As giants like Citigroup, State Street Corp. and Bank of New York Mellon gobble up small fund-administration service providers, niche players are circling the wagons in hopes that they can compete by specializing. One of the newest is ISIS Fund Services, a tiny Bermuda-based firm formed last fall by a breakaway team of Citigroup alternative-investment specialists led by Ede Conyers, the founder and general manager of Forum Fund Services, also based in Bermuda, which was acquired by Citi in December 2003.
ISIS has about $2.5 billion in assets under administration; by comparison, some rivals have hundreds of billions. Citco Group and State Street, the largest competitors, have in excess of $400 billion apiece in single-manager hedge fund assets under administration. Such companies offer services that include domestic and offshore accounting, portfolio valuation and corporate governance and compliance.
Small fry like ISIS are battling the odds. Hedge fund administration is a business in which scale increasingly drives business, though ISIS executives say they see steady demand for smaller, customized solutions. “Larger administrators and investment banks that participate in the hedge fund administration space are focused on two primary criteria: profitability and assets under administration,” says Jason Bibb, a managing director at ISIS who argues that his firm’s boutique quality gives it an appeal big competitors lack.
Bibb says bigger players have in some instances raised their minimum account size threshold per client to
$500 million. But as he notes, nearly two thirds of hedge funds have less than $100 million in assets — fertile ground for niche firms. Additionally, large administrators sometimes divest themselves of smaller, less-profitable clients, providing fresh prospects for midsize and smaller providers, Bibb says.
In a report last fall on fund administrators, Aite Group, a Boston-based research and advisory firm, says the newcomers shouldn’t be taken lightly in the trend toward consolidation. “The acquiring firm could easily be one of the independent or spin-off administrators,” says Denise Valentine, a senior analyst at Aite.
Big competitors dismiss the upstarts, however. “I don’t think there are any serious competitors who don’t have scale,” says Andrew Smith, head of North American securities and fund services at Citigroup. Alan Greene, head of State Street’s U.S. mutual-fund-servicing business, agrees. “It costs a fair amount to get these developments built,” he says. “If you have a large asset base, you have some pretty important unit-cost advantages.”
Locales like Bermuda, the Cayman Islands and the Channel Islands of Guernsey and Jersey have figured prominently in the growth of offshore administration firms. There is approximately $2 trillion in alternative assets in offshore funds, according to a survey this year by the International Custody & Fund Administration, which tracks the securities back-office industry, compared with $655 billion in onshore U.S. funds. ISIS’ Bibb suggests that tax considerations aren’t the only explanation for the prevalence of offshore funds. “For one thing, there is a concentration of expertise [offshore].”
Bibb says ISIS made the right call and that small-firm flexibility will be enough to help such outfits fend off the big boys. “There will always be a place in the market for all types of administrators,” -he says.
