Carbon360Ë Research is releasing its second annual 2007 Carbon360Â° Fund Administrator Service Provider Fact Book today. The 2007 Report is a comprehensive 250 page guide on the service offerings of 74 administrators. In addition, it provides in-depth industry analysis (market breakdown, growth, revenues, costs, and profit) and trends in the fund administration space. Our findings illustrate that overall industry growth remains strong, despite the fact that costs of services, technology and people have risen sharply. These cost escalations have created an environment of compressed margins and uneasiness industry wide.
The Carbon360Â° Fund Administration Service Provider Fact Book was created from the largest group of 3rd party fund administrators ever to be profiled, and provides correlation analysis versus several leading industry databases. The Carbon360Ë Report illustrates that previously reported Hedge Fund industry assets under management (âAUMâ) have been grossly underestimated.
Carbon360Â° found that single manager hedge fund AUM exceeded $2.72 trillion, based on reported Assets under Administration (âAUAâ); the previously widely accepted figure excludes funds that self-administer. Carbon360Â° analysis has shown that approximately ten percent (10%) of existing hedge fund managers are self-administered, accounting for an additional $680-$810 Billion in real hedge fund assets. Self-administered hedge fund managers control between 25%-30% of all hedge fund assets; inclusion of the self-administered hedge fundsâ previously âuntracked assets,â places the total level of real Hedge Fund industry assets between $3.4 and $3.5 Trillion as of the end of the first quarter 2007.
The Hedge Fund Administration sector continues to experience consolidation. Following a flurry of M&A activity over the past two years, the biggest players are increasingly dominating the sector. Potential Initial Public Offerings by several key players is a new development in the administration space, and the pace of private equity investment in the sector has also ticked up significantly.
Brian Shapiro, President of Carbon360 observed that, âContinued merger action and private equity backed liquidity events is expected among fund administrators as many start to experience technology and personnel limitations. This will be coupled with the demand for more capacity from hedge fund managers as client-bases broaden and once silo-ed managers turn toward multi-strategies to compete with fund of funds. This is also a case of getting while the getting is good, with the majority of smaller players all hanging out For Sale signs, and asking valuation multiples in excess of 23 time trailing twelve month EBITDA, why not!.â
However, our research indicates that hedge fund administration may not be a field of dreams. Despite overall industry growth and the fact that Business Process Outsourcing accounts for 37% of total spending by investment managers, margin compression within the Fund Administration services industry is real. Carbon360Ë began tracking fund administrator revenue and profit in 2002, based upon a methodology, which monitors all four primary lines of business: NAV Lite, Month-End Only, Full Front-to-Back and Fund of Funds administration.
Hedge Fund and Fund of Fund administration revenues were expected to grow 13% year over year, from $2.77 Billion FYE 2005 to $3.14 Billion FYE 2006. Carbon360Ë found that in fact, overall Gross Operating Margins declined over the two year period from 2004 through 2006. Gross Operating Margins fell from a peak of 24.3% in 2004, to 22.5% in 2005, and to 21.7% as of the end of Q2 2006. Projected gross profit for the industry FYE 2006 was $639 Million an increase of 10% from $580.5 Million FYE 2005. This represents a significant decline in the rate of profit growth, which had been up nearly 70% from 2004 to 2005 fiscal year ends.
âFor industry needs to be met, the fund administrators, must either allocate greater percentage of their revenue increase into research and development, or divest themselves of the IT responsibility through strategic partnership with software vendors,â observed Brian Shapiro. âAt present we only see an average of 16% being spent on actually improving systems, this is primarily due to the overwhelming cost of the people required to service the customer and resulting margin compression.â
âThere is continued frustration being experienced by the buyside with its technology and services solutionsâ said Mr. Shapiro. âThe desire to see both prices reduced and services expanding are pressures on the fund administration business that are in clear contradiction of one another, or are they?â he adds âthe door is open for both incumbent and new entrants to the market to develop product and service sets that more closely match the needs of the investment community, though it will come at a price.â