M&A within the fund administration sector is set to continue, with regulation and compliance favouring providers with a full-service offering. Inflexion partner and head of its £2.5 billion Buyout Fund, Flor Kassai, talks about why private equity is well placed to drive consolidation and build global leaders of scale.
Private equity typically seeks businesses which are resilient and cash generative, so it’s no surprise that the fund, trust and corporate administration services sector is high on investors’ wish lists. They bear admirable hallmarks of an annuity business: recurring revenues and strong cash conversion provide great value protection, and many have high EBITDA margins owing to loyal customers given the costs of moving once established.
Crucially, fund administration also offers strong growth potential, with market trends shifting in favour of one-stop shops and regulators raising the bar in terms of compliance. Together, these points mean excellent consolidation opportunity in a very fragmented market where many players have come out of banks or law firms owing to regulatory changes. This has driven industry growth for over a decade, and activity is set to continue.
Consolidation is also being driven by smaller businesses feeling the pressure of higher compliance costs and the need to invest more heavily in IT systems, enhancing the appeal of joining forces with larger players. Additionally, a broad jurisdictional footprint is increasingly important to maintain clients as regulatory changes – Brexit passporting rules being a recent case in point – meaning certain jurisdictions become more or less attractive over time.
The right private equity firm can add a lot of value to these businesses, with a growing number of examples highlighting the benefits and thus fuelling further interest in partnership. Experienced backers can help to professionalise sales capability drawing from best-in-class examples from other professional services industries, invest in technology to help them become properly tech-enabled, support jurisdiction expansion to provide clients with a one-stop-shop solution, facilitate succession planning and help drive M&A in a heavily fragmented market.
The story of Sanne Group illustrates the positive impact the right private equity investor can have. In 2012 it was small and relatively unknown, however minority funding from Inflexion that year kicked off two transformational years of growth: between 2012 and 2014, the company generated revenue growth of 38% CAGR and EBITDA growth of 45% CAGR. This was top-line growth supported by two acquisitions which helped the company to expand internationally and added 80% to Sanne’s headcount, as well as opening a Singapore office.
"The story of Sanne Group illustrates the positive impact the right private equity investor can have"
As this was going on, other administrators had looked at IPOing but had not yet achieved it, yet Sanne managed a very successful IPO, floating on London’s main market in March 2015, generating a 4.0x MoC and 80% IRR for management and investors.
The Sanne growth and flotation really helped raise the profile of the fund administration sector, with the high valuation (which continued to increase over subsequent years) making public and private markets aware of the inherent value. Another administrator, Intertrust, listed later that same year, and JTC successfully listed in 2018.
With each success comes growing awareness of the value in building fund, trust and corporate administration services businesses, thus driving consolidation further and so whittling down the number of privately owned independent operators, with owner-managed operators Aztec, Langham Hall and Crestbridge standing out in this space. Sanne itself reached FTSE 250 status before agreeing in 2021 to be delisted by Apex in an all-cash deal for 920p per share, one of many acquisitions for Apex which includes IPES in 2018 following two iterations of private equity backing (RJD and then Silverfleet). Intertrust was delisted in 2022 for over $2bn by CSC after the firm outbid global private equity houses hungry to back the firm.
Ocorian was carved out of its law firm parent in 2016 by Inflexion and has made 11 acquisitions since becoming independent. These include the transformational acquisition of Estera from Bridgepoint and most recently the acquisition of Nordic Trustee from Altor Equity Partners, a Nordic private equity firm. This delivers a true global platform of scale created via the combination of various private equity owned businesses. Ocorian has also been strategically pivoted towards servicing the higher-growth alternative assets end market across fund services and capital markets services, and is now truly a global leader of significant scale.
Listed businesses in the space have a similar M&A strategy, for example with JTC acquiring US-based SALI Fund Services.
Hong Kong’s Baring Private Equity Asia (BPEA) is looking to merge its investments in Tricor and Vistra. BPEA had bought Tricor from Permira in 2021 and has held Vistra since 2015, and bringing them together could create a services firm worth c$7-8bn.
The continued scope for consolidation in a fast-growing industry combined with private equity’s own rising wall of capital suggests the administration sector will remain in high demand for the foreseeable future.
*Flor Kassai is partner and fund manager at Inflexion.
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