The new wave of disruption
05 Sep 2018
Klaus Holse of SimCorp explores M&A activity in the financial services technology space to see if developments truly serve the buy side challenges that exist today
Image: Shutterstock
The recent spell of vendor acquisitions, including State Street Global’s buyout of OMS provider, Charles River Development, has certainly tightened the net on technology vendors in the financial industry, causing a new wave of disruption on the buy side. But what value do these deals offer the buy side market and do they truly solve the buy side challenges that are causing a strain on investment operations today?
The buy side industry has seen disruption from all corners this year—from implementing gargantuan regulations like the second Markets in Financial Instruments Directive (MiFID II) and General Data Protection Regulation (GDPR) to handling technology innovation such as blockchain and artificial intelligence (AI), and now merger and acquisition (M&A) fever. You’ve most likely heard of the two major acquisitions that have taken place most recently.
Last month, State Street Global acquired Charles River Development in a landmark $2.6 billion deal, while SS&C acquired EZE only a few weeks later. These aren’t just symptomatic of regional M&A trends either. Earlier in the year, Ireland’s Ion Investment Group fiercely fought off Temenos to buy Fidessa for a record £1.5 billion, having already ticked off a wish list that includes several treasury management solutions from OpenLink Financial, IT2, Financial Software Systems and Wall Street Systems. But what’s causing this onslaught of M&A?
I think it’s fair to say that the consolidation in the industry is a direct result of shifting customer demands. With greater pressure now than ever before, firms today are recognising the limitations of their current investment technology. They want to reduce complexity, reduce costs, reduce operational risk, and more importantly improve profitability, through new business opportunities that their current technology stack simply cannot deliver. And they need it now, not only to survive today, but to thrive tomorrow.
Commenting on the recent deals, Spencer Mindlin, Capital Markets Analyst at Aite Group, said: “Vendors realise that clients are looking to reduce their IT costs and risks. Clients are now drawn to global, multi-asset, front-to-back solutions with a lower total cost of ownership.”
This is the ultimate driver behind these deals: a consolidated approach that offers a holistic solution to the buy-side challenge. These acquisitions are now driven more by long-term goals than the acquisitions of the past, which often concentrated on short-term payoffs. And so off goes the bandwagon, where many technology vendors are scrambling to buy their way out of years of underinvestment, to effectively deliver the whole investment chain, front-to-back, in one offering. But what does front-to-back really mean? And does a series of acquired systems stitched together really ensure the operational ease, cost savings and risk reduction on the buy side needs to operate competitively, in the same way that a single integrated system can deliver?
Smoke and mirrors
Acquiring a set of best of breed solutions and bringing them under one roof may mean that a vendor can now call their offering front-to-back, but if it’s not developed as one system from conception, it’s hard to see the exact benefits.
There’s a big difference between a single system covering the full gamut of front-to-back investment management operations and a system comprised of multiple systems covering a front-to-back scope. Even if the intention is to integrate it into one front-to-back system, this will be a paramount investment—which is likely to prevent you from developing other new functionality in the meantime—and a quest we remain to see a vendor succeed with. This is worth bearing in mind for investment managers on the lookout for new investment management solutions.
Architecturally, we have been thinking ‘integrated’ all along, not least due to the fact that our solution was founded on the idea of an investment book of record (IBOR). We realised very early on that investment firms needed a one-system solution across the value chain to operate with the highest possible level of efficiency.
Over nearly two decades, we have made it our goal to develop a single integrated system, with a robust and modern front office suite, that supports the core requirements of institutional investors, from asset managers to pension funds, insurance or bank treasury.Not having a single system running the course from front-to-back creates risks of data inaccuracy, as well as costly and burdensome manual reconciliation. Empowered by an integrated IBOR in the front office and across the investment lifecycle, our target operating model provides a true value-add and addresses key buy-side pressures.
In the case of one large European client, we have helped to increase their fund straight-through processing (STP) rate from 85 percent to 99 percent. For our clients who have been able to operate their funds below 10 basis points, they cite system consolidation, improving STP rates and having an IBOR for readily accessible and accurate data, as being among their winning strategies for the compression of operating costs.
We are now seeing firms handling larger and more frequent volumes of data than ever before, with a greater need for speed, transparency and accuracy to inform their investment decision making. The status quo of multiple systems and interfaces, coupled with legacy architecture, has inhibited the ability to conquer data management efficiently.
A front-to-back solution underpinned by a ‘true IBOR’
Data management is a sought after goal, particularly in a competitive market, because data that is managed effectively can help a firm better understand and retain its clients, identify cross-selling opportunities, create new lines of business, and not the least, optimise investment decisions. It is an invaluable weapon for any firm, and can’t be overlooked in today’s low margin environment.
SimCorp has always maintained that an integrated investment platform powered by a single source IBOR is key in the effective management of data across the investment lifecycle. The transparency delivered by an IBOR is a considerable asset when it comes to making information, which normally only resides in the middle and back office, available for investment decision making. You may wonder what constitutes a true IBOR? SimCorp narrows a true IBOR down to 10 requirements.
Front to back not just in product but in strategy
We welcome the fact that the market is finally seeing the true value of a front-to-back solution. However, with consolidation activity set to continue, it’s important to consider whether these acquisitions will truly help investment managers overcome some of their key day-to-day challenges? In truth, I think they will to some extent. But to really eliminate the crucial headaches, whether it is access to intraday data for decision making, addressing the burden of arduous reconciliation, gaining the transparency needed for reporting and client communication, or accessing new asset classes cheaply, the buy-side needs a single integrated system.
As you will see, front-to-back investment solutions can comprise a multitude of ways, but it is our unwavering belief, and that for 180 clients worldwide who rely on SimCorp Dimension for their investment decisions every day, that one system, one data source and one truth across the whole organisation is the best approach to buy-side operations.
