Shrewd Operators: Advent-SS&C Bombshell Exposes High Stakes on the Buy Side

A day in financial technology without an acquisition is like an afternoon in London without a little rain: it happens, but not often.

What's interesting about these moves isn't their regularity, but rather their character — not only the products or companies involved, or specifics about how they're structured — but the raison d'etre and the personality politics sometimes lurking behind them.

Usually, they make plain sense even to the untrained eye; at other times they'll have us immediately scratching our heads. It's the rare single deal, though, that changes the whole industry's calculus overnight, a marker weighty enough to signify the start of a new era in vendor consolidation. Those that do, often come with 10 digits attached to them. And on the evening of February 2nd, fintech got one.

Whether the move for SS&C Technologies to buy Advent turns out to be a masterstroke or a mistake, sources from hedge funds and alternatives managers' senior executives, to fund administrators and technology shops, all say the deal will be incredibly impactful going forward. For one thing, it affirms SS&C's place in the very highest echelon of buy-side tech giants — an exclusive club. But more importantly, it is an massive gambit in a space that usually avers that kind of thing.

Waters sought to understand why. The responses, which were conducted on background so as to allow contributors to speak candidly, were surprisingly colorful.

We're hedge fund guys; we don't have five to 10 year roadmaps like banks ─ we're at one or two, and we're therefore not freaking out or having internal meetings to discuss this yet. Where it gets weird and wild is after that, what are they going to do with it?

Novel Combination
It's hard to overstate the importance of Advent changing hands. Its flagship Geneva system has dominated the alternative investments space (not to mention its ubiquitous Moxy OMS, by far the most popular OMS across the buy side in terms of current installations) for years, but that doesn't just mean hedge funds anymore.

Even a senior executive at BNP Paribas' securities services arm took note, with the firm currently pulling in a new book of alternative fund administration business from Credit Suisse that runs on the San Francisco-based vendor's platform. "We definitely saw that, with interest," he says.

First, a little history: Multiple sources say that Advent had been looking for a buyer for more than a year, with annual earnings down to only 2 percent and investors "clamoring for a change," as an executive with a data management provider servicing hedge funds puts it.

"Something had to give: either the stock had to tank — which I'm sure people didn't want — or they would sell high," he says. "On the other side, this is what SS&C does: They buy cash flow. They don't develop; they don't try to build. These are cash-flow consolidation plays, and now they own pretty much every portfolio accounting system ─ Geneva, DST, Portia, Financial Models Company ─ that isn't Eagle or SimCorp. Because of the consolidation, SS&C will be able to save $45 million in efficiencies per year just by getting rid of redundancies. So you're already making 10 percent year-over-year compounding return on your investment by doing nothing but consolidating. And, when you look at financing rates being down at around 3 percent, it's brilliant. You can load up on debt, do the consolidation, you get the cash flow and you can pay off the debt. It's a classic investment banking move."

And yet it's the type of move that is rarely seen in the fund administration space, for a couple reasons. One is that it's just plain hard, says a contact at a large bank-owned fund administrator.

"We've thought about a move like this in the past, and what we've found is that trying to be good at both is not an easy business to be in," he tells Waters. "To do software-as-a-service well and license systems, it takes a lot of infrastructure, a lot of intellectual capital, and focus. At the same time, the admin space does as well. So I suspect what they're trying to do is face two marketplaces, one licensing systems like Advent does, and then secondly they'll look to leverage this in an end-to-end play through the back office with accounting. This also seems like a push to flesh out their private equity administration platform as well, since 70 percent of that work is still done in house. But it's not an easy thing to do."

Indeed, the CTO at a large American, multi-strategy hedge fund with over $10 billion under management, says the two disciplines make for a novel — almost unheard of — combination, reflected in the topsy-turvy way fund accounting has been dealt with in past years.

