Video Transcription
Introduction
Alan Meaney: Hello, everyone. It's just come up to the hour so we're going to kick it off and get started with this webinar covering fund admin M&A trends in a new world. I'm delighted to be joined by Bill Salus of Paddock Consultancy. Hello, Bill. Can you still hear me okay?
Bill Salus: Yeah, Alan. I have, I can. Good afternoon.
Alan Meaney: Excellent. As I mentioned in the chat, this call is being recorded. Bill is dialing in so we won't get the pleasure of seeing his video but I just turned it on there to show everyone a sunny day it is here in New York for the time being. We've 30 minutes and on our prep call with Bill, we probably could have spoken for an hour. We'll try and get as much as possible into this session. If you do have any questions, ping them through on the Q & A section on Zoom. Just to kick things off and going to do brief introductions. My name is Alan Meaney, I'm the CEO and co-founder of a software business called Fund Recs. We help firms automate reconciliations and data transformation in the funds industry.
Alan Meaney: I have known Bill for a number of years and he was kind enough to come to Dublin and moderate a panel on Fund Admin mergers and acquisitions at Adminovate last year and as part of a follow-up to that and I guess probably an overdue conversation and the fact that we can't get outside of our apartments or houses, we've decided to organize today's webinar. So Bill, my background's in fund administration and operations then they were obviously leading the software business for the benefit of everyone that's dialing in that doesn't know yet, but I see plenty of names that you'd be familiar with. Can you give me a quick overview on your background and your involvement in the funds industry?
Bill Salus: Yeah, sure and good afternoon, everybody. Thank you for joining Alan and I today. I think as Alan said, it's a sunny day on the East Coast for the most part. I can tell you the landscaping business seems to be doing well because I've got every leaf blower or in my neighborhood going on, but hopefully you don't hear that background. Myself, a career investment servicing professional have worked with the back, middle and front office service providers that range from global banks to global fund administrators. I started Paddock Consultancy about three years ago, specifically to take advantage of my career expertise and my experience.
Bill Salus: What we do at Paddock really is help service providers in the space that are looking to understand growth, acquisitions, organic growth or even executive decisions around building out businesses across middle and back office investment services. At times and lately, because of, actually this very topic that we're on the phone (about) today, I've been helping many fund companies or private investors that have been looking to take advantage of the growth or the opportunity that the markets have presented themselves. That keeps me in touch with those people that are interested in service providers, service providers that are interested in growth in some way or another, or even for example, with firms like Alan's FinTech's, RegTechs that have been sprouting up along the backbone of this ecosystem. Quite interesting times as we call it, the plumbers have become very glamorous and very interesting and no doubt the topic of this conversation is impacted by these economic conditions.
The Impact of Covid-19
Alan Meaney: That's great, thanks Bill. Before we jump into the main topic, just wanted to spend a couple of minutes just talking about the impact of Covid-19 and I guess like myself, you're speaking to your clients on a regular basis and just for the benefit for everyone on the call, just give them a sense of what you're seeing in the market in terms of how people are dealing with the situation, how it's impacting their day to day business and what you see happening in the next couple of months.
Bill Salus: Yeah. There are two sides to the business, there are the amount of fund administrators, the service providers. There are many of them in the US and globally. Then there are people that have some vested interest in them. I think you've got to look at both sides and in answering that question. Clearly the surprise and the acceleration of the virus and how it does impact every single thing and every single thing in our lives from our families, our clients, our business and our ability to deliver services has been impacted.
Bill Salus: I'm not even sure that the impact can be gauged and maybe can't be gauged for many months to come. What we do here is people are pretty much hunkered down, executing on their pandemic resiliency plans, dealing with work at home situations, dealing with effectively a mandated restructuring of work order in order to be sure that their clients are running and your clients are typically in this case, investment funds, fund managers who are trying to understand their risks, trying to understand how they keep their clients happy and in the know and at the same time do what the business is supposed to do every day.
