The PE timebomb: Why the Asian corporate services market is set for a new phase

Foulger Underwood’s Singapore managing director Tim Underwood takes part in a Q&A aimed at revealing the current structure of the trust and corporate services market in Asia, and its direction of travel. Tim discusses the market’s private equity owners, and how emerging locations are proving attractive for both clients and providers.


Q: Tim, what is the current structure of the corporate and trusts services market in Asia?

A: The market in general remains fragmented. If you look at trust providers (as opposed to pure corporate service businesses), the larger trust advisers have moved away from acquiring pure private client trust businesses and turned their attention to deals within the corporate service space. They see that, while providing trustee services is high value, to make it commoditised and maximise margins the service offering tends to be focused on the structures established rather than being part of an overall wider holistic solution for the client.

Offering corporate services, which these trust companies have now turned to, allows them to derive additional revenues from corporate clients across a wider range of solutions such as compliance services, payroll and secretarial offerings in a multi-jurisdictional environment.

At a micro level, some of the smaller and more established single jurisdiction corporate services firms are seeing clients ‘grow out’ of the top. By definition of being single jurisdiction, they might be able to help a client set up in Vietnam but can’t assist directly if the client expands into Hong Kong or Shanghai – which invariably feeds into a larger player who can do all of that.

The issue for the end client in this scenario is that consolidating all your service requirements with a larger provider is attractive (one point of contact), but does tend to come with a premium charge. So the smaller corporate service players are now looking at distribution, and how to address that – they’re looking at building up links in networks and associations. The alternative option would be to join a bigger player, like one of the trust companies, and take equity within.


Q: With PE ownership so prevalent, what potential impact will that have on the number of players in the Asian mid-market?

A: The trust and corporate services mid-market in Asia is certainly different to Europe and elsewhere. A non-PE backed independent mid-market player in Hong Kong, for example, that is doing very well for themselves will find the allure of the PE-backed firms too attractive to ignore at some point.

From an Asian context, many M&A deals at this level have already happened – the low hanging fruit been picked off. Others that exist independently are self-sustaining, perhaps in a good network or association from which they can provide more regional services to clients. Some of these still-independent firms are benefiting from staff and clients leaving PE-backed firms to join them as they become tired with aspects of the PE model.

Overall, there’ll be a further squeeze on the number of established firms in the mid-market. Larger firms will continue to grow, but that’s not to say there won’t be more startups in this sector.


Q: Over what timescale could these changes occur?

A: There are two distinctly different markets in Asia. In the next three-to-five years in the more established markets such as Singapore, Hong Kong and Tokyo, the number of mid-market players will reduce in general terms. The key drivers for this reduction will be distribution - or lack of - for the mid-market firms; while underlying clients are becoming more demanding in terms of their requirements and desire to be more regional and global in their own outlook.

The PE-backed firms have their own targets for growth across the region, which will be derived from organic and inorganic means. Given they have a pool of cash to deploy via M&A, the inorganic growth is generally the fastest route to achieving growth targets – and speed/time is critical for the PE model, in order that the PE firms can scale and exit.

A lot of the larger trust and corporate service firms still don’t have a significant presence in frontier markets like Myanmar, Vietnam, Indonesia and the Philippines. The smaller, but well-established firms in these jurisdictions will come under increasing pressure to sell, as eventually someone will make an offer they can’t refuse. The potential pool of acquisition targets in these frontier markets is smaller than the more established markets in Asia, but the double-digit growth and future potential in these frontier markets is hard to ignore for the PE-backed firms.


Q: If the market does consolidate, what is the ripple effect for smaller players, and the larger PE-backed trust and corporate services providers at the top?

A: The larger providers will continue to be able to benefit from offering regional and global pricing for clients, which will compound issues for smaller providers in retaining clients and preventing them from moving up to larger scale firms. But a vacuum will be created as the larger firms focus on higher-value clients, leaving the smaller firms to offer their more hands-on service to the larger pool of mid-size clients.

The opportunity for the smaller corporate service businesses, in terms of being successful in the face of increasing pressure from larger providers, is to set themselves out as specialists within a specific service line or client type. We have examples of these firms in both Singapore and Hong Kong that are drawing business away from larger firms, as they have specialised.


Q: What can players in the market do to protect themselves, or take advantage of, these looming changes?

A: At the smallest level: You’ll have to be a specialist in terms of type of client or service line. Develop your USP to differentiate against the generalists, then you’ll get lawyers and potentially other corporate services firms referring work through.

Secondly, what are you trying to build? If you’re in your 30s to 40s, then look at the specialism recommendation. But if within 3-5 years of retirement then perhaps it’s about making your business look as attractive as possible for investors/acquirers, given what they are looking for now.

If you’re already specialised, you’ll be attractive to a subset of larger firms and broader mix of mid-market firms.

Tim Underwood is Singapore managing director of Foulger Underwood.

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