"When the big fund admins like GlobeOp or Citco land a new account, they're generally known to just hire 50 more people out of college to manage it," the CTO says. "We think of them as being pretty low-tech, scaling up and down by hiring people rather than investing in technology. Before the Madoff scandal, many fund managers saw Advent Geneva's lineage with Goldman, and SunGard's VPM, and thought 'these are pretty good, let's take it into our own hands,' and brought many fund accounting functions and net-asset value (NAV) strikes in-house. Then Madoff happened and investors began to require a third party do it, and back out it went to the admins, even if many funds, including ours, kept Geneva running for daily transparency and cashflow. That is how we got here. SS&C's board of directors look at GlobeOp and realize it isn't exactly regarded as a tech evangelist. I think the board demanded a radical move to advance those capabilities."

'Scary'
Advent was the obvious solution — but here's where the more intriguing questions begin. For starters, SS&C owning both GlobeOp and Geneva means almost all of the top 10 fund administrators are now precariously running their books on a competitor's system.

"In terms of SS&C being both a provider and a tech vendor, that does make it complicated for Advent's admin clients, though less of an issue for their direct clients," says the chief technologist at a major alternative asset manager with over $200 billion under management. "You could argue that perhaps they should separate the businesses long term."

The executive at the data management provider is far more blunt, pointing out that he knows of one large admin that is currently replacing its legacy accounting platform with Advent Geneva. This is a conversion that perfectly illustrates the potential end-run that could be in the works, he says.

"This company is literally going from proprietary systems that they built and transitioning to Geneva, and from their perspective, one of their primary competitors owns their technology and can control what they’re going to bill them. That’s scary," he says.

"For [SS&C chief] Bill Stone, this may be a moment of brilliance if he thought this all through, and bought this platform to throw these other guys out of business," he continues. "Maybe he's just buying cashflow, but now he can strong-arm the likes of SEI, Citco, HSBC … all of them. He could be making a play for those fund admins’ assets, using technology to force consolidation onto the GlobeOp platform."

For his part, Stone told Waters in an earlier interview that prior acquisitions, rather than potential admin marketshare, will be the guide.

"Clients of Portia and DST Global Solutions have found they get access to everyone in the organization, and that we’ve kept a tremendous amount of talent and capability from those companies here. That has been a huge priority. We’re excited about becoming larger, but we’re high-touch, and want to remain that way," he said. “Some competing admins are big customers of Advent, and we recognize that. At the same time, a central nervous system like Geneva isn’t something most people want to tear out very often."

Breadcrumbs
The integration process, sources say, will provide important breadcrumbs as to which direction this all heads, but in the medium term, SS&C has a more immediate puzzle to deal with.

Integrating Advent's technology too closely with GlobeOp will raise some eyebrows among other admins, and risks diluting what makes Geneva and its other offerings so popular to begin with. Integrate too little, and you potentially face a technology estate in total disarray.

"For a deal of this size, you need to have a technology model and strategy already in place, before it's even announced," the fund administrator contact says. "Concision is key. First, you need a good idea of how you're going to service clients, and second is the integration, itself. I don't think they can avoid integrating; otherwise these things become very unwieldy and cumbersome."

The multi-strat hedge fund CTO says he and others have already been told by senior SS&C leadership that, for now, Geneva will be left alone. What happens later, though, is less clear.

"There's some truth to the idea of SS&C using Advent to corner the market; that's probably got some legs to it, but it's reason number eight why they made the buy," he says. "GlobeOp has more than 2,000 people using Geneva themselves; they wanted to buy it to control their own destiny with the way they use it. No big hedge fund is ever thrilled with their admin, so maybe this is a nice, shiny way to appease some of their big clients, too. Advent is well-run and very tidy out there in San Francisco, and for now I think GlobeOp will just reap the dividends, which means in the first year or two we will see no impact. We're hedge fund guys; we don't have five to 10 year roadmaps like banks ─ we're at one or two, and we're therefore not freaking out or having internal meetings to discuss this yet. Where it gets weird and wild is after that, what are they going to do with it? Because we've seen other integrations where the product gets driven into the ground."

Shrewd Operators
The shape of that integration will also be heavily influenced by who sticks around from Advent, and more crucially, who doesn't.