Bill Salus: That is to deliver information back and forth from investors or GP's to fund administrators, deal with GP's delivering information to LP's and doing that in a way that doesn't skip a beat and in a very efficient and error-free way. People, generally Alan, are hunkered down. Everybody has a plan but I'm not sure they had considered executing on it for as long as we've had already and for this foreseeable future, which looks very, very foggy at the moment.
Alan Meaney: Yeah, totally just from our own experience, talking to our client base and the different folks in the industry. I think people have adjusted really well in this initial phase but like you said, that's going to be an extended period. Now we have to see what the new normal looks like for the businesses operating remotely, because it's one thing to have to work from home for a couple of days. It's another thing to do for a couple of months. From a culture perspective and even the practicalities of performance reviews, et cetera and meetings, everyone is just slowly but surely.
The History of Fund Admin
Alan Meaney: Great. That rolls us nicely into how that would impact some of the core topics of the webinar of Fund Admin M&A. I'll go through a couple of slides here just to show where this conversation would have originated from originally was on our fund admin M&A tracker that we've been tracking for a couple of years now. We've put together 86 deals historically. We've seen an acceleration over the last five years across the industry of M&A deals. For you Bill, how is that going to play out you think in the short term? Before we really get into specifics, was it the practicalities, we have questions in the prep call and even stuff like if there is an active deal in motion at the moment, the practicalities of an onsite due diligence have to be changed. What we did yesterday isn't what we're going to be doing tomorrow.
Bill Salus: Yeah, absolutely and again, I think when you look at that history there, that very active history of aggregation and roll up and divestitures of fund administrators across the world. There is another side to that, which is that many of these deals, particularly at the larger end have been financed or capitalized by private equity firms. I think when you look (at) that tracker and if you look underneath it and double click through it a bit, you'll see that in many cases there's been capital driving this activity, administrators taking on capital from private investors in order to execute on some sort of growth strategy that they have, which very well could mean acquiring other administrators.
Bill Salus: From the administration side... and you're right by the way, the distraction around the business and not only the distraction of the everyday business but this is such a penetrable impact that it goes beyond the front line of businesses and will extend deeper into the fabric of economics and the economic environment here is really going to interrupt, maybe delay and basically will change the way deals are done going forward. As we'll talk through the half hour here, there's going to be good and bad or pros and cons to almost every side and so I try to be clear on some of these.
Bill Salus: This activity from a fund administration standpoint, their goals were pretty common. The markets of outsourcing particularly fund admin outsourcing due to the proliferation of alternative investment funds, firstly with hedge, secondly with private equity and now everything in between, Fund administrators wanted to expand their market share, expand their scale, move up market into fund managers provide effectively more things to a wider diversity of clients. Those that had that as an ambition we're looking to do that in both organic and inorganic ways.
Bill Salus: With the amount of service providers that had been around the world and that have been coming into the market has given them many opportunities to acquire, to achieve that market share or scale goal. They've also wanted to look at geography expansion. They were in one geography, maybe (they'd) like to be in another. That could happen in the US, I'm on the West Coast, want to be on the East Coast, or it can happen, I'm in Europe, I want to be in US or around the world. There's a lot of play around expansion of geography for those administrators that had that as a goal.
Bill Salus: Product expansion is also critical if you were in hedge, maybe wanted to get into private equity, maybe wanting to get into global funds. Now we see admins looking at horizontal strategies around corporate services, banking, treasury, more upstream middle office services, I think it's a diversification and an addition of revenue play along those fronts. In order to do that, they generally needed capital to do that. A lot of the administrators may have started with some seed funding but these strategies require a lot more.
Bill Salus: They look to the private investor markets for that capital. From the private capital side, there are also attractions. Was a unique space in the market, clearly fund managers, so fund admins, clients were growing, there are more managers in alternative space, more funds, more regulation around these funds over time, more burden on the managers to look at outsourcing or co-sourcing strategies where it some way alleviate the risk and cost of their technical and operational infrastructure. They liked the market wind around this space in terms of growth of the customers. They liked the market wind that the successful administrators were able to ride, growth and of top line growth, bottom line.
