Firms need to decide who they are and the strategy to follow, in order to remain competitive, discusses Keith Hale, Executive Chairman of TrustQuay.
40% expect to see an increase in their own firms’ M&A activity
TrustQuay’s recent survey showed 59% of firms in corporate services, trust and fund administration expect industry consolidation to accelerate over the next 2 years – that’s a very significant amount when you consider how much consolidation has already taken place in recent times. It also found that over 40% of those surveyed said they expected to see an increase in their own firms’ M&A activity.
If we look back over the last year alone, players like Ocorian, IQ-EQ, Apex, Equiom to name a few have been active on the acquisitions trail.
What’s driving this consolidation is the opportunity to build scale in what has traditionally been a heavily fragmented industry. Many firm’s origins were as carve-outs from private banks, law firms or accountants to become standalone businesses.
Given the fragmented nature of the market, differentiation is key to on-going future growth and success. Smaller niche specialist corporate service providers have traditionally tried to differentiate via better customer service for example, but it is hard to grow purely organically unless there is a distinctive and unique value proposition.
The other approach that corporate service providers are taking is to gain global coverage, market share and economies of scale via M&A, typically enabled by Private Equity backing. The net result is the biggest and increasingly rapid upheaval the sector has ever seen – our prediction is that in 5 years’ time, the industry will shrink from over two thousand firms to hundreds. It will polarise between global players on one side leveraging their global coverage and economies of scale, versus smaller niche specialist firms on the other with uniquely highly targeted value propositions such as a digital-enabled offering, perhaps combined with their high-touch customer service.
This accelerating polarisation will have consequences. Larger global players offering a wider array of services across a range of jurisdictions and vehicles will need to significantly increase the automation of their offerings, particularly as the trend to move away from traditional time and material charging models towards fixed fees continues. This will drive firms to increase their focus on efficiency in unit production cost by automated processing and digitalising workflows.
Successful firms need their combined businesses to live up to the brand and vision as an integrated scaled global business, rather multiple silos
Another key challenge for these consolidating firms is how to successfully integrate their disparate businesses and technology in order to drive efficiencies in their combined businesses. Delivering a smooth and seamless as possible integration is also critical to delivering the expectations of private wealth, corporate and fund clients, who want their service levels to be maintained or improved, but probably with a changed pricing model and reduced fees as has happened in other financial service sectors.
Successful firms need their combined businesses to live up to the brand and vision as an integrated scaled global business, rather than a disconnected and inefficient scenario consisting of multiple silos simply under common ownership, with fragmented operations and technology.
While polarisation is driving firms on one side towards consolidation, this will create opportunities for firms on the other who focus on a specific niche or product offering. By being specialists in a niche area or specific jurisdictional capability which offers a high-value service to clients, they too will remain competitive in an increasingly polarised market.
The most at risk from change in our view will be the middle tier of providers – it is this part of the market that is most vulnerable to being squeezed either by the global consolidators or the niche specialists. There is a risk of them becoming increasingly less competitive unless they pivot to a path of offering a more specialised or high-value service.
As we enter the new decade, the fundamental question for firms is to decide their strategy and start executing at pace, in order to successfully adapt to the rapidly changing corporate services, trust and fund administration market. Forward-thinking firms may have already defined their strategy and have also recognised the powerful role that technology will play in adapting their business strategy and go to market approach, to drive efficiency and grow margins, differentiate themselves to generate new revenue opportunities, or perhaps grow through M&A but in a consistent, integrated and digitalised driven manner.
Change therefore will bring opportunity, but unfortunately not for everyone.
Keith Hale, Executive Chairman of TrustQuay.