In any service-oriented industry, the keys to survival are understanding a client’s needs and expectations and providing a service tailored to meet those needs and expectations. There is a growing trend for corporate services providers who traditionally had operated within national borders, to use consolidation strategies to diversify geographically and to keep pace with the demands of an increasingly sophisticated and global client base.
It is an undisputed fact that we live in an era of rapid globalization of industry and markets. Taking private equity as an example, Preqin (an industry research organization) notes there is an increasing trend toward investors in the U.S. and Europe looking for opportunities in other regions as the more developed private equity markets face political instability and an ever-increasing regulatory burden.
Stricter regulation has also contributed to fund managers looking to source an increasing amount of capital from investor groups outside of traditional financial markets.
These geographic trends present certain challenges to the way in which corporate service providers in offshore jurisdictions, such as the Cayman Islands, have traditionally serviced their clients. The corporate services industry in Cayman was historically viewed as an adjunct to the provision of legal services.
Law firms, recognizing that there was a need for efficient corporate administration and management of SPVs and investment funds, began to develop their corporate services divisions.
However, as the funds industry became more global and the underlying structures more complex, the range of services required to administer these vehicles expanded rapidly. For example, in addition to basic domiciliation and registered office services, service providers were called upon to also offer independent director and trustee services, compliance and regulatory advice, registrar and transfer agency services, fund administration, and the list goes on.
As the list of potential service offerings grew, so did the potential for conflicts of interest. Hedge fund investors, for example, who were pushing for more independent oversight of a fund’s activities by requiring independent non-executive directors, had little tolerance or appetite for legal advisers to the funds in which they had invested to also profit from providing services of a fiduciary nature. Recognizing this concern, law firms such as Walkers chose to divest of their affiliated corporate, fiduciary and company secretarial businesses.
An attractive opportunity
Such divestments also presented an attractive opportunity for corporate service providers to diversify geographically, thereby meeting the demands of an increasingly global client base. There has been significant consolidation within the corporate services industry in recent years (for example, the mergers of TMF and Equity Trust in 2011; Intertrust and Walkers Management Services in 2012, followed by Intertrust and ATC in 2013), and this consolidation by acquisition trend, backed by the world’s largest private equity firms, looks set to continue.
This trend is also echoed in other sectors of the financial services industry. For example, in 2012 two significant acquisitions were completed within the fund administration sector: State Street Corp. acquired Goldman Sachs’s hedge fund administration unit, and SS&C completed its acquisition of GlobeOp Financial Services. Such acquisition strategies enable organizations to not only expand their corporate footprint by broadening their geographical reach, but also provide for an expansion of services through the consolidation of experienced employees and the pooling of infrastructure.
Aside from potential conflict of interest concerns, a further inevitable consequence of globalization and enhanced regulation is growing complexity around corporate structuring. Clients are becoming increasingly sophisticated and investing in high performance systems and processes, and service providers have little choice but to do the same to keep pace with client demand. The larger, more sophisticated, corporate service providers in the market, backed by the world’s dominant financial sponsors, have far more leverage when it comes to investing in market-leading technology and infrastructure than firms that are privately owned by a handful of individuals.
Although corporate services firms produce high income streams, they are also viewed as non-core businesses for law firms, and hence it is often difficult to attract sufficient financial and other investment. While there may still be some limited scope for smaller providers in terms of administering non-complex structures, it is becoming increasingly difficult for law firm-affiliated and single-jurisdiction providers to compete on a global scale.
As globalization of industries and markets becomes the norm, and once peripheral economies are beginning to take center stage, the provision of corporate services is itself becoming a global industry.
Corporate service providers who are earmarked for success are those that are evolving and adapting in anticipation of the needs of a geographically diverse and sophisticated client base. Clients who are accustomed to operating in an era of speed and ease of technology are increasingly attracted to the more sophisticated global players, and the technology and infrastructure that such firms are able to provide.