Bill Salus: I think they felt that they can deliver options around financing, equity, debt, minority, majority as well as various exit strategies. Sponsor to sponsor strategies, sponsor to strategic or other administrative strategies, even IPO. I think from the market standpoint, the space became maybe surprisingly to all of us that have been in the business, as I said in the plumbing business of investments for so long that the attractiveness of this market really came to the forefront.
Bill Salus: You had administrators wanting the capital to grow, you have private investors looking to deploy capital and it was a great marriage there over the past few years that fueled that growth. Many of those are indicated on that tracker, many of them were not because they're not an administrator strictly by an administrator this is just taking on money to execute on these growth strategies.
Alan Meaney: Yeah. One of the types of transactions that we haven't included just purely because it's M&A is a lot of the capitalization that hasn't been a full acquisition. A lot of firms have taken on a non-majority shareholding, which in effect is driving that growth that just doesn't get picked up in our numbers. One thing that we spoke of that was very interesting is obviously things have changed dramatically from that to what we're dealing with now and one potential impact of that is as private investors look at potential deals, the lens they're looking through it has changed. In that the opportunities that they have inside of this space are now emerging. We have to look at opportunities in this space in that context of potentially, investors could see more attractive returns elsewhere. How would you think that's going to impact specifically the fund admins in this space, do you think it'll have a knock on impact.
Bill Salus: Yeah, let me take it from this standpoint. During this run-up, during this massive amount of activity, which by the way, I'm not saying and don't want to be interpreted that this activity over time is going to stop. There's still hundreds of administrators, hundreds of opportunities to invest in the market for outsourcing and all those wins of outsourcing are still there. Regulatory burdens, risks burdens. The fundamentals of those markets are still there. They may be elongated, they may be dampened, they may be a little bit more difficult to assess but I think there's still, there's still very much there. If you look at it from a capital deployment standpoint, the uniqueness of this market is going to be impacted by a couple of things.
Bill Salus: First, I think all of this, and particularly with the dampening on projected or prospective revenue growth by fund administrators, I think that valuations had seen a massive run up over the past few years may be tapering down. I say that I'm not a banker but it just feels like the valuations might be at a point where if all of these distractions get in the way of deals, particularly assessing growth or assigning risks to growth, then maybe valuations come down. At the same time, the uniqueness of the space may become not as unique. I think you mentioned that other segments that private equity firms are looking to invest in now can become more attractive.
Bill Salus: They may be cash strapped, they may be looking for debt, they may be looking for equity, they may be looking for some distress strategy. I think from a private equity standpoint, their world is getting busier because they have more segments. More segments might mean that the uniqueness from the administration is not as unique and they can, they're going to be turning their time to other segments, particularly those firms that have had and as you know 2019 represented a really high watermark for the amount of dry powder that was being held by private equity firms. They've always been looking for opportunities. This one particularly was ripe. I think now they may turn their attention, not so much away from this but in addition to this into other segments.
Bill Salus: And, you're right, people are distracted, they're not in the office. It's hard to do due diligence, pipelines are impacted. Funds are still going to be very active in starting funds. Megafunds are still going to be taking on lots of money. Service providers that have a successful client base from managers that are looking to deploy new strategies that are looking to take advantage of these markets now are going to find themselves in need of fund administrators and I think that's going to help their growth as well.
Bill Salus: I think it's going to be a couple of different things that are going to impact this overall from valuations to other segments coming into the sights of some of the investors.
Alan Meaney: Yeah, an extended note from that Bill, as well as the actual PE investment side of it and the general market trends for alternative investment, will we see any re-emergence of hedge funds as a hot sector given we have had a move to passive investment? Will active investment become more popular? We're still in a low interest rate environment, will that continue to have an impact on opportunities? Then the fixed fees and the private equity space, private equity has been up for a long time. Do you think that's even going to have the positive note on just trying to bring something upbeat?
Bill Salus: Yeah. Just on that latter note we can... If you're an investor or if you're an administrator one of the elements of your business was revenue growth, revenue stability, revenue diversification and part of this is why the private equity fund administration has always... Well since it really started to become more predominantly outsourced, if you will, it's always been attractive because of the more fixed fees, longer term, stability of clients for fund administrators, maybe different style of work, because it didn't have the trading volumes as an example that a hedge fund has.
