Fund Administration in Europe .

Fund Administration in Europe. Deloitte & Touche House Thursday, 4 December 2008

Agenda.IntroductionRonan Nolan – Head of Investment Management Practice2008 Survey ResultsBrian Forrester – Partner, Investment Management Managing in a DownturnDerek Moriarty – Partner, Financial ServicesQ&A

Fund Administration in Europe.2008 Survey ResultsBrian Forrester, Partner, Investment Management 4 December 2008

Contents • About the Survey • The Credit Crunch • Future Marketplace • Challenges and Issues • Final Thoughts

Why was the survey conducted? • In 2006 and 2007 Deloitte carried out a survey of the Fund Administration community in Ireland, in order to obtain an understanding of the key business issues facing the industry • This year, the survey was extended to include fund administrators in Luxembourg and the Channel islands (Jersey, Guernsey and the Isle of Man) • The results have been reported on a Europe wide basis, with jurisdictional differences being highlighted where appropriate • The survey was carried out in November 2008

Who participated in the survey? • We had responses from 63 companies providing fund administration services across Europe • The respondent Fund Administrators currently service nearly $4 trillion of assets which we believe represents approximately 70% of the total industry in those countries * Summary of various sources • Comments contained in the findings and analysis that follows have not been attributed to survey participants to maintain confidentiality • Not all participants answered all questions • No part of this report may be reproduced or distributed without the prior written permission of Deloitte & Touche $1485bn $3873bn

Asset profile of respondents • It is difficult to obtain consistent data on assets under administration (AUA) in each country, and the table opposite reflects the mix of assets between alternative and traditional assets as confirmed by respondents • This demonstrates clearly that the Channel Islands administration companies focus almost exclusively on alternative asset classes • Luxembourg and Ireland have a large base in traditional assets, although alternative assets have been growing in both. The responses from Ireland in particular conflict with data provided by the IFIA which suggests alternative assets account for approximately 60%* of the total * Source : IFIA Statistics September 2008

Alternative assets mix • The mix of alternative assets shows a clear distinction between jurisdiction • The vast majority of AUA in Ireland are in hedge funds and fund of funds • In Luxembourg the main asset class is fund of funds, and overall there is a greater mix of product • The Isle of Man also has a good mix of product, whilst Guernsey and Jersey are dominated by Private Equity and Property Assets • The mix of product has evolved over time and is a combination of the nature of expertise available and the local investment products

Contents • About the Survey • The Credit Crunch • Future Marketplace • Challenges & Issues • Final Thoughts

What a difference a year makes … • In October 2007 we asked administrators in Ireland “Do you believe the credit crunch will have a material impact on your business in the short term and long term”. Responses were as follows:- • 12 months on it is clear that the impact of the credit crunch has indeed been significant. The administrators who responded in 2007 were not alone in their prediction last year, and the pace and impact of the credit crunch has been far more severe than most could have anticipated

Direct Impact • We asked participants how the impact of the credit crunch has been felt • By a clear margin the most significant impact has been the reduction in AUA which impacts directly on fees earned • This is also impacted by the No. 4 issue of a reduction in new funds launching • There has been a move towards liquid investments in money market funds which typically earn lower basis point fees • Margins already under pressure due to rising costs are now being squeezed even further • Managing liquidity issues (redemption gates, lock ups, sidepockets) is the number 2 issue. This can be very time consuming • The approach to investment valuation is also a significant issue No.1 No.2 No.3 No.4

Reduction in New Hires • 83% of respondents noted that their head count plans had changed • For an industry that has traditionally been a heavy recruiter of graduates and experienced resources, these statistics will be of concern in the wider community as a recessionary period is entered • Not only is there a significant decrease in expected hires, 14 of the 63 respondents stated that they were looking at redundancy and redeployment programmes. This is spread across all jurisdictions • It is clear that industry will have to find different ways to service clients without adding head count 16.9% 83.1%

