Magazine Issues » October 2021

Euroclear and MFEX deal: Creating a new funds market leader

Van_de_Velde_and_PlamerThe post-trade giant’s acquisition of MFEX will expand the client service offering by creating a new funds market utility and a leading global provider of fund services.

As fund management companies grapple with increasing complexity and costs, there is growing demand for an efficient mechanism to access a broad network of end-investors in a fragmented marketplace.

In response to this client need, post-trade provider Euroclear in March 2021 agreed to acquire MFEX Group, a global digital fund distribution platform which has been majority-owned by Nordic Capital.

The combination of MFEX’s distribution platform with Euroclear’s FundSettle post-trade operations expertise creates a compelling offering for fund distributors and fund management companies.

Jo Van de Velde (pictured left), global head of strategy, product and innovation at Euroclear, says: “So far, we have been focusing on trading and custody, bringing operational efficiency and scale. We now see that there is a growing need for a more holistic end-to-end model, including the distribution side.

“In response to growing demand, we decided to complement our funds offering with distribution services, but given that it takes time to develop a broad distribution network, we decided to buy or partner, which resulted in the acquisition of MFEX.”

FundSettle streamlines back-office processes through offering a single point of access for order management, settlement, and asset servicing, which results in greater efficiencies and cost savings.

Under this acquisition, which closed on September 15, 2021, MFEX and Euroclear believe their complementary businesses will produce significant value through revenue synergies, expanding the client service offering by creating a new funds market utility and a leading global provider of fund services.

Outsourcing to market infrastructures
The funds market is massive, driven by the growth of ETFs, ESG investments and pension savings, but compared to the securities markets remains quite complex and costly to process, says Van de Velde. “This is simply because of the fragmentation of the funds industry in terms of network of transfer agents, the management of distribution contracts with the various fund management companies, and the growing complexity of coping with regulation,” he says.

“This means that clients are increasingly outsourcing their funds processing activities to market infrastructures, which we think are the natural place to support the sector’s growth.”

MFEX, which offers a complete fund distribution solution for fund companies, will greatly benefit from Euroclear’s trading and custody capabilities, combined with its fund management network. The uniqueness of MFEX is extremely complementary in terms of services to the client, says Van de Velde.

“On the one hand, Euroclear has a very scalable model today with a wide investor reach, while MFEX is a champion on the distribution side, having established a network of over 1,000 fund management companies. We have a common vision on how we see the industry and the opportunity to develop an open and neutral market infrastructure for the benefit of the market. Both companies are very much aligned in what we want to achieve in terms of vision and there is a strong cultural fit.”

MFEX and Euroclear’s respective teams have been working with each other for many years.

“The acquisition is a natural progression of the partnership from an internal point of view, but also from the client point of view, by providing a single point of entry at a time when integrated service offering is something that clients are looking for,” says Carl Palmér (pictured right), chief commercial officer at MFEX.

He says that this is one of few industries where it is possible to create a world leader within a relatively short period of time – about two to three years.

“Our ambition has always been to be a world leading fund platform, and MFEX is now one of the three leading platforms. Five years ago, there were around 30 platforms, now there are seven, of which three are really competing with one another. At MFEX we take an industrial approach to the business, and the combination of us and Euroclear will help to achieve that in the coming years.”

Since Nordic Capital became a majority owner in 2018, in partnership with the founders, MFEX has developed from being a Nordic leader in its industry to a pan-European leader with an emerging global presence, executing a series of strategic acquisitions.

Looking forward
Palmér predicts that, in the coming years, fund distributors will continue to outsource to platforms.

“We will see distributors outsourcing non-core services such as trading and custody to streamline processing, and distribution services to reduce legal and regulatory compexity,” he says.

“The second leg of growth will be with fund companies. Unlike distributors, who require standardised services at a low price, fund companies are actively looking for new services to help them distribute their funds, develop their business in new markets and outsource non-essential tasks while keeping control over their distribution.”

He also thinks there will be growth in dedicated services which support them. Taking a holistic approach to supporting fund companies manage their distributor networks includes the intermediation of the contractual relationship, due diligence and management of fund data.

Demand for data analytics will continue to increase. Euroclear and MFEX sit on an enormous amount of data. This provides an opportunity to industrialise the funds industry, which is lagging the securities market.

“The platforms are becoming marketplaces for services towards different participants, and there will be services that MFEX and Euroclear will develop together, but also being aggregators of services, and providing them through a single point of entry,” says Van de Velde.

Clients want to know who is buying their products and through which channels. Because of their size and central position, market infrastructures play a big role in providing market transparency at the issuer level.

For MFEX, a world leader in terms of distributor assets, providing that transparency back to the asset manager is very important.

In the future, Palmér says that providing data analytics up to the end-investor level is going to be key. He says this would be particularly useful for an asset manager when setting up a new strategy. For example, they may be keen to know where, geographically, there is investor demand. “When a manager initiates a campaign in a specific market, they will want to have some concrete feedback from that campaign,” he adds.

Other dedicated services for clients could be to digitalise compliance, onboarding work flows, providing portfolio managers with further breakdowns of the underlying assets, or helping risk managers manage liquidity.

As the growth in environmental, social and governance (ESG) funds continues, having transparency and understanding of the underlying components will be very important. One of the issues with ESG is that there have been numerous examples of greenwashing.

Data can play a big role here in solving the issues of tracking ESG and knowing whether the criteria is right, Palmér says. “I would say that the industry is probably not looking at the right data there yet. Investors will want to know whether an ESG strategy helped to reduce the carbon footprint, reduce homelessness or improve gender equality.

“The performance indicator on that fund is no longer only measured in terms of returns, and that is a big challenge for the industry because we’re not used to working with that kind of data.”

By combining their complementary services under the name ‘MFEX by Euroclear’, this new entity is well positioned to maximise business opportunities in partnership with the clients.

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