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Jack McDonald, Conifer

Strategy will be to focus on ‘growth from the core’


Conifer Financial Services is one of the world's leading independent fund administrators. It has more than 200 clients representing more than USD110 billion of combined assets under administration (AuA) and has a strong footprint in both the US and Asia (Singapore) following its successful merger with Vastardis Capital in 2014. 

Speaking with Hedgeweek, Jack McDonald (pictured), President and CEO of Conifer Financial Services, says he is not surprised by the recent acquisition activity in the industry. In his view, fund administration is, in many regards, a scale game and consolidation will continue over the near term. 

"While bigger isn't necessarily better, scale does matter. In addition to the challenges faced with increased client/investor demands and ongoing fee pressures, there are rising regulatory and compliance pressures, for example, that we as a service provider need to be prepared for. Investors are asking more from their managers who, in turn, are asking more from us."

With respect to consolidation in the fund administration arena, McDonald sees three key trends emerging with respect to the acquirers. Firstly, there are mergers between peers, similar to Conifer's merger with Vastardis Capital in 2014. Examples can be where two firms come together to leverage the strengths of each organisation and add more scale to the overall operation. Secondly, there are the larger consolidators, such as SS&C and Mitsubishi. Thirdly, McDonald expects new types of acquirers will enter the marketplace. For example, while investment banks have largely exited the fund administration business, custodial banks, insurance companies and other types of asset servicers will likely increase their participation. Cross-selling integrated, higher margin and value added services to a broad universe of asset managers has the potential to augment the slower growing traditional custody and clearing operations.

The custodial trend for acquiring fund administrators is being driven by MUFG Investor Services among others, the global asset servicing group of Mitsubishi UFJ Financial Group. Its latest acquisition, announced on 3 May 2016, was Capital Analytics, the private equity administration business of Neuberger Berman Group. 

McDonald thinks that custodial banks will play a larger role in the next wave of consolidation in part because they recognise that they haven't invested as much in their performance reporting and analytics businesses to satisfy the marketplace demands. Traditional `books and records fund administration' platforms were originally built through the lens of a custodian, says McDonald, "because many of their institutional clients engaged them for integrated custody and accounting whereas independent fund administrators built their reporting platforms through the lens of servicing accounting and delivering insight into performance trends required by investment managers and investors. There is a big difference." 

As asset owners increase their allocations to alternative managers, independent fund administrators are gaining market share. "We are seeing a definite shift in the market with large asset allocators needing more in the way of analytics and performance reporting than banks have historically provided. I expect Conifer and others to be beneficiaries of this trend."

There is a good argument to suggest that custodial banks are more inclined than investment banks to invest in and provide administration services because asset servicing lies at the heart of their business model. Prime brokerage, by contrast, is capital intensive and leans on the balance sheet of investment banks, particularly with respect to Basel III constraints. When investment banks have a need to sell assets and strengthen their balance sheet to raise assets, the fund administration business is often a likely candidate because broadly speaking it is not thought of as a core asset. 

Because hedge funds (and other alternatives managers) have traditionally utilised non-custodian fund administrators, there is an opportunity to convert some of these managers to the custodians, provided they have the requisite service and technology to satisfy their needs; often, acquiring another administration will be the most efficient investment to make.

MUFJ Investor Services have proved to be active acquirers but it remains to be seen if the likes of State Street, BNY Mellon, Northern Trust, etc, will step up their acquisitions in the hedge fund administration space. 

McDonald identifies three important ingredients when developing a recipe for a successful fund administrator. First, one needs a broad team of experienced management and staff able to support the business as client demands evolve. "While our primary job is to make sure the accounting is done accurately and consistently, delivering the highest levels of client service is key," stresses McDonald. 

Second, a successful administrator is one that is nimble and strategically adept at building partnerships with clients to meet the dynamic challenges that alternative fund managers, and their investors, face in the industry. 

Third, any credible administrator has to have a sophisticated level of technology to support the business," remarks McDonald. "Today, you have to do more than give standard accounting reports to clients. The world has changed with all signals leading to the administrator as the official books and records; as such, if clients have multiple products with multiple custodians, prime brokers, etc, they will come to the administrator and ask them to aggregate financial information and report in dynamic ways."

Furthermore, McDonald believes the market values the fact that Conifer Financial Services is an independent administrator providing superior client service and technology in a focused manner. Their strategy going forward, he says, will be to focus on growth from the core, "opportunistically investing in systems and architecture, whether organically or via future acquisitions, all with an eye towards adding value to clients as we build our business." 

"By definition, independent administrators have the opportunity to be more nimble than larger bank-owned platforms. With over USD110 billion in AuA, we have sufficient scale to satisfy institutional clients with our stability and breadth of the organisation while being acutely focused on every one of our clients from a service and partnership perspective. We've seen the results of this focus as our business has continued to grow over the last couple of years," concludes McDonald.

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