As Luxembourg looks to attract more alternative assets, specialist asset servicing providers are finding new ways of competing with the big one-stop-shop banks. Angele Spiteri Paris reports.
Specialist asset servicing providers are giving the big banks in Luxembourg a run for their money as they are partnering up with independent banks to offer fund managers a cost-efficient package, which includes custody coupled with the tailor-made approach of a small, focused shop.
The specialist service providers are no fools; they’re keenly aware that the large banking groups are their main competition.
Claude Mermans, managing director at Custom House Funds Services, Luxembourg, says: “Our competition comes from the big banks offering a custody and administration package at very attractive prices, but we are always ready to offer competitive quotes.”
Custom House has been active in Luxembourg in one form or another for a number of years. The firm currently offers administration to hedge funds, but is planning to expand and broaden its expertise to include private equity and real estate. Therefore, due to its longstanding presence, Mermans knows how the game is played.
Even the new players in Luxembourg know the value of being cost-competitive when compared to the banks.
Simon Henin, managing director, Ipes Luxembourg, says: “We definitely consider the big banks to be our competition. We’ve drawn up quotes against some larger players and the feedback we received was that our proposal was cost competitive.”
Ipes, a service provider specifically focused on private equity, is one of the newest actors in this market, having set up its Luxembourg base just a few months ago, following its success in Guernsey.
Specialist providers often struggle to fight the big banks on price because houses such as BNY Mellon, JP Morgan and State Street offer administration and custody in one package, within which they can afford to slash cost.
However, both Mermans and Henin say the solution for battling the giants successfully is to partner with other banking giants without losing their independence.
“We are building up our partnerships with some banks,” says Mermans. “It’s difficult but there are always some players that won’t want to pitch for the administration portion of a mandate, which means we can partner with them to provide that. This is usually because they consider the segregation of duties to be part of their value-add.”
Henin agrees: “The partnership approach makes sense. We started to work with a few independent banks that offer custody services and in doing this, we have built up our knowledge of the market and can offer something that is quite competitive. In particular our clients benefit from the most appropriate custody offering for their needs.”
However, not any bank would agree to this arrangement. ING and RBS were two of the names mentioned by some observers in the market as having had such strategic alliances in place. However, for confidentiality reasons, none of the players directly involved could confirm any specific agreement.
“Certain banks in Luxembourg understand this concept [of partnership] and are happy to partner with us. In setting up these relationships, we always make sure we maintain our independence, which is why we cannot have any exclusive agreements with any of the banks we deal with,” says Mermans.
Nathalie Dogniez, partner and head of investment funds at KPMG, says: “For small service providers, it’s important to have a connection with the banks. This allows them to offer a more effective streamlined service and gives them a competitive advantage.”
This competitive advantage has been clearly demonstrated.
“We have won quite a number of mandates with this set-up [partnering with a bank that will do the custody] when pitching against big banking operations, pitching for both the custody and administration portion of the mandate,” says Mermans.
Some might think clients will always be asked to pay a premium for the specialisation that comes along with assigning a mandate to a smaller, niche player.
However, Henin disagrees: “I don’t think we’re more expensive than the specialised departments of the big banking players. The structure of our offer may be different because we are one of the only administrators to charge on a time-spent basis, but on the whole I think the way we present it is more beneficial for the client. Our clients like the transparency we offer and that they only pay for the services they use.”
The cost competitiveness of the partnerships between specialists and banks is also acknowledged by their competitors.
Martin Dobbins, senior vice president, State Street Bank Luxembourg, says: “We see strategic alliances between large banks with small specialist partners try to compete in this space.
“However, we understand that clients who would rather appoint one service provider across the board and build that single relationship, become familiar with the policies and the people within that one firm.”
The big banking players are obviously not ready to be outdone by the small specialists. In reaction to the increasing interest in alternative assets, the banks have been setting up their own specialist servicing operations, or buying in that expertise.
State Street acquired Mourant in April 2010 and BNY Mellon completed its acquisition of PNC Global Investment Servicing in July 2010.
Dobbins says: “We have seen firms setting up with specific focuses and we acquired Mourant last year to expand our private equity and real estate expertise.”
Camille Thommes, director general of the Association of the Luxembourg Funds Industry (Alfi) says: “Traditional service providers have been extending their offering by providing services for alternative products. The new fund administration houses entering the Luxembourg market are more geared towards alternative products and therefore the existing providers have beefed up their capability to service these products.”
Indeed, the big players know the value of building their specialist expertise. Pierre Cimino, managing director at Caceis Bank Luxembourg, says: “You need to be big to play in the administration market but when dealing with alternatives, you need a tailor-made approach. So big players need to develop the necessary skills to service alternative managers previously serviced by small boutiques.”
Caceics is one of the bigger players that has chosen to develop its expertise internally rather than acquire a specialist business.
However, Mermans sides with the smaller specialists. “It’s true that we could lose some competitiveness because the big banking players can handle certain elements, like large volumes. But we’re always ahead when it comes to new products and giving our clients a customised approach,” she says.
Unsurprisingly, the big banks that have bought in their specialist expertise claim they have this, too.
Dobbins says: “Mourant had depth of knowledge and experience. So in acquiring the firm, we bought that intellectual capital of people and expertise. The purchase was not just about technology and infrastructure, it’s about offering our clients a more tailor-made approach.”
In the shade
However, for all the developments made in the alternatives arena, Luxembourg is not the jurisdiction that immediately springs to mind when discussing these types of assets.
Luxembourg may have become synonymous with Ucits, but the growing number of specialist service providers in the Grand Duchy suggests that it has more to offer in the alternative funds arena than has previously been perceived.
Serge D’Orazio, head of investment funds and global custody services at KBL European Private Bankers, says: “We caught up over the years on alternatives in Luxembourg. Historically, industries like Ireland’s have taken more advantage of alternative structures, but Luxembourg could develop as a centre for regulated alternative vehicles, specifically for hedge funds and funds of hedge funds.”
“Luxembourg is good at alternatives, but we need to improve that part of the picture,” says Cimino at Caceis.
One also has to consider that alternatives like private equity, are quite recent in Luxembourg. The Specialised Investment Funds (Sifs) regulation was drawn up in 2007 and the Sicar, another structure for private equity and venture capital vehicles, has been around since 2004. So compared to Ucits, which has been in place since the 1980s, this regulation is still in nappies.
The lag in bringing alternatives to Luxembourg might be due to the risky reputation with which these types of assets are associated.
Cimino says: “Things like hedge funds were seen to be very dangerous and maybe that is why Luxembourg came so late to the alternatives game. It was not very keen to be seen to be taking too much risk.”
Thommes, at Alfi, goes further: “We’ve seen tremendous growth in the number of Sifs set up over the past few years.”
Dogniez at KPMG agrees: “The fact that fund managers are now launching alternative funds in Luxembourg is evidence that the image of the Grand Duchy is changing.”
Cimino says: “The launch of the Sif demonstrated the huge political will to develop alternatives in Luxembourg, and despite a late launch, the Sif has seen capital inflows which outstrip even Ireland’s Qif [Qualifying Investor Fund].”
D’Orazio says: “Alternative asset classes remain a very active field of investment. Furthermore, if the AIFM [Alternative Investment Fund Managers] Directive will reshuffle the industry and people begin to redomicile their funds, I’m convinced that they’ll chose Luxembourg over other European fund centres.”
“We’ll certainly be doing more to look to fully benefit from the AIFM Directive when it comes into force and position Luxembourg as a centre of excellence in that segment,” says Thommes.
©2011 funds europe