How is SS&C Technologies faring?
SS&C Technologies is a publicly traded company and we are approaching an annual run rate of over $750 million in revenue. The business is focused in two discrete areas: we have the hedge fund business, which provides fund administration, and the institutional business, which services asset managers, wealth managers, insurance companies, real estate investment trusts (REITs), pension funds and other institutional corporate clients.
Virtually all of our services are in some fashion related to investment management and the investment lifecycle in terms of front-, middle- and back-office services. Even though the majority of our revenues are recurring revenues, we are a large software company that provides software as a service.
How lucrative is the REIT market, and how well serviced is it?
There are two aspects to the REIT market: there are equity REITs, which own physical real estate, and there are mortgage REITs, which essentially own securities or loans. There is also hybrid REITs that own both securities as well as the hard real estate.
We have had a presence in that marketplace for some time. SS&C has a software product for property management, but we also have a lot of our technology devoted to complex financial instruments. However, in the last two years, and accelerated in the last 12 months, we’ve taken a very sharp focus on the mortgage REIT space. The reason for that is that mortgage REITs have been increasing in popularity. If you were to look at many of their trends or performance you will see they have been increasing in number and size. A number of our existing clients are either asset managers for mortgage REITs or they’re large shareholders. Given the number of existing outsourcing services and software products that we provide to mortgage REITs, SS&C made the decision to form a dedicated group for the services and we are expecting the group to double in size over the next 18 months.
REITs are very complex. The mortgage REITs invest in mortgage bonds or loans and use complex hedging strategies. They borrow on a short-term basis, buy on a long term-basis and they use sizable leverage to gain profit margin on the gap in the interest rates.
Most of the companies are public companies, so the primary value proposition of our services to the mortgage REIT is to be sure that it is getting timely and accurate financial reporting. Companies are less focused on the cost of the underlying services, rather they’re paying for the expertise and the quality of the software/service.
Why has SS&C decided to launch a REIT servicing group?
It really was a natural extension of what we were already doing. On the buy side of the mortgage REIT, a lot of our investment software was already focused. We very much try to differentiate ourselves in that we support very complex asset classes and, as REITs invest in such classes, they are a natural extension for us.
On the equity REIT side, we had the existing property management software that we’ve had in place for a long time. It was really the combination of that as well as the fact that SS&C also has a lot of dedicated accounting and tax expertise inside the company, which, when you combine with the complexity of the software and the accounting and tax expertise into a bundled service, is where it made a lot of sense for us to follow this market.
Mortgage REITs invest in bonds, but these entities trade like equities and this is being viewed as a very attractive asset class right now. They’ve had very strong performances in 2013 and they’ve had a very strong performance year-to-date in 2014. They are complex yet they are performing very well. There is quite a bit in the press about looking to mortgage REITs as alternative investment vehicles because they leverage the short-term/long-term borrowing derivatives strategies and they utilise sizable leverage, too.
What services do REITs require, and why?
A very high percentage of these companies are public registrants, so when you look to what the public registrant require, they are looking for us to provide the majority of their underlying financial reporting requirements. They also have very complex tax structures. These are pass through tax entities, and companies are striving to avoid double taxation so we provide them a tax service. Given the complexity of the securities, there are security valuation services that we provide, as well as a lot of the traditional outsourced services with respect to data gathering, reconciliation, and so on.
What is the reason for REITs relying on manual processing?
Because mortgage REITs use unique complex hybrid structures and invest in complex securities, there is not a lot of software out there that could support what these entities are doing. As a result, a lot of these companies have built their own spreadsheets or have done a lot of their own customised software development.
One of the consistent requests is that they’re in search of timely, accurate financial reporting that is also very well controlled. The reason for the very well controlled part is they are all public companies, all heavily regulated from a financial reporting perspective, and when you are relying on manual spreadsheets or electronic spreadsheets, you’re likely by definition to not be in a well-controlled environment. There is a lot of push on REITs from their external auditors to implement more sophisticated software solutions, which is where we come into play.
That really is what we are doing in all these relationships, whether these are outsourced services or whether the REITs decide to buy their own licenced products, we are providing the sophisticated software and expertise. What they’re doing in many instances is scrapping entirely what they’ve done internally, much of which is home developed, and replacing it with a true software product.
What other services will the group provide to REIT clients?
REITs are complex environments. SS&C often comes in to replace entire systems. One of the things that we do very often is overall operational assessments—what are the process flows, how are they processing securities, how are they managing their portfolios—we also do financial process improvement, which is, again, organisational evaluations. Typically, these evaluations are primarily with the CFO organisation, chief investment officer or chief technology officer.
We also do a lot of discrete investment, accounting and evaluation of financial instruments focusing on the accounting and tax aspects of those. As you would expect with any entity that has a very large portfolio, there is going to be other things that they are going to be looking for, such as straight-through processing solutions for trade management or portfolio performance solutions.
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