Don't believe the hype | White & Case LLP International Law Firm, Global Law Practice

Don't believe the hype

Fiduciary assets may not be the most obviously attractive business units within financial services, but steady profits and the opportunity for consolidation are enough to keep financial sponsors interested.

Some of the most noteworthy deals by financial sponsors in the financial services sector since the credit crisis have been in the trust and custody services and fund administration market.

Blackstone listed Dutch trust administrator Intertrust in October 2015 in an IPO that valued the business at €1.3 billion, and in 2014 Warburg Pincus and Singaporean sovereign wealth fund Temasek teamed up to take a 50 percent stake in Santander’s global custody business, in a deal valuing the entity at €975 million.

Fiduciary services have steady, predictable revenue streams and can deliver attractive economies of scale

The strong interest and large investments from financial sponsors in this sub-sector, however, have come as something of a surprise: There is significant downward pressure from companies who have had to trim their own cost bases and put pressure on the providers of fiduciary services to lower prices, turning their services into low-margin commodities. There is faster growth on offer in the fintech sector, as well as a larger number of deal opportunities coming to market in banking, asset management and debt.

Yet despite the pressure on pricing that some providers have had to manage, custody and administration services continue to tick the boxes for financial sponsors.

 

A predictable play

There is a steady flow of assets coming to market as financial institutions refocus on their core business and sell non-core divisions.

Fiduciary services have steady, predictable revenue streams and can deliver attractive economies of scale if more business is run through existing infrastructure.

"On the surface these companies look like very boring businesses, but if we were in the middle of the Californian gold rush, these would be the people who made their fortunes by selling shovels and wheel barrows," says Professor Scott Moeller, Director of the M&A Research Centre at Cass Business School. "Earnings are constant and because there is so much focus on fintech, multiples are moderate. There is no hype in this part of the market. Everyone might be looking for the next Uber, but somebody still has to make the cars."

Private equity investors have also seen the opportunity to consolidate what is still a fragmented space. JTC, a fund administration company backed by mid-market investor CBPE Capital, for example, has made five bolt-on acquisitions since 2010, expanding its client base and geographical reach.

Increasing regulation across the financial services market has also helped to boost business for administrators. Ipes, a specialist fund administrator focusing on private equity clients and backed by Silverfleet Capital, has seen its assets under administration grow to more than US$50 billion as clients look for outsourcing support to manage compliance with AIFMD, FATCA and Dodd-Frank legislation.

Finally, mirroring the trend in other areas of financial services, alternative investors have seen the opportunity to apply new technologies and processes to the management of large portfolios of assets under administration, which has facilitated cost reduction and further economies of scale.

 

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