Bill Salus: That market has had that element of revenue stability that was very, very keen for investors where the hedge, you could argue, had a lot more work to it. If there was a high volume trading strategies, derivative trading strategies, valuations or NAV cutting Net Asset Value calculations were at times more tricky for these and so the administrator also charged basis point fees on assets under administration, which made it a little bit more variable. I think that in that case, that element is going to be in the favor of administrators that have maybe more of a private equity book but at the same time, the definition of a hedge manager really, experienced ones take advantage of disruptive and fractured markets that we have.
Bill Salus: You might see a bit of resurgence in hedge fund managers looking to take advantage and apply those non-correlated returns that they're famous for to a greater degree and that would be helpful. That would help more funds means more need for fund administrators and that could play into that hand very well.
Most Successful M&A Deal in the History of Fund Admin
Alan Meaney: Very good. We have a question it's in from Pete Townsend, so we call it out here. Pete is asking, what would you guys think would be the most successful M&A deal in the history of fund admin? Not to put on a massive picture on the spot here. Basically, pick your favorite child is what Pete is asking you to do.
Bill Salus: All my clients. Honestly, Peter, I think it's a bit of a tricky question. Let me answer it best I could and maybe in a few different ways. I think because of the run-up and multiples and the success of the fund administrative business and the vast and expanded market that fund administrators and service providers is played in. I think those deals that have been capitalized by private equity firms have by in large been fairly successful. I think the market helps that, I think the wise deployment by the fund administrator is it helps the management addition that private equity funds have brought to the table has been very helpful in the cases where fund administrators have gotten that capital from private equity.
Bill Salus: I think to me and it may be not every deal has been a home run, it feels like in that sense, the investments have been fairly good. I think in terms of the fund administrators, obviously they've gotten capital that's helped them achieve results that they would have never done through their own organic generation of revenue. They were able to step up into market products and so forth as we said earlier. I think that's overall helped the financial position, fund administrators have gotten larger, they've gotten more scaled, they've gotten into different products and by and large seemingly become stronger entities.
Bill Salus: Those smaller administrators that may be rolled into larger administrators gain their own ability to leverage their client base with the massive product of a larger administrator. That seems to be very successful but I think if you look at the administrators, I think Alan has a slide here representing some of the administrators that have multiple fields. It might even be too soon to say, did they come out of all of these acquisitions revenue or P and L is much better, market share much better than the decline, and perceive that they not only got a stronger company to deal with but a company they can go for more product. They can spend more of their wallet on, which is basically the point of acquiring other fund administrators.
Bill Salus: I don't know if it's... we've seen if you go down the list we got Apex and Alter Domus and others that have had several acquisitions. If they've finished integration on the backend, if they finished buckling together their products and services to deliver to the marketplace. I think to name any particular one as, that's the model, I think it's maybe too soon to call. I might also say that there is a difference between that market, then names like that and the global banks, which haven't tended to acquire as many things as many other providers, but have tended to either buy complimentary businesses... State Street and Charles River, SS&C and Intralinks, Algorithmics, the whole suite of services that they're trying to bring the bear to again attack more revenue pools at the fund managers. Again, there's a momentum there, there's obviously a better story, there's a more holistic story on paper. All of that looks fantastic but I think it remains to see as to whether or not you can point and say that strategy really worked and knocked the socks off the market.
Alan Meaney: Perfect, that's great Bill. Just for Pete's benefit my favorite transaction was SS&C's acquisition with Advent. I just think it completely shifted the dynamic of the market and changed the industry forever. Moving on quickly because we're shortening up on time. Chris Meader has jumped in with a question and it's the exact opposite of Pete. Chris asks no need to name names, but can you think of any M&As in the admin space that perhaps were not as successful and what has made them unsuccessful? I'm going to re-twist Chris's words into a more positive question for you Bill. What makes for a successful integration? Because I think that's really what Chris is asking.
What Makes For A Successful Integration?
