Deutsche Bank has joined the wave of consolidation in the hedge fund administration market, buying California-based HedgeWorks for an undisclosed sum.
Founded in 1999, HedgeWorks has around 100 hedge fund and fund of hedge fund clients with service locations in Boston and the Cayman Islands. With about $10bn under administration, it falls at the smaller end of a market that seems to be addicted to scale – 2007 alone saw Citi’s buyout of Bisys, State Street acquiring IFS and Caceis picking up Olympia Capital. The previous year was notable for the mega-merger of the Bank of New York and Mellon.
New launches
Last year was also notable for movement at the other end of the spectrum, with the launches of Citadel Solutions and LaCrosse Fund Services, with $17.5bn and $12bn under administration, respectively.
Deutsche Bank is yet to break into the top 10 administrators by assets under administration, and the HedgeWorks acquisition is clearly not a size or capacity play.
Karsten Munschek, director in the corporate development group at Deutsche Bank, explains that the company is principally interested in HedgeWorks’ proprietary technology and its staff. The Californian business has an automated system that includes fund accounting, portfolio management, subscriptions and booking. Deutsche Bank’s existing processes require more manual intervention.
“While we were able to produce or render some of those services in-house with non-hedge fund specific systems, we have now acquired a company that has a software system in place that is up and running and allows us to serve funds of funds and less complex hedge funds on a highly automated and efficient basis,” Mr Munschek says. “To build this system internally would take probably one to two years. Now we can onboard new clients from today onwards.”
Last year, Nick Griffin, partner at KPMG, told FT Mandate that any independent hedge fund administrator looking to carve out a niche in the industry by developing innovative technology could find itself a target, although to call this purely a technology play would be to sell short HedgeWorks’ expertise, says Mr Munschek. The deal could also be seen as a recruitment exercise in an increasingly constrained labour market. “If you want to do a green field you have to buy the software, but you also have to hire the right people who can manage the software and have the risk awareness to do the right things. So it wouldn’t be fair to say that we have bought only software, we have also bought an excellent employee team and the management team,” he says.
While HedgeWorks’ employees might be able to count on job security, their clients would be justified in eyeing the transaction with concern. As administration platforms have struggled for capacity, administrators have dropped less profitable clients from their rosters to make space for more high-value business. Deutsche Bank typically looks to service larger funds than its new subsidiary.
Mr Munschek is keen to dispel suggestions that some clients might not make the cut. HedgeWorks’ platform is scaleable, he believes, and the bank’s acquisition strategy will continue to target higher value funds. But for the time being, current clients will be retained. “We, of course, target larger funds than the company [HedgeWorks] currently serves. However, the company is very profitable, so there’s no issue at all with the current clients,” he says. “We anticipate continuing to service them.”
Cross-selling
Deutsche Bank will look for further return on its investment through cross-selling opportunities with its prime brokerage arm, subject to the usual security procedures.
“Organisationally HedgeWorks is run as a separate business unit within the global transaction bank, whereas prime brokerage is run within global markets, and there will be strict information barriers and Chinese walls, so clients don’t have to be afraid that our prime broker gets access to their data,” Mr Munschek adds.
“Of course, if the client wants to have administration services in addition to prime brokerage services we are happy to accommodate this, as we are always interested in meeting the needs of our client base.”
