For super funds and their advisers

How Mainstream proved its true value on a world stage

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To most market observers, Mainstream Group shareholders struck the jackpot with the takeover battle for the company. While happy with the result, it was not quite like that for the three founders.

Judged on a world stage, they believe, the final $415 million bid represents about fair value. Sure, they recommended a lower bid worth $180 million early in the piece, but the founders did a deal which cost them, personally, about $16 million, to allow a search for a higher one.

This deal was to insert a “go shop” option, which gave Vistra Group, the opening bidder, the right to 75 per cent of the difference between their bid of $1.20 a share in March and the successful Apex Group bid of $2.80 in June. Importantly, it gave the founders five weeks to get a higher bid. The share piece was 90c prior to Vistra’s offer.

In that time the board received indicative offers from three global players; the two which offered cash with no debt funding requirements – SS&C and Apex – considered in the best interests of shareholders.

Martin Smith

The founders are Byram Johnston and Martin Smith, who worked in the business from the outset, and non-executive director John Plummer. [Photo above is of Smith (l) and Johnston, holding grandson Sebastian, at the ‘ringing of the bell’ on listing.]

Plummer provided initial funding through a convertible note and joined the board prior to the company’s IPO in 2015. Before this year’s bidding war, the three spoke for just under 40 per cent of the company.

Smith will remain with the company at least until May 2023, to which he is contracted, working on the integration of the two businesses. Johnston, who stepped back as chief executive in 2017 to a non-executive, but active, chairman’s role, will be spending most of his time on his farm near Oberon, west of Sydney.

Peter Hughes

According to Peter Hughes, the Apex founder and chief executive, reporting lines and structure of the business have not yet been finalised. However, he said in response to written questions from this masthead: “Consistency of service for clients is an important part of the acquisition and we intend to achieve this through the retention Mainstream’s management team and employees. Mainstream’s staff will join Apex and will further strengthen our existing talent in the region.”

Technically, the takeover is not yet finalised. The indicative schedule to completion under the scheme of arrangement is a first court hearing in the week starting August 2, a scheme meeting in the week of September 20, followed by a second court hearing, subject to regulatory approvals, and ‘effective date’ in the week of September 27. The ‘record date’ is scheduled for the following week and final implementation date the week after in the second week of October.

Hughes said from his base in Bermuda that the company would implement additional incentive and financial packages for Mainstream’s key staff and provide attractive renumeration and benefits on an ongoing basis.

He said: “We share Mainstream’s philosophy that a company’s greatest asset is its people. As Apex expands and evolves it will mean additional opportunities for Mainstream’s employees to gain new experiences and take advantage of new development opportunities and work in different Apex locations as part of a truly global business.”

Although only three years older than Mainstream, having been started by Hughes in September 2003, Apex has been well capitalised with the help of private equity since 2011. Genstar, through various funds, is the largest shareholder, and a newcomer to the register, which is well known and highly regarded in funds management circles, is TA Associates. Hughes speaks for just under 20 per cent.

The firm currently has more than 4,500 employees in more than 149 locations, including 60 in its Sydney and Melbourne offices, compared with Mainstream’s 330 in eight offices. It is more diversified in its offering, too, and has invested more heavily in technology through a mix of proprietary systems development, joint ventures and partnerships.

Like Johnston and Smith at Mainstream, Hughes’ earlier career included a stint at a big management consulting and auditing firm, KPMG. He also worked at a fund-of-funds group as CFO and an investment committee member.

For existing Mainstream clients, Hughes can see some instant benefits. He said they would benefit from Apex’s approach to technology which gave clients a comprehensive suite of solutions. Of particular note was Apex’s private markets technology platforms. These included: Advent Geneva, Apex Connect, Allvue, E-Front, ESG Ratings & Advisory, Fund Recs, Investor Portal, Investran, ManTra, Paxus, Yardi and others.

Mainstream’s US business, run by Jay Maher, who formerly worked at SS&C, includes a private equity and venture capital administration business. Prior to joining Mainstream in 2015, Maher had been a founding partner of Northpoint Partnership Services, which concentrated on the PE and VC markets. It was acquired by SS&C in 2007 and Maher became global head of private equity. Over the next eight years it grew from handling admin for US$3 billion in private markets to about US$150 billion.

Hughes said: “In addition to its leadership position in Australia, Mainstream brings a highly regarded, fast-growing private equity and venture capital administration business in the USA and meaningful European business to Apex. This will further strengthen Apex’s growing market position in the Americas region, where it now has 14 offices and over 500 employees, who will soon be joined by an additional 75 employees upon final close of the acquisition of Brazilian fund administrator Banco Modal.