Implications Changing Environment Economic and Regulatory Environment Products and Asset Class • Large flow of Funds into conservative asset classes • Reducing popularity of Alternative Asset Classes • Need to align Service Capability with Client Demands • Pressure on Fees • Pressure on Margins • Regulation • Recession • Continued Market Volatility • Falling Assets – 30% Redemptions? • Future of Regulation? • US Election • UK Review of Offshore Centres • Increase in Operating Costs • Highly Competitive Market across Europe • Cash is King • Reduced Appetite for Risk? • Use of Leverage • Complex Products • Liquidity Management • Gates and Sidepockets • Fund of Funds • PE and Property NEED TO ADAPT The Future Marketplace

Outlook for Growth • In 2008, 65% of respondents expect their revenue to fall or grow by less than 10% • In 2009 this increases to 70% • This compares with the predictions of the 2007 Ireland survey where 75% expected growth greater than 20% in 2008 and 2009 • However, 72% of respondents expect revenue growth in 2008 and 76% expect growth in 2009 which shows a certain resilience in the industry in the face of significant challenges 12.9% 37.1% 21.4% 28.6% 12.7% 16.9% 46.5% 23.9%

Business Confidence • We asked respondents whether they were positive or negative over their outlook for their business over the short and longer term • In the short term 44% of respondents had a pessimistic view • On a 2 year view however 83% of respondents have an optimistic view • This timeframe is consistent with most commentators 25.4% 43.7% 31.0% 1.4% 15.5% 83.1%

Update on key issues arising from 2007 Ireland survey • We asked respondents to consider whether the key findings from the 2007 Ireland survey were likely to be more or less of an issue in 2008 • 84% of respondents said that cost containment would be more of an issue • 67% felt that maintaining service quality was more of an issue • Only 29% felt that managing internal expansion will be more significant • IT enhancements remains a key issue to keep pace with the industry

Margin Pressure – Key Issues arising 2008 Market Forces Margin Pressures Reduced Income High Fixed Costs Maintain Service Quality

The landscape is changing and businesses need to move with the times Re-evaluate service offerings and align operations with client needs Review individual client margins. Assets don’t always equal profit Strategic client de-selection Resources Productivity Improvement – opportunity to implement changes on the long finger 71% already implemented process standardisation 46% in the process of implementing improved work practices They say you should invest in a downturn….. The Need for Change

Expected Cost Savings • 63% of respondents expect annual costs savings in the region of 6-15% • In the current market of falling assets is this enough to maintain profitability? • Need to balance short term cost reduction with the expected upturn in 2 years Short Term Long Term

The People Agenda • It is interesting to note that despite the downturn experienced hire recruitment remains the number one HR challenge. Good people are still hard to find! • Strategic hiring • This is closely followed by retention, although attrition levels expected to fall • Increasing compensation is still an important challenge, although less so that in previous years • 14 respondents noted redundancy and redeployment as a key issue No.1 No.2 No.3 No.4

Outlook for Attrition Levels • The industry has suffered from high levels of staff turnover in recent years • 85% of respondents expect attrition levels to stay the same or reduce in 2008, rising to 87% in 2009 • Reduced attrition should allow for higher levels of productivity • Every cloud has a silver lining! 14.7% 52.9% 32.4% 13.1% 44.3% 42.6%

Outlook for Offshoring/Outsourcing • Both outsourcing and offshoring are expected to increase in the future • Evolution towards Global Operating Model • 78% of respondents have already started offshoring • Main driver for outsourcing is to deliver cost savings • Procurement not strategic mindset • 70% of organisations who have outsourced operations believe they could be achieving more from their outsourcing arrangements* 4.3% 50.7% 44.9% 7.5% 55.2% 37.3% * Source – Strategic Outsourcing for Success, Deloitte 2008

Use of systems • The use of specialist 3rd party systems are prevalent across the industry • 85% of respondents use a third party fund accounting platform • 67% of respondents intend to make significant system improvements in the next year

Contents • About the Survey • The Credit Crunch • Future Marketplace • Challenges and Issues • Final Thoughts