While SS&C has often retained staff after acquisitions, sources point out that it was "surprising" that senior leadership from GlobeOp left shortly after SS&C scooped it up in 2012. And in the case of Advent — famous for attracting intellectual, free-spirit types — there is broad-based agreement that an exodus could be in the offing.

"The big thing to watch would be cultural fit," says one industry veteran with a major technology provider. "Despite being a 30-year old company, Advent has retained its West Coast vibe and is very much a laid-back, tech-led firm. SS&C, on the other hand, is a much more corporate environment, populated by some rather shrewd operators. This might be something to watch for with this deal, though obviously it's a longer-term issue rather than something you’ll see in the first year or two."

Agreeing, the CTO at another large American hedge fund says Geneva's object-oriented database, Aga, is a particular spot to worry about as time moves on.

“Of the software developers that Advent employs, the majority of them have been with them for 15 to 20 years building Geneva. They have a lot of proprietary knowledge of how the object-oriented database in its back-end works," he explains, describing Aga's reputation for complexity among industry developers as "voodoo."

"The thing I’ll be watching for is what happens to that team," the CTO continues. "If we start to see departures, that’s going to worry people. If the institutional knowledge of how this proprietary beast works is leaving, suddenly you’re not sure what kind of quality you’re going to get in subsequent releases from Advent. If SS&C are smart and leave Geneva to the senior architects and technology management already in place, this should be a nonevent. For the rest of us, if they try to mess with the architecture or they start losing some of the core people, then it has much bigger ramifications.”

Que Bono?
Consolidation on this scale isn't all bad news, of course. Anything that upsets the current order is bound to draw close scrutiny, particularly when 4,300 different clients are involved. The alternative asset manager CTO, citing his own history of vendor acquisition, says its progress should produce a lot of lively conversation in the coming months.

"My view is that the consolidation of technology platforms is probably good for the industry," he says. "There is so much technology drift that it is difficult for people to know the systems they should use today, so making the various solutions work better together would make decisions easier. It all comes down to execution though: In the past, as consolidation has happened, there hasn’t been as much dedication to really consolidating the products.  If that is the case, little good will come of it. If they do a good job of platform integration, it could create a good deal of value."

While SS&C may know the space better than just about anyone, the bank-owned fund administrator contact — whose firm has almost exclusively focused its IT spend on the alternatives space — wonders whether the Advent addition is one giant leap too many.

"When you grow your businesses organically, you have the benefit of iterating into a marketplace as dynamics change, versus just acquiring everything and running it," he says. "You try to make sure you have a good strategy in each distribution channel. SS&C are playing into a lot of segments now. It's a big audience to please, and they all have different requirements. It’s difficult to spread your spend out across that many distribution channels, and there’s a risk of being spread too thin."

And in that sense the acquisition — despite its uniquely large size — will also prove a guide for future deals going forward, the data management executive suggests.

"Things are consolidating faster than I thought they would, and that’s a big deal," he says. "We’re in a shrinking business. The assets are growing, the overall asset under management (AUM) across the industry is high, but the number of firms is more concentrated. On the hedge fund side, the number of firms doing well is dwindling. We’re not in a growth phase anymore, and these deals reflect that."

Nevertheless, the multi-strategy hedge fund CTO points out that at least one interested party will gladly watch on as the industry enters a new phase.

"SunGard is probably thrilled with all this," he says.

Salient Points

• SS&C Technologies' acquisition of Advent represents a massive shift both for the portfolio accounting space and for fund administrators more broadly.

• One challenge the newly-formed entity will face is allaying fears from Advent Geneva users at competing fund admins as well as direct users, who will not wish to see Geneva integrated more closely with SS&C's GlobeOp business, or lose its technological advantage.

• Sources around the industry also point out that the operating culture at the two firms is quite different, and could lead to personnel turnover that will have a significant effect on Advent's technology going forward.

• The deal could well mark a new period of vendor consolidation, with further large firms coming together to leverage scale as asset managers and owners rationalize their operating and technical relationships.