“In addition, Mainstream has built a strong business and experienced teams in Hong Kong and Singapore which will bring significant benefits to our existing operations in these hubs. Geographic complementarity is a key strategic driver of this acquisition…”

Apex operates in all of Mainstream’s locations: Australia, the US, Singapore, Hong Kong, Ireland, Malta, Isle of Man and Cayman Islands. Its Australian operation focuses primarily on specialist financial solutions via investor services, private equity, hedge fund and corporate services teams.

Hughes said: “Mainstream’s Australian custody offering adds a significant new string to our bow in Australia and will benefit our current clients hugely.”

As with Link Group, the big diversified super fund administrator, Mainstream’s custody offering does not include core equity custody, which requires a sub-custodian bank. Those two admin companies in Australia, as well as their smaller competitors, tend to provide pieces of master custody where the six bank-owned master custodians are reluctant to do so, such as admin and accounting for smaller managers and specialists.

The collaborative nature of such a relationship is particularly a hallmark of Mainstream’s business style and, according to Johnston and Smith, one of the reasons for its success.

Mainstream’s history

Both Johnston and Smith received their early education in business process outsourcing as management consultants in the late 1990s at Arthur Andersen Consulting. Arthur Andersen Consulting was the advisory arm of the global auditing firm which split with the accounting and audit arm in 2000 and formed Accenture, now a listed entity.

The two main elements of the education, Johnston says, are:

  • Consultants are always looking to solve problems for clients, which is the culture they wanted to develop at Mainstream. “Martin and I would talk to prospects as consultants would do. We’d look to save them time and money from doing unnecessary stuff. Often times, we’d get the business without a tender.”
  • With outsourcing, it is a lot easier to operate in an industry where clients already appreciate the advantages of a good outsource partnership, such as financial services. “We didn’t want to have to encourage people to outsource as well,” Johnston says.

In 2003, Johnston and Smith left management consulting to start in business together for the first time, with Financial BPO, which was majority owned by the Powerlan systems group, which operated in funds management through its subsidiary Garradin. After Computershare bought this, the two decided to move on and build an administration and services company themselves.

“We saw that there was still a new and emerging market with managed funds,” Johnston says. “We noticed that the only ones really doing outsourcing were the custodians and they were knocking back the small and start-up managers.”

On such start-up, also launched in 2006, was Magellan Financial Group, where they arranged an introduction to founders Hamish Douglass and Chris Mackay, who were both from a banking background. Douglass was co-head of global banking for Deutsche Bank in Australia and New Zealand and McKay was chair of UBS Australasia, after previously being its chief executive. “They wanted people to work with them,” Johnston says.

The first service was retail unit registry, “where no custodians wanted to go”, Johnston says. The main competitor in that space then and for much of the subsequent 15 years was OneVue, launched in 2004 and run by Connie Mckeage, as chief executive, from 2006, through a listing in 2014, until last year when it was purchased by Iress.

Jenny Elhassan

Jenny Elhassan’s recollections of Mainstream’s evolution provide an interesting perspective. She has the distinction of being its first employee, in 2006, who was enticed away from a job at Perpetual’s corporate trust business after being contacted by a recruitment agency. She hadn’t been thinking of moving on but, with what was probably a mix of flattery and curiosity, she made an appointment to see Martin and Byram at the office in Sydney.

The company headquarters still resides in that office, in a nondescript building at the Circular Quay end of Pitt Street. The office occupied about half a floor, with another two floors subsequently leased.

At first, her job was to start the unit registry function, for which she recruited and built her team. Her job expanded to head up onboardings and the project management office.

“It’s incredible to think that 15 years ago there were just seven of us and now it’s a global fund administration business,” she says.

She had been a team leader in unit registry at Perpetual, but she had a degree behind her that could have taken her in various directions; a Bachelor of Science with a major in mathematics.

“I always was a direct report to Martin, so I always had good access,” she says. “Mainstream gave me the opportunity to be creative. They showed a lot of trust and faith in me. I do work hard, and they appreciate it.”

She is one of the many staff who became shareholders after the IPO and had the good sense not to be tempted to sell when the share price started to move. When the impact of covid-19 eventually subsides, she is looking to put her gains to good use in the property market.

Byram calls them “estate events”, which the company created for Jenny and others through the Apex takeover. They can have a similar effect to that of receiving an inheritance.

At the outset, Johnston and Smith had readily agreed their roles. Smith would run the operations and Johnston, 20 years his senior and a more natural salesperson, would be chief executive. In practice, the roles blurred, although Johnston leaned towards strategy and Smith towards execution.

Magellan, arguably Australia’s most