First, the boring bit – some facts. 2020 was a record year: most reported mandates, M&A transactions, and people moves since I began recording them in 1999. The WFH culture certainly didn’t stop inserv providers from building their businesses, nor their clients from launching new products. Of the 180 reported mandates, 39 were related to private assets, whilst 26 were for ETF products. Most of these were fund launches. New mandates were announced by 44 different providers. The “world’s worst oligopoly”, as some ill-informed Wall Street analyst once described the industry? I don’t think so.
What’s more, the 2020 figures tell us something about the strength of the independent sector. Fully 50pct of all new mandates were reported by non-bank providers whilst, of the 42 recorded M&A transactions, 37 involved at least one independent administrator.
What this proves is that the inserv industry is in rude health, despite all the challenges of a pandemic, cybersecurity, and a low/no interest rate environment. The banks, in particular, are learning how to wean themselves off their longstanding reliance on net interest income, focusing instead on how to improve the ratio between fee revenue and non-interest expenses.
At the same time, the market is moving in their direction. According to research conducted by Brown Brothers Harriman, many buyside managers are considering further outsourcing, most notably in data management, where the custodians have built some really impressive capabilities. These same managers are also considering increased allocations to alts, as well as ETF launches, and a stronger commitment to securities lending. Added to the forecasts of the widespread deployment of record levels of dry powder as PE investors take advantage of lower valuations, this looks like a fantastic opportunity for the inserv market across the board.
The keywords for 2021 will be selectivity – and patience. Not all deals are winnable. Not all clients are going to be winners. Even BlackRock has had to scale back its ambitions for the private capital sector after struggling to raise anything near its original USD12bn target. Many ETFs are launched and fail. With selectivity comes the need for patience, and a lot of it. State Street spent three years courting and supporting T. Rowe Price, a major BNY Mellon client, over its plans to launch a family of active ETFs, which finally went live in August 2020. Other providers could tell similar tales.
Selectivity also extends to something else – asset quality. Not all assets are created equal, and yet a few dinosaurs still believe that asset growth, rather than margin growth, is the goal. Step forward J.P. Morgan for a perfect example. In Q3 2020, its securities services business reported AuC growth of more than 11pct from Q3 2019. Over the same period, revenue was flat. Is there an accountant in the house?
Every provider – bank or independent – needs to focus on strategic client management. Even today, too many administrators get distracted by transactions, rather than building long-term, profitable and mutually beneficial partnerships with their clients. Those that excel in this will be the real winners in 2021 and beyond, regardless of top-line AuC/A numbers, which are increasingly irrelevant. All too often, consultants and analysts do not understand this, let alone place a proper value on it. 2021 is a great opportunity to teach them a lesson.
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