BNP Paribas acquires Credit Suisse's fund administration arm
BNP Paribas Securities Services has agreed to buy the fund administration arm of Credit Suisse creating a business with combined alternative Assets under Administration (AuA) of $231 billion.
The transaction is expected to close in the first half of 2015. Terms of the deal were not disclosed. In a statement, BNP Paribas said the transaction would enable the firm to support the growing convergence between traditional and alternative managers. The deal will see BNP Paribas Securities Services become one of the larger fund administrators overtaking the likes of Northern Trust, J.P. Morgan and Morgan Stanley. There had been a lot of talk in industry circles for some time now about BNP Paribas taking over Credit Suisse's fund administration arm although it could not be confirmed by sources at either organisation earlier in the year.
One industry expert said the deal would enable Credit Suisse to refocus its resources on its burgeoning prime brokerage business. Credit Suisse was ranked the third most popular prime broker by Hedge Fund Intelligence, putting it behind Goldman Sachs and J.P. Morgan. However, cross-selling prime brokerage together with fund administration has become something of a taboo for institutional investors wary of the counterparty risks posed by bulge-bracket banks providing bundled services. The expert said this was a factor which could have facilitated the sale.
Credit Suisse sought to grow its fund administration business through the acquisition of the hedge fund administration arm of Fortis Bank Nederland in 2010. However, Credit Suisse’s administration business was also heavily geared towards funds of hedge funds, an asset class which at best can be described as being in a state of stagnation. Credit Suisse also owns a sizeable equity stake in Viteos, a fund administrator and outsourcing provider.
The BNP Paribas acquisition of Credit Suisse Prime Fund Services (PFS) is the latest in a series of M&A activity in the fund administration space. Once a highly saturated landscape, many fund administrators are struggling as their hedge fund clients struggle to grow their Assets under Management (AuM). A survey of hedge fund administrators by eVestment found 95% believed M&A would play a significant role in the business over the next few years.
There are a number of factors behind this M&A. Institutional investors have an inherent bias towards bank-backed administrators making it harder for standalones to survive. Furthermore, regulation such as the Alternative Investment Fund Managers Directive (AIFMD) has also made bank-backed administrators more appealing through Article 21, which subjects depositary banks to strict liability for any loss of assets.
This provision sent shockwaves throughout the standalone administration market, many of whom did not have the balance sheet strength to make right this obligation. However, Article 36 of the Directive does allow for depositary “lite”, whereby firms can provide the depositary duties of safekeeping of assets, oversight and cash-flow monitoring, but does not subject them to strict liability, if a non-EU manager wants to market to EU investors through national private placement regimes. This has given standalone administrators a brief reprieve.
Nonetheless, the European Securities and Markets Authority (ESMA) is conducting a wholesale review of AIFMD in 2015, and there is speculation it could scrap national private placement thereby rendering depositary “lite” obsolete. Such an approach would severely dent the standalone administration market and could prompt another wave of mergers and closures.
It is not just standalone administrators that have been impacted by M&A. Investment banks, many of whom are being forced to meet Basel III capital requirements, are ditching business units deemed as high cost and low margin such as fund administration.
The last few years have seen a torrent of deals in the fund administration space. Mitsubishi UFJ Financial Group acquired Butterfield Fulcrum and Meridan, two Bermuda-based fund administrators. In November 2013, US Bancorp Fund Services acquired the Dublin-based Quintillion, having already purchased AIS Fund Administration in 2012. Other high profile deals included SS&C’s acquisition of GlobeOp. Perhaps, the highest profile deal of late was the buy-out of Goldman Sachs Administration Services by State Street AIS creating the world's largest hedge fund administrator.