The march of M&A

Written by: Gill Wadsworth Posted: 10/01/2022

BL75_M&A illoFund administration is one of the biggest tech-powered elements of the financial sector, But a host of M&A activity is driving huge consolidation in the market – including headline-making purchases from private equity firms. So what does it all mean for the future of funds?

Last summer, private equity behemoth Apex Group paid £1.51bn for fund administrator Sanne – ending a bidding war that resulted in investors receiving 920 pence per share.

That marked a significant increase on initial offers from Apex’s rival Cinven, which after five rejected attempts had tried to tempt Sanne’s management with an offer of 875 pence per share.

That Apex was successful with its bumper bid is indicative of the ferocious competition for Channel Islands fund administration businesses, particularly those that run the back offices for alternative investment funds including private equity and hedge funds.

Nicholas Hyett, Equity Research Lead at Hargreaves Lansdown, explains: “It helps that the cost to bring Sanne in to detangle regulatory red tape is just a drop in the ocean for most of these funds, and getting it right is far more important than cutting corners. 

“The group has competitors in some of its individual markets, but there aren’t many firms doing what Sanne is doing on a global scale. All that gives Sanne some pricing power.”

Hyett adds: “Alternative investment funds are having a moment in the sun amid a low-interest-rate environment, as investors seek out potential higher returns.

“On top of that, global trading complexity is increasing as challenges such as Brexit add to the regulatory headache that fund managers must deal with.

"Sanne has had no shortage of potential customers to draw from and once a fund has been established, it’s all but impossible to switch administrators, so revenue is very sticky.”

Purchasing power

Sanne itself has been busy snapping up rival administrators, notably buying out the fund administration division of PraxisIFM in July last year – which added more than £25bn of assets under administration and 80 employees based in Guernsey, Jersey, London, Luxembourg and Malta.

The PraxisIFM acquisition followed Sanne’s earlier takeover of Scandinavian fund services provider Private Equity Administrators, as well as Dallas-based STRAIT, which provides fund solutions for alternative investment firms. 

There is still huge scope for private equity firms to continue their assault on the fund administration sector. According to data from S&P Global Market Intelligence and Preqin, 25 private equity firms across the world hold $509.81bn in dry powder, marking 22.3% of the record $2.286trn in total global dry powder.

Jonathan Smith, Founding Member and Partner at Wyvern Partners, says it is likely that private equity firms will put at least some of that money to work in the funds administration sector.

“Private equity loves the fund administration sector, and no private equity investor has ever lost money in it. Fund administration is a lovely sector for investors; it is cash generative with good margins and it is gently growing,” he says.

The latest Monterey Jersey and Guernsey fund report shows that funds under administration continued to grow strongly during the 12 months to June 2020, increasing by 3.2% to $922bn despite the market disruption caused by Covid-19. 

Aztec Group retained top spot as the largest fund administration business on the islands, with $237.6bn in assets under administration after seeing growth of 9% for the year to June 2020.

Matt Horton, Group Head of Private Equity at Aztec, says there are clear reasons for this exponential growth.

“The market growth in Jersey and Guernsey reflects their position as centres of excellence for private equity and alternative funds, reinforced by political and fiscal stability, the professionalism of their service providers and the quality of the regulatory bodies. 

“This year’s report reinforces the significance of the fund industry to the Channel Islands’ financial services sector,” Horton says.

Rival jurisdictions

However, the Channel Islands has competition from other tax-neutral jurisdictions when it comes to attracting private equity investments.

Ivo Hemelraad, CEO at financial services company Zedra, says his business already has a significant footprint on the islands and, while he is keeping his options open, it is expanding regions. 

“We have been active in the fund services sector; we acquired a business in the Cayman Islands as well as one in Luxembourg.

"We continue to look at opportunities in the Channel Islands, but we already have a presence in Jersey and Guernsey and would only continue to expand here when we can see there is the chance for additional growth,” he says.

BL75_M&A illo2While some businesses on the islands have welcomed private equity investments with open arms, Smith says there remains notable opposition from certain quarters. 

He explains that reluctance to do business with private equity providers stems from “horror stories” of rapid short-term expansion at the cost of long-term value creation. 

“Some [private equity firms] have made real messes of their investments,” he says. “There are good and bad private equity practices. Some of them buy lots of businesses, but they fail to integrate them and instead just believe that gaining size is all that matters.”

Smith says bad practices include increasing fees without improving service levels. “If you put up prices and the quality of service goes down, then the clients are unhappy and the intermediaries who recommended the clients went to that trust are also unhappy – and everything is blamed on the private equity owners for forcing through change in the sector.”

However, as Smith notes, the private equity sector is “quick to learn” and more recent transactions have been driven by better practices.

These include Vistra, which in September completed an acquisition of Newhaven, an independent provider of corporate, fiduciary and business support services to corporates, professional services firms and private clients.

Smith says: “Vistra has grown into a multibillion-dollar business. It invested in people, and it knows that you do not run a successful business off a spreadsheet. 

“It takes long-term decisions and a realisation that while you can get short-term growth by putting up the fees, you won’t generate any new business.”

In the case of the Newhaven takeover, Vistra will retain Chief Executive Reuben Anstock and his management team in senior roles and bring the company under the Vistra brand.

Smith says: “One of the mistakes that bad private equity firms made was failing to see that strong management is key. Contrarily, Vistra is an example that you can almost start from anywhere if you have a strong management team.”

Another example of the importance of keeping the incumbent top brass in situ when taking over a business comes from Ocorian’s private equity-backed acquisition of Guernsey-based Trust Corporation International, which completed in August.

Frederik van Tuyll, Chairman and CEO at Ocorian, says the combined forces of the two management teams results in a more “powerful” business.

“Our combined capabilities and expertise will result in a powerful full-service offering in Guernsey from our team of more than 160 professionals,” he says. 

“We are a very considered acquirer, and this acquisition is a strategic investment in Guernsey alongside our core and complementary service lines.”

Ocorian’s “considered acquirer” status is another important factor in takeover success. Smith says the “buy anything” model is discredited and acquisitions have become more strategic. 

Buying in teams

He also notes the importance of ensuring the incoming team from the acquired company keep some skin in the game.

“Successful acquirers will spread the equity ownership widely among the employees. They buy partly for cash, with the rest in shares, so that the people selling become part of the bigger group,” he says.

Consolidation in financial services across the Channel Islands shows no sign of slowing and, as the challenges of the Covid-19 pandemic become more manageable, the rate of mergers and acquisitions may increase. 

While the involvement of private equity firms may have once been viewed with suspicion, these financial backers will prove critical to success. Given the amount of dry powder, the appetite from this sector will be evident for some time to come. 


Add a Comment

  • *
  • *
  • *
  • *
  • Submit

It's easy to stay current with blglobal.co.uk.

Just sign up for our email updates!

Yes please! No thanks!