Fund admin: Pure player or one-stop shop?

Although the private equity industry has worked overtime to get itself out of the post-Lehman quagmire and on the road to recovery, the collective mood remains somewhat austere. Less commitments. Smaller funds. Less deals. Less carry.

By contrast, fund administrators seem to be working around the clock, picking up new clients and growing year-on-year. It is now believed that between a quarter and a third of European GPs are using the services of external fund admin providers, up from around 10% in 2008. Furthermore, this figure is set to increase in light of the current PE industry landscape.

Unsurprisingly, growing demand for fund admin services has resulted in the emergence of a deep and competitive market for GPs to choose from. One of the clearest lines of divide rests on the choice between one of the independent "pure players", or the large investment banks that were quick to develop similar services in the boom years.

Given that in-depth, trustworthy reporting is increasingly favoured by LPs, it is tempting for a PE house to showcase the name of one of the "big boys" on their PPMs. Firms such as JP Morgan or RBC also have the ability to provide a wide array of additional services, from financing to corporate finance advisory. The one-stop-shop approach is indeed proving popular in many areas of the private equity advisory world, as it can allow a GP to optimise its costs and streamline its operations by cutting down on the number of adviser relationships it has to manage.

These arguments could be seen as a threat for smaller, independent players, as Ipes commercial director Justin Partington notes: "We see some GPs considering global brand names - that goes for administrators but also lawyers and auditors. The challenge for independent administrators is to be seen as one of those top brand names."

But independent providers remain unfazed, confident in the fact that the boutique approach is more relevant than ever. Augentius managing director David Bailey insists on the focus that comes with specialising in a single asset class as opposed to the banks' one-stop-shop solution: "We don't see it as notable obstacle, because sadly many of the banks don't deliver a tremendously good service. The cost of administering a fund is actually not that great. Often people would much prefer paying for quality and a partner they can trust, rather than having to spend time and resources double-checking everything."

Meanwhile JP Morgan executive director Patrick McCullagh argues that having a dedicated team for private equity fund administration guarantees a high-level of service, but also that being part of a larger group helps alleviate the challenges faced by independent players: "Staff turnover for instance has traditionally been high, especially in international locations and the Channel Islands. We tend to recruit further along the experience tree, when people are well qualified and more stable in their career, rather than less qualified or less senior staff who are perhaps attracted to a move by smaller or shorter term salary increments."

Market consolidation

The large groups also reckon the stability argument is likely to appeal to GPs, as some observers believe new business will come in part from continued consolidation in the administration market. It began two years ago, when Mourant was acquired by State Street, and JP Morgan was bought by Schroders shortly thereafter. McCullagh believes that being on top of the food chain makes sense when GPs are increasingly looking for long-term, stable relationships with the teams administering their funds: "Most of the independent players came out of management buyouts. It is a common belief that large banks are the consolidators in this industry, as has been seen through several recent acquisitions."

Augentius did spin out from Ansbacher in 2006, while PE house RJD Partners backed the £25m MBO of Ipes in 2008. But Partington doesn't see this as impacting the quality of service they offer their clients: "We have been in this business for over 13 years and have a strong and stable management team as well as many long-standing client relationships. In our experience, clients are most concerned with quality service provided by a team they know and trust. There's a case to be made for both business models and this is borne out by demand, although what we're seeing is a move towards independents."

Meanwhile not all in the fund admin industry agree that consolidation is the only way forward. Says Bailey: "There are probably no more than half a dozen of admin services providers with any sort of a substantial client portfolio," he continues. "There will be a small amount of consolidation, but it can't be that much since there aren't that many players out there to start with. It would risk getting a bit too monopolistic, which can't be healthy for the GP industry."

This article is an extract from unquote's Fund Administration Report 2011, available to all unquote" subscribers.

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