If fund managers have little desire to change providers, then custody banks need to look for new forms of business. This is where alternative investment managers come in, says Nicholas Pratt.
A review of the latest round of asset servicing mandates reveals a number of clear trends. One of the first is that many managers and investors are reticent to change their provider barring an administration disaster.
While this reticence is beneficial to third-party providers in terms of retaining current business, it is less encouraging to them in terms of growth. It is no wonder then that asset servicing providers are focusing on providing more services beyond the traditional back-office functions to their existing clients (see also Back Office View, page 66). Or else they are targeting new types of clients. For example, alternative investment managers considering outsourcing to third parties for the first time, or insurance firms and pension funds deciding to appoint independent custodians rather than letting their asset managers do the safekeeping.
Private equity managers have traditionally performed administration services in-house, but an increasing number of asset servicing mandates are coming from the private equity sector. According to Kamran Anwar, Emea head of private equity services at Citi, there are three reasons private equity managers are outsourcing. First, investors have become selective in the funds they back and so raising capital has become more challenging. Second, investors are demanding greater transparency. Finally, there is an increasing amount of regulation calling for greater reporting and transparency.
The prospect of a large number of private equity servicing mandates is welcome news for the custodians that acquired alternative administrators back in the last decade. And the number of mandates being awarded at the moment is perhaps recognition that these acquisitions have been largely assimilated into the groups that bought them.
Citi acquired Bisys back in 2007 and it now makes up part of Citi’s Private Equity Services division. Meanwhile, Northern Trust acquired Omnium which now makes up Northern Trust Hedge Fund Services. As Clive Bellows, Northern Trust country head in Ireland, says: “Anyone who cannot provide services for every fund type will struggle.”
Regulation has been a huge influence in terms of asset servicing trends. For example, the new rules in the United States and Europe on central clearing for over-the-counter (OTC) derivatives, the European Market Infrastructure Regulation, and the Dodd-Frank regulation in the US, have created a big demand for clearing services and collateral management – which is a departure from the traditional middle and back-office services provided by asset servicing companies but is in keeping with providers’ ambitions to move further up the value chain.
However, providing these services is a complex undertaking for providers, especially collateral optimisation, which requires an enhanced infrastructure and new fucntionality and the ability to perform these services several times during the day.
Furthermore, says Alex Buffet, head of market data and asset servicing at Societe Generale Securities Services, not all clients are aware of this complexity, especially those looking for clearing services in line with new rules regarding central clearing of OTC derivatives.
“We started to see RFPs [requests for proposals] for clearing and collateral management services come in last year,” says Buffet. “In the past two weeks, we have had two RFPs from Germany where we are competing for a clearing and collateral management mandate and we expect to see at least one RFP a week for these services in the lead up to Q1 2013.”
Another area of interest inspired by regulation involves risk measurement and analytics services. This involves two areas of focus, says Dan Wywoda, head of global products at BNY Mellon Asset Servicing. “The first is aggregating risk data associated with their portfolios as of a point in time. This helps to frame the risk makeup of their portfolios.
“The second area is to take the risk data and apply various scenarios to test the makeup with a forward looking view of what could impact the returns on the portfolio.”
Elsewhere, providers are developing products and services to support clients’ fund distribution ambitions, especially cross-border Ucits funds or in emerging markets in Asia, Latin America and the Middle East and North Africa. Another area of increasing demand from clients involves pooled funds and the Irish “common contractual fund” structure, says Bellows.
“There are a lot of international fund managers looking to target European institutional investors and are using a common fund platform based in Ireland to do that.”
Competition and pricing
There are implications arising from these new trends. Offering collateral and clearing services brings asset servicing firms into competition with clearing providers; targeting the alternatives space means going up against prime brokers; and providing risk analytics is a market traditionally dominated by risk vendors. So how will asset servicers compete?
“Asset servicing firms from a custodian background may not have the in-built experience or expertise for some of these services but they have the client relationship. Increasingly, clients are looking to reduce the number of providers they use,” says Buffet.
And while the risk vendors may have the technology, asset servicing firms have the data. “We are acting more in the role of a data provider when the clients have decided to use specific vendors,” says Wywoda. “When risk vendors come to see us, we have to remind them that the asset servicing company will quite often be the official record keeper for fund managers and everyone else is doing their analysis based on these records.”
The other implication of providing new, more complex services like collateral management, involves pricing. “The market for these new services, like collateral management, is not mature yet so, to an extent, you have to design your pricing model based on how things move forward,” says Buffet.
Whereas traditional services such as custody and administration are invoiced according to CSAs, newer services like collateral management will be invoiced according to movements during the day. In other words, the services will be charged based on the activity involved rather than the value of the assets involved.
Will this change be accepted by asset managers?
“I think its common sense,” says Buffet. “But we will have to test the model to a certain extent because not all asset managers are aware of the complexity of the services involved.”
©2012 funds europe