Bill Salus: Yeah. I think again from the investment side of things. The investor takes on or deploys capital to a fund administrator based on a growth pattern and a growth trajectory that would include executing on a wider geographic marketing plan or different revenue coming in from different products that they're able to sell and so forth. I think what makes that work is that those plans have been achieved. I would say to Chris that not in every case they have been able to achieve that as fast as maybe everybody would have thought. You're asking a lot of a fund administrator to really take on the technology developments very quickly, geographic deployment very quickly, it's a very competitive market out there. Even if you have more weapons to bring to the market, it's very difficult and very competitive, there's fee compression and so forth.
Bill Salus: I think the measurement of success there would be whether or not, why we invested in the thing actually was achieved. I think from the administrative standpoint, they're taken on the capital to do certain things. I think the first thing might be in whatever environment came post-transaction, whether they just had an investor positioned by an equity company or whether the private equity company or whether they found themselves as part of a new or different organization, did it work?
Bill Salus: Did the people work that the client stayed on, were they able to re-engineer client service strategies to protect the client base and parlay that upstream into larger clients as an example or more diversified clients. Were the people comfortable that they had a runoff and people did they have to have a runoff in people because of synergy, strategies and initiatives. I think in that case, you hear from the market at least, a little maybe mixed reviews. A little nervousness that there's a lot on the admin plates. Internally, does it affect my client service team? Does it affect my daily interaction with my partner that I had, that's now a different partner. I think that measurement may be a little more mixed.
Alan Meaney: Super thanks very much for that one Bill.
Bill Salus: I would express the same question though.
Alan Meaney: We'll get them on the next time. My prediction that we'd run out of time too quickly with this call has been right. The final thing to wrap up with you is just get your whirlwind tour of what you think M&A trends they're going to look like for the next six to 18 months before we wrap up.
M&A Trends For The Next Six to Eighteen Months
Bill Salus: I think there'll be a number one difference because I think that there might be... With this market with maybe a change. This is called a change in valuation. I think deal terms, whether you are an administrator buying another one, or whether you are coming in from the other side and capitalizing transactions, I think the terms will change. I think they could even be more buyer friendlier than seller friendlier. I think they could be more of a different mix of debt and equity. I think exit strategies are going to be different, maybe there'll be longer term or just to say maybe the length of time, the length of holdings will be longer term on the investment side. I think on the strategic side, you might see an acceleration of deals taking advantage of markets and firms that may not be as cash, balance sheet, client-base pipeline rich and therefore may now find themselves more interested, rolling up into a larger organization.
Bill Salus: I think the deal terms, the deal longevity, exit plans and I think more interest in roll-up strategies is going to change some of this market. I do think overall, I think any fund company or any administrator that I talk to is open for business. They're just distracted right now. As they come out of this and are able to assess, "Okay where do we stand in our pipelines?" All of the administrators are going through cost controls already. They're doing a hiring freeze, obviously there's a travel freeze and they have to reassess maybe their whole financial position in order to understand what they could engineer on the acquisition trail.
Alan Meaney: Yeah, that's, that's really insightful. I think just to add on top of that but I think we're going to see it happen on the back. This is the way people are selling is going to change slightly as well. Any enterprise sales deal is very much reliant on person to person contact. I think that's going to evolve and we will see more marketing like this. More web based, remote based marketing to sell to funds. Relationships are very important but obviously now we can't rely on it as a certainty. I just want to thank you because we ran over by two minutes. I want to thank Bill for his time and all his great insights and we'll do a follow-up where we get this record and share it out.
Alan Meaney: We might do an expanded panel version at some stage Bill because I think we still have plenty more to cover. (I'd like to) thank everyone who's dialed in. It's been really great to have your time and also to wish everyone well. We wish them a calm and safe next few weeks and good luck with everything and hopefully we all get back into the office shortly, so I no longer have to homeschool. Thanks Bill.
Bill Salus: Well, thank you everybody, I appreciate it, I hope it was helpful and get back to us. We'll answer any questions you have. Thanks.
Alan Meaney: Cheers. Thanks Bill.