A single system achieves far more accuracy, transparency and automation, and delivers the buy side the means to overcome the complexity and costs that are currently holding them back and also increase the opportunities for alpha.
The buy side industry has seen disruption from all corners this year—from implementing gargantuan regulations like the second Markets in Financial Instruments Directive (MiFID II) and General Data Protection Regulation (GDPR) to handling technology innovation such as blockchain and artificial intelligence (AI), and now merger and acquisition (M&A) fever. You’ve most likely heard of the two major acquisitions that have taken place most recently.
Last month, State Street Global acquired Charles River Development in a landmark $2.6 billion deal, while SS&C acquired EZE only a few weeks later. These aren’t just symptomatic of regional M&A trends either. Earlier in the year, Ireland’s Ion Investment Group fiercely fought off Temenos to buy Fidessa for a record £1.5 billion, having already ticked off a wish list that includes several treasury management solutions from OpenLink Financial, IT2, Financial Software Systems and Wall Street Systems. But what’s causing this onslaught of M&A?
I think it’s fair to say that the consolidation in the industry is a direct result of shifting customer demands. With greater pressure now than ever before, firms today are recognising the limitations of their current investment technology. They want to reduce complexity, reduce costs, reduce operational risk, and more importantly improve profitability, through new business opportunities that their current technology stack simply cannot deliver. And they need it now, not only to survive today, but to thrive tomorrow.
Commenting on the recent deals, Spencer Mindlin, Capital Markets Analyst at Aite Group, said: “Vendors realise that clients are looking to reduce their IT costs and risks. Clients are now drawn to global, multi-asset, front-to-back solutions with a lower total cost of ownership.”
This is the ultimate driver behind these deals: a consolidated approach that offers a holistic solution to the buy-side challenge. These acquisitions are now driven more by long-term goals than the acquisitions of the past, which often concentrated on short-term payoffs. And so off goes the bandwagon, where many technology vendors are scrambling to buy their way out of years of underinvestment, to effectively deliver the whole investment chain, front-to-back, in one offering. But what does front-to-back really mean? And does a series of acquired systems stitched together really ensure the operational ease, cost savings and risk reduction on the buy side needs to operate competitively, in the same way that a single integrated system can deliver?
Smoke and mirrors
Acquiring a set of best of breed solutions and bringing them under one roof may mean that a vendor can now call their offering front-to-back, but if it’s not developed as one system from conception, it’s hard to see the exact benefits.
There’s a big difference between a single system covering the full gamut of front-to-back investment management operations and a system comprised of multiple systems covering a front-to-back scope. Even if the intention is to integrate it into one front-to-back system, this will be a paramount investment—which is likely to prevent you from developing other new functionality in the meantime—and a quest we remain to see a vendor succeed with. This is worth bearing in mind for investment managers on the lookout for new investment management solutions.
Architecturally, we have been thinking ‘integrated’ all along, not least due to the fact that our solution was founded on the idea of an investment book of record (IBOR). We realised very early on that investment firms needed a one-system solution across the value chain to operate with the highest possible level of efficiency.
Over nearly two decades, we have made it our goal to develop a single integrated system, with a robust and modern front office suite, that supports the core requirements of institutional investors, from asset managers to pension funds, insurance or bank treasury.Not having a single system running the course from front-to-back creates risks of data inaccuracy, as well as costly and burdensome manual reconciliation. Empowered by an integrated IBOR in the front office and across the investment lifecycle, our target operating model provides a true value-add and addresses key buy-side pressures.
In the case of one large European client, we have helped to increase their fund straight-through processing (STP) rate from 85 percent to 99 percent. For our clients who have been able to operate their funds below 10 basis points, they cite system consolidation, improving STP rates and having an IBOR for readily accessible and accurate data, as being among their winning strategies for the compression of operating costs.
We are now seeing firms handling larger and more frequent volumes of data than ever before, with a greater need for speed, transparency and accuracy to inform their investment decision making. The status quo of multiple systems and interfaces, coupled with legacy architecture, has inhibited the ability to conquer data management efficiently.
A front-to-back solution underpinned by a ‘true IBOR’
Data management is a sought after goal, particularly in a competitive market, because data that is managed effectively can help a firm better understand and retain its clients, identify cross-selling opportunities, create new lines of business, and not the least, optimise investment decisions. It is an invaluable weapon for any firm, and can’t be overlooked in today’s low margin environment.
SimCorp has always maintained that an integrated investment platform powered by a single source IBOR is key in the effective management of data across the investment lifecycle. The transparency delivered by an IBOR is a considerable asset when it comes to making information, which normally only resides in the middle and back office, available for investment decision making. You may wonder what constitutes a true IBOR? SimCorp narrows a true IBOR down to 10 requirements.
Front to back not just in product but in strategy
We welcome the fact that the market is finally seeing the true value of a front-to-back solution. However, with consolidation activity set to continue, it’s important to consider whether these acquisitions will truly help investment managers overcome some of their key day-to-day challenges? In truth, I think they will to some extent. But to really eliminate the crucial headaches, whether it is access to intraday data for decision making, addressing the burden of arduous reconciliation, gaining the transparency needed for reporting and client communication, or accessing new asset classes cheaply, the buy-side needs a single integrated system.
As you will see, front-to-back investment solutions can comprise a multitude of ways, but it is our unwavering belief, and that for 180 clients worldwide who rely on SimCorp Dimension for their investment decisions every day, that one system, one data source and one truth across the whole organisation is the best approach to buy-side operations.
A single system achieves far more accuracy, transparency and automation, and delivers the buy side the means to overcome the complexity and costs that are currently holding them back and also increase the opportunities for alpha.
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