2017 has been a time of instability across the markets with Brexit, US elections and possibly overheated equity markets with managers looking for alternative options in the credit/debt fields and more investment in PE.

 

Many of those external influences remain a distraction to the markets with new possible threats emerging such as the possibility of a Bitcoin bubble with current valuations of a $400bn industry it can no doubt have negative connotations particularly with futures trading on bitcoin beginning mid-December.

 

Yet merger and acquisition activity within the FINTECH space is back at the highs of 2006/2007 and as managers continue their search for Alpha it seems that the FINTECH space continues to offer the most attractive offerings.

 

Consolidation continues in the traditional areas of Fund Administration and for the first time since the boom of Mancos and Supermancos began in 2012 onwards, in anticipation of AIFMD, the first of these Mancos are beginning to divest with notable acquisition’s of Manco’s in Luxembourg and ACD’s in the UK.

 

The private equity firms are recognising that over 25% of all new regulated funds coming into the Irish and Luxembourg markets are coming in through the Manco model which represents an immense opportunity for accelerated growth and capital creation.

 

In conjunction with the Manco Gateway to European regulated funds naturally flows the demand for distribution avenues that can parallel with those offerings. It is the distribution element that we are now seeing coming in from the US or other jurisdictions coupled with the Manco model that will prove a most desirable product. It is the capability to provide EU fund management solutions across Luxembourg, Ireland and the UK coupled with a cross-jurisdictional offering that is a most desirable solution and one that the clients of Apex already leverage off our many industry partners.

 

Apex as an independent fund administrator with a global and diversified client base can now offer through its many industry partners offer these regulated solutions to its clients facilitating a greater flow of business across our group. This in turn has changed the dynamics of the type of funds that we are working with in Ireland.

 

Since our entry into the market Apex Ireland has always administered regulated fund structures with a proportion of offshore v’s onshore funds being 80:20. This proportion of funds has moved considerably with the majority of new business coming in being regulated UCITS or non-UCITS funds. As an administrator, generally speaking, it is the regulated funds that are larger funds with a higher fee revenue attached whether due to the greater frequency of NAV for UCITS or peripheral reporting requirements required for those funds that demand higher resource allocation and fees.

 

Other significant changing trends within the industry is the continued push for outsourcing of private equity funds away from the manager to third party administrators. To highlight the opportunity 80% of alternative fund managers outsource the administration of their funds whilst only 30% of private equity fund managers follow the same practise.

 

The continued demand for greater transparency amongst investors and the drive towards best of breed technology around PE reporting and tax and regulation is forcing the administration to be outsourced. Preqin estimates that private equity industry assets total $4.2tr which suggests an untapped market potential of nearly $2.9tr in PE assets. (See details below)

 

While middle office outsourcing rates remain low, recent surveys from EY highlighted a clear trend towards further use of third parties for areas such as portfolio company analytics. Until recently, many players were geared largely towards hedge funds – outsourcing rates have historically been much higher there because of the nature of their investments and the need for custody services.

 

As a result, there were very few specialist private equity administrators who had the skills and technology to service the unique characteristics of a private equity fund. The landscape has changed, with more services now tailored specifically towards private equity, so there’s a pull factor.

 

Yet there are also a couple of major push factors. One of the biggest drivers is the increased reporting requirements of limited partners today. They need more detailed information in specific formats and they are seeking the comfort of a layer of independence in reporting. Regulatory change is also pushing firms towards outsourcing as items such as FATCA and CRS compliance require upgraded IT, which can be expensive to build and maintain. There is clearly a greater percentage of smaller and medium-sized houses looking to outsource, although demand is actually across the board.

 

Some larger houses are also looking at this because, even if they do have the firepower to build big, in-house teams and invest in IT, they are facing continued pressure on fees, which can make the need for constant technology updates prohibitively expensive.

 

With the smaller and medium-sized players, there’s a move to outsource all fund administration services, while at the larger end, many firms are choosing from a menu of options and will often have inhouse teams and infrastructure plus external providers and these act as a buffer for each other.

 

When all of these trends and variables converge it is not difficult to see as to why PE houses view the funds industry as such an attractive proposition for the medium term.

 

It is an exciting journey and one that has been refreshed and revitalised with the recent acquisitions. We look forward as a group to exploring the greater combined strengths that we can offer our clients and the new heights that we may reach in the coming years.

 

Hedge Fund Industry Observations

 

  • According to research by PriceWaterhouseCoopers, outsourced fund administration is utilized by approximately 80% of hedge funds and fund of hedge funds.
  • The increased institutionalization of the hedge fund industry, coupled with several high profile fund failures and cases of fraud, have driven the demand for third-party fund administration.
  • As the industry has adopted the use of outsourced fund administration functions, fund administrators have enhanced their services to include middle- and back-office functions that can help reduce the operating expense ratios of fund managers.

 

Private Equity Observations

 

  • The private equity fund administration market remains largely untapped with only 30% of the industry utilizing an outsourced fund administration function.
  • Preqin estimates private equity industry assets total $4.2tr (2) which suggests an untapped market potential of nearly $2.9tr.
  • Should the private equity market follow suit with the hedge fund industry, fund administrators with an existing private equity administration function have a unique opportunity to tap into a large and growing market – with a limited number of private equity administrators in the market, there is a large opportunity available for existing providers.

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