Winter 2013

SPECIALIST ASSET SERVICING: Knock-on effects

BrusselsEuropean regulation such as the AIFMD could create opportunities for fund administrators outside Europe. Yet independent firms must work hard to win business from banks. Orlando Crowcroft reports.

While most of the funds world has greeted the slew of regulation to come out of the US and Europe in recent years with disappointment, firms working in fund administration seem to have been quietly pleased.

For companies that take the burden of administration, accounting and back-office services away from fund managers, more regulation for asset managers means more business. New rules such as the Foreign Accounts Tax Compliance Act (Fatca) and the Alternative Investment Fund Managers Directive (AIFMD) have seen demand increase for administration services.

“It has been a tough five or six years but people are moving towards more outsourcing. There is more regulation and it is more complicated. That’s all fairly positive [for us],” says Peter Hughes, chief executive and founder of Apex Fund Services.

Some of the European regulations may have significant knock-on effects for the Mena region. A consequence of the AIFMD, which only applies to EU funds, is that some alternative managers are wondering whether Europe justifies paying the substantial compliance costs required to operate there.

“Europe doesn’t have that much money so a lot of people are saying: ‘Actually, we don’t need to do it, we can find money from the US or elsewhere on the globe,’” says Hughes.

As a result, there has lately been an increase in banks in emerging markets offering fund administration, an industry traditionally dominated by European and US firms.

“We are seeing quite a lot of banks who are in custody and are looking to diversify their revenues into fund administration services. I’ve seen this across the Middle East and as far away as Indonesia and China,” says Geoff Harries, global head of asset servicing at DST Global Solutions.

MARKET GROWTH
The trend has gathered pace as capital markets in the Middle East have grown. While few equity markets in the region are able to handle sophisticated hedge fund strategies, there has been an increase in pension funds targeting the Mena region and asset manager-type models for wealthy investors.

“Tough markets like Saudi are good opportunities. As they open up a market they will be looking at having more global institutional money allocated to them and therefore will need our services more,” says Hughes.

But while there has been an increase in interest in third party administration and asset servicing in the Middle East, this space is dominated by banks looking to add a new arm to their traditional custody-based offerings to clients. Few independent fund administration firms have cracked the region, says Harries.

“A lot of it is built on long-term relationships, and I would certainly trust my custodian bank to offer me more services [rather than] another service provider with which you then have to build a different service agreement.”  

He thinks this trend is likely to continue in the short to medium-term, until third party providers get to grips with local regulations and understanding of the domestic marketplace.

In complex and restricted markets such as Saudi Arabia, local banks may be better suited to wrestling with the demands of accounting and regulators.

“Market entry is a difficult strategy to execute. Looking at a map is simple but trying to understand what is happening within a domestic market is a difficult thing to do,” he says.

But for firms such as Apex, which has offices in Dubai, Abu Dhabi, Bahrain and Saudi Arabia, the Middle East presents a lucrative proposition. Local banks may know the regulatory space better than outsiders, but as institutional and international money flows increase in the Mena region, third party providers expect more work.

The recent upgrades of the UAE and Qatar to emerging market status by MSCI will only serve to increase the need for good fund administration, says Hughes.

“When we first went there it was about educating asset managers to the importance of what we do, but now everyone sees it for what it is. They see that if they want to attract money globally then they need to attract independent administrators,” he says.

ADMIN HEYDAY
These changes reflect a shift in attitudes towards the back office in investment firms. Back in the 2006 and 2007 heyday for fund administrators, it was a lack of time and rapid growth that persuaded busy fund managers to turn to third-party administration. As fund sizes grew and investors scrambled to get on board, it was an advantage to be able to pass off back office services to someone else.

Now, regulation is often the motive for contracting a fund administrator. The AIFMD, which introduces new rules for fund managers wanting to market their funds in Europe, and Fatca, which requires heavy disclosure to the US government about American taxpayers, have worried many investment managers.

“Fund managers are having a bit of panic, but when you break it down it is just a bit of form filling and making sure you have the right data. That’s something a fund administrator is best placed to do,” says Hughes.

©2013 funds global mena

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