The Coming Shakeout in Trust and Corporate Services
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The Coming Shakeout in Trust and Corporate Services Emerging leaders have made explicit strategic choices about where to play and how to market their services. By Tim Cochrane, Marc Lino and Lennert Spek Tim Cochrane is a partner with Bain & Company’s Financial Services and Private Equity practices, and is based in London. Marc Lino and Lennert Spek are partners with the Private Equity practice, and are based in Amsterdam. Copyright © 2017 Bain & Company, Inc. All rights reserved. The Coming Shakeout in Trust and Corporate Services The venerable trust and corporate service (T&CS) indus- explicit choices on a differentiated strategy, and to sharply try, long a fragmented group of small, local offices often improve their go-to-market approaches and their com- spun out of law firms, now finds itself rapidly becoming pliance processes. That marks a distinct change for the professionalized. In recent years, the industry has under- industry. Until recently, many providers barely paid heed gone brisk consolidation through rollups by regional to strategy or marketing. They relied on close-knit rela- leaders, as well as acquisitions by private equity (PE) tionships and a few mergers and acquisitions (M&A). As a funds attracted to the stable revenues and the opportu- result, many remain subscale, relatively inefficient in nities to inject more rigorous management methods. It operations and unproven at cross-selling. also faces regulatory and media scrutiny in the wake of tax evasion scandals. New risks to the industry, moreover, emerged after the leak of millions of tax haven documents in the past Based in select locales including Luxembourg, the several years, most prominently from a Panamanian law Cayman Islands, the Channel Islands, Hong Kong and firm. The documents revealed international heads of Singapore, these firms focus on setup, operational man- state on the rolls of clandestine companies in tax havens agement and liquidation of legal entities for corporate, and major banks facilitating tax avoidance through off- fund and private clients. The global market is likely to shore enterprises. News reporters found that some of grow at a healthy 3% to 5% per year through 2020, the shell corporations were used for fraud, tax evasion Bain & Company estimates, on the back of rising house- and evading international sanctions, and the media hold wealth and greater corporate and tax regulation, coverage triggered criminal investigations and audits as well as more outsourcing of administrative services in dozens of countries. These revelations about a couple by PE and real estate funds (see Figure 1). of providers created a cloud over the entire industry. Leading T&CS firms have been taking actions to ensure But not all firms will gain from the rising tide. A con- that they have sterling compliance processes and an fluence of forces have put pressure on providers to make impeccable customer base. Figure 1: Burgeoning wealth and regulation are boosting demand for global trust and corporate services Global T&CS market value, € billions CAGR €10 2014–20 Total 3%–5% 8–9 2%–4% • Continued recovery of the global economy 8 and growing number of wealthy households • Swelling regulation boosts revenue per entity 6.5 5%–7% • Fund administration includes hedge funds, High-net-worth 6 which comprise 60% to 70% of total funds individuals Fund 4%–6% • More funds outsource fund administration administration and core T&CS services 4 Funds—special purpose • Fund administrators expand service offerings vehicle services • Offerings can expand middle-office functionality to real estate funds 2 3%–5% • Greater regulation continues to limit growth Corporates • Regulatory changes reduce entities as the cost of legal structures rises • Growth in revenue per entity rises through 0 greater compliance requirements 2014 2020 forecast Note: Special purpose vehicle services exclude hedge funds Source: Bain & Company interviews with industry executives and experts 1 The Coming Shakeout in Trust and Corporate Services Strategy choices around where to play often seek a one-stop shop with an extensive geographic footprint and an integrated offering. Intertrust has enjoyed Bain recently reviewed the financials of many T&CS a 22% compound annual growth rate (CAGR) in revenue firms and conducted extensive interviews with industry from 2011 through 2016 and an EBITDA margin of 37.5% executives and clients. Based on that analysis, combined in 2016. with our experience working with those groups, we see three prevalent strategies emerging around where to play The regional specialist. Firms choosing this strategy con- in terms of geography, products and customer segments centrate on expertise in local regulation. They