Florencia Kassai, Inflexion Private Equity

'Heavily fragmented’ trust, fund and corporate services sector ripe for consolidation, says Inflexion Private Equity


The recent acquisition of Estera by Inflexion Private Equity, a leading PE group with GBP5.4 billion in AUM, signals a move by private equity firms to explore M&A opportunities in the fund administration and corporate & trust services arena, which remains a relatively new, standalone sector. 

The acquisition from Bridgepoint will see Estera merge with Ocorian, one of Inflexion’s existing portfolio companies, to form what it calls a “global corporate service and fund administration leader of significant scale”.

It is just the latest example of PE groups looking to identify long-term value and growth targets in the M&A deal space, and make best use of the dry powder they are sitting on. Given that this reached an estimated high of USD2 trillion at the end of 2018, according to Bain & Company’s Global Private Equity Report 2019, the pressure on GPs to put that money to work effectively, continues to rise.

Commenting on how Inflexion views M&A opportunities in the fund admin/corporate & trust space, Florencia Kassai (pictured), Partner, observes that historically, trust and fund admin businesses were embedded within a bank, a law firm or an accounting firm. 

“Over the last 10-15 years, she says, “most of the banks have exited these divisions due to regulation; and for law firms and accounting firms due to succession planning So it is only recently that industry providers have started to trade as standalone entities.”

Having been through this wave of independence, Kassai says the sector is heavily fragmented but is now going through a period of significant consolidation. 

“This is driven by demand from global clients for a multi-jurisdiction one-stop solution, and regulators increasing the cost of compliance in an attempt to reduce the number of operators down to fewer, more financially sound and higher quality players,” says Kassai.

“The Ocorian-Estera deal is a good example of these dynamics, being two businesses with a legal services heritage that became independent, but are now combining to form a group with increased global reach - broadening their service proposition - and in doing so, increasing the addressable pool of in-jurisdiction bolt-on acquisitions.”

Together, Ocorian and Estera, will provide a complete range of services to clients with multi-jurisdictional needs. In particular, Ocorian clients will benefit from Estera's established North American presence (Bermuda, BVI and Cayman), while Estera clients will be able to leverage Ocorian's strong links to the Middle East and Africa. The businesses will have over 1,250 professionals globally, serving over 8,000 clients across the corporate service, fund administration and private client sector.

So what makes this sector appealing, aside from the consolidation and bolt-on opportunity play?

Well, according to Kassai, businesses in the Trust, Fund and Corporate Services space typically have a plethora of features that PE seeks in an investment including, inter alia:

  • A high level of recurring revenues: structures require administration for a long period of time 
  • Moving services incurs high levels of friction costs, both time and cost, so once set up they tend to remain with the provider unless the service is poor
  • This effectively results in the acquisition of a number of medium-term annuities 
  • High EBITDA margins: depending on business line mix and jurisdictional mix
  • Strong levels of cash conversion 

A new magic circle?

Given these attractive features, there are an increasing number of investors interested in entering the sector, including, as mentioned, the high degree of fragmentation that still exists. As such, the scope for further consolidation remains viable for those actively pursuing acquisition strategies.

“Now that the industry has matured in independence, over the next five years we will see significant industry consolidation,” remarks Kassai. “In the next five years, this sector is likely to mirror the legal and accounting practices, where a “magic circle” of global firms emerges at a global level, ensuring quality consistency and coordination across offices. These firms will be best placed to attract the larger, more sophisticated global clients who focus on quality and are looking for a one-stop shop solution.”

Inflexion’s mantra is to build robust businesses that will continue to deliver shareholder value beyond its period of ownership. It therefore takes a long-term view when assessing add-on acquisitions. There has to be a compelling strategic rationale behind each acquisition, says Kassai, such as: 1) enhancing the service offering by providing a wider jurisdictional footprint, 2) access to new lines of business to diversify revenues, and 3) to create a more interesting career path for employees to ensure the acquisition company can continue to attract and retain the best talent.

There are a wide variety of value creation strategies for this sector but those that Kassai believes to be the most impactful include:

  • Professionalising the business development capability to drive new business
  • Investing in a global operational centre to migrate administration work away from small ‘tight’ labour markets to jurisdictions where there is a larger pool of talent to deliver comparably high quality service levels, thus enabling the business to more efficiently scale
  • Investing in technology to enhance service levels and increase operational efficiency
  • Developing a multi-jurisdictional footprint to enable the business to service clients on a global basis, with one point of contact
  • Assisting in the process of consolidation, as smaller businesses feel the pressure of higher compliance costs and need to invest more heavily in IT systems, and decide to join forces with larger players
  • Preparing the businesses to be ready to list in a reputable stock exchange, allowing them to become fully independent in the long-term

“This is a broad agenda and requires significant support from its investor,” emphasises Kassai.

“From Inflexion’s perspective, we believe we are demonstrably well-placed to support these strategies given our international office footprint, dedicated digital capabilities, significant industry network and our sector-specific know-how from former investments in the sector such as Sanne Group. 

“Bringing all of this to bare has the potential to make transformative difference, as demonstrated by the Estera transaction.”

Post- merger, the combined group will be the 6th largest global player in its sector and a demonstrable M&A platform. 

As Kassai concludes: “This will enable it continue making strategic acquisitions in key geographies, such as into Asia and the US, and key business lines where we want to strengthen our position.” 

Finding a strong platform company that a PE manager is confident can execute on additional bolt-on acquisitions – not the PE fund itself – is key to any buy and build strategy. With the Estera-Ocorian merger, Inflexion appears well placed to pursue further opportunities in this fragmented sector.

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