Final Thoughts • The market place is different to 12 months ago. The impact of the credit crunch was far more severe than predicted, and the future for the fund administration industry is uncertain. All European jurisdictions are feeling the pinch and short term sentiment is negative. • In recent years the alternative asset classes have grown faster than traditional asset classes – a situation that is predicted to reverse. Administrators who have invested in people and systems to support growth in the alternative space may need to re-assess. • Falling revenues have led to significant pressure on margins which in turn is requiring a significant focus on cost. Headcount is under pressure, and a number of redundancy programs have been announced. This is likely to increase in the short term. • Falling revenue does not always lead to a falling workload, and the reduced workforce will need to maintain the same service levels as previously. This will require administrators to look at process improvements to increase operating efficiency. • A number of operational projects have been deferred in recent years owing to client demands. The downturn may allow administrators to undertake some of the improvements that are necessary, and be better positioned when the upturn comes. • But……..on a 2 year horizon administrators are positive about their prospects, which suggests the above challenges can be overcome.

Fund Administration in Europe.Managing in a DownturnDerek Moriarty, Partner, Financial Services4th December 2008

Implications Changing Environment Economic and Regulatory Environment Products and Asset Class • Large flow of Funds into conservative asset classes • Reducing popularity of Alternative Asset Classes • Need to align Service Capability with Client Demands • Pressure on Fees • Pressure on Margins • Regulation • Recession • Continued Market Volatility • Falling Assets – 30% Redemptions? • Future of Regulation? • US Election • UK Review of Offshore Centres • Increase in Operating Costs • Highly Competitive Market across Europe • Cash is King • Reduced Appetite for Risk? • Use of Leverage • Complex Products • Liquidity Management • Gates and Sidepockets • Fund of Funds • PE and Property NEED TO ADAPT Recap: The Future Marketplace?

Need to balance strategic with tactical initiatives The Nature of Enterprise Effectiveness Tactical Improvements Operational Efficiency Strategic Redefinition • Platform rationalisation • Business Scope (market / customer choices) Streamlining the Cost Base • Off shoring Creating a low cost Operating Model • Reengineering • Location rationalisation Increasing benefits & sustainability • Leverage lower cost locations • Remove bespoke services (unless cost to serve can be justified) Quick Wins • Simplify standard processes • Reduce error rates (six sigma “Lean” techniques) • Process improvements, ( e.g. activity reduction) • Strategic sourcing (e.g. outsource IT development) • Reduce headcount and increase span of control • Policies & procedures (e.g. corporate expense reduction) • Known inefficiencies / low value tasks • Recruitment freeze • External spend review Increasing implementation time & costs Key Success Factors • Establish the cost base • Apply rigorous process • Balance timing and scale of benefits • Ensure senior management commitment • Engage the business • Generate savings initiatives (use a variety of techniques; identify more saving than the target)

Outline Approach Phase 1: Establish Baseline and Size Opportunities Phase 2: Define Improvement Recommendations and Develop High-level Action Plans Phase 3: Implement Action Plans High-level Action Plans for Key Areas Recommendations for Prioritised Opportunities Opportunity Assessment Performance Mgmt, Metrics & Tools Baseline Cost Model Quantified Savings and Costs Confirmed Change Management Plan Service Delivery Model Analysis Opportunity Gating Process Immediate Improvement Opportunities Project Launch Workshop Prioritised Opportunities Executive Dashboard Savings Tracker Detailed Implementation Action Plans Benchmarking Phase 1 Phase 2 Phase 3 - Opportunity assessment - Opportunity prioritisation - Launch quick win opportunities (“no regrets”) - Anticipated benefits and costs to achieve - Resource requirements - Change management and stakeholder alignment plans - Detailed action plans for implementation - Baseline observations - Service delivery model observations - Benchmarking (internal / external) - Immediate cost savings opportunities - Customer retention & pipeline management Key Output

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Fund Administration in Europe .