Why investors are putting their trust and funding into administration services

It’s fair to say that LivingBridge (then known as ISIS) backed MBO of Equiom (then known as Anglo Irish Trust) sparked a deluge of interest and investment into the sector. It also started a trend of renaming and rebranding that has continued at such a pace that I frequently have to suffix my description of a company with “the business formerly known as…”.

In 2006 I don’t think anyone would have predicted the level of activity that would still be going on in the sector in 2020, but as the chart below shows, there has been strong and continuous growth in M&A over the last eight years with 2019 being the most active year on record. This has been driven by PE investment in the sector and also continued consolidation as we move towards a “Big 4” or “Magic Circle” like model of major global players, similar to that seen in the accountancy and legal professions:

The question is, what is driving this continued activity and interest? Well, there are a number of factors at play:

• The long-term, recurring nature of the client relationships and revenue streams (typically 10-20 years for closed-ended funds and often over 20 years for family trusts) make these businesses relatively resilient to economic cycles (and external shocks such as Covid-19) and therefore easier to leverage. They are high margin and highly cash generative, all of which help drive strong PE returns;
• Increasing regulatory complexity and scrutiny on the underlying funds and structures is driving outsourcing of these services by investment managers to specialist providers, for example the regulatory requirement under AIFMD for independent, third party depositaries;
• A fragmented landscape of independent players provides the opportunity for larger players to consolidate and grow through M&A, expanding service offering and geographic presence whilst also generating economies of scale and multiple arbitrage for owners/investors;

The success of the listed players has created an extremely attractive exit route for larger Private Equity investors and has also created demand for acquisitions of smaller, independent players, creating capital appreciation opportunities throughout the value chain and size range in the sector; and

• The realignment of strategies within large financial and professional services groups has resulted in carve-outs of administration services operations from larger banking, accounting and legal businesses. These non-core assets create significant value accretion opportunities for specialist Trust and Fund Administration providers who can consolidate the client base of these players onto their existing platforms.

Even as we continue to move towards a market structure dominated by a small number of global players, there continues to be a market opportunity for smaller, independent specialists who can focus on a specific niche and develop a more dynamic, entrepreneurial offering which then becomes attractive to the larger players when it reaches sufficient scale. This clearly creates ongoing M&A activity and appetite for PE to continue to invest, helping smaller, owner-managed businesses grow and develop into attractive acquisition targets.

In 2010 I couldn’t see how the market could continue to be as active as it had been – now I can’t see how it won’t continue to be for the foreseeable future.

Sources: CapitalIQ, MergerMarket, Pitchbook, Company Websites and Mazars Intel

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