develop a (see Figure 2). full array of services for customer segments within a single jurisdiction or region. Many Asian markets look attractive The global platform. Companies pursuing this strategy because of the strong underlying economic growth. aim to differentiate by building global scale and pro- viding services to multiple customer segments across One firm benefiting from that trend, Tricor, has con- many jurisdictions. M&A often helps to achieve global centrated on growing its business in Hong Kong and scale, though it requires excellent integration of the Singapore, serving subsidiaries of multinationals and re- acquired firms. gional public and private companies. Tricor’s expertise in local regulation and law has underpinned its growth, Intertrust, for example, has thrived by identifying its most especially in corporate services, and the geographic fo- profitable customers and building an integrated service cus has afforded opportunities for cross-selling. Tricor offering and salesforce around their priorities. Starting had a revenue CAGR of 5% from 2011 to 2016 and an as the market leader in the Netherlands, it has built a sizable operating profit margin of 29% in 2016. share in other countries, both organically and through M&A. The firm focuses on PE and real estate funds, multi- The customer segment or product specialist. This strat- national corporations and financial institutions, which egy involves building a distinctive business through deep Figure 2: Three prevalent strategies have emerged Elements of success Examples • Intertrust • Global scale and ability to serve multiple • TMF Group Global customer segments across jurisdictions Customers Jurisdictions platform • Citco • Acquisitions and excellent integration • Vistra Services • Estera Regional/ • Local regulatory expertise • Tricor jurisdiction • Full array of services for numerous • CT specialist segments within a jurisdiction or region • CSC • Local firms • Alter Domus Customer/ • Knowledge of customer needs, deep • State Street segment/ relationships and specialist service expertise product • Aztec Group specialist • Expansion into adjacencies such as • Banks, law firms, fund administration accountancies Source: Bain & Company 2 The Coming Shakeout in Trust and Corporate Services knowledge of customers’ needs and priorities and spe- just to be considered. Winning clients at the initial stage cialist service expertise for a specific customer segment is crucial, as it is very difficult to persuade them to change or asset class. their current provider. Our survey found that 80% of clients hardly ever change their provider before liquida- One attractive segment, PE and real estate funds, should tion of the entity, in some cases because the client would see strong demand for services because of their indus- need to go back to regulators to explain why it switched try’s growth and the increasingly complex reporting (see Figure 3). “If you’re getting good service, you’re requirements that spur outsourcing of fund services. loath to leave,” a managing director for investor admin- Alter Domus has focused on underserved PE and real istration at an alternative investment manager told us. estate funds, offering them a vertically integrated proposi- “Moving a thousand entities can often create more prob- tion. The firm is the clear market leader in Luxembourg, lems than it solves.” from which it has built a strong presence in key European and Asian markets. It recently moved into the US market, In the sales arena, given that about half of new client where outsourcing has picked up steam. As one of the business still originates via intermediaries such as lawyers, few vertically integrated providers, Alter Domus can bankers and accountants, maintaining strong ties with offer solutions that reduce overall cost and administra- the right intermediaries helps to promote healthy flow tive burden for clients. The firm’s revenues rose at a 13% of clients. Such ties are especially effective to reach indi- CAGR from 2011 through 2014, rising to roughly 20% in viduals and small businesses, or to break into new juris- 2015 and 2016, and it secured a significant minority stake dictions or customer segments. Few trust companies, from the investment firm Permira. however, have realized the potential of these relationships. A more disciplined approach would identify promising Other strategies may emerge, of course, and no single intermediaries for each customer type, service and geog- strategy is inherently better than another. The key for a raphy, then segment the list by size and the interme- firm is to make explicit choices and invest to excel in the diaries’ own priorities. capabilities that are critical to supporting the chosen strategy. Muddling along a middle course, by contrast, Besides going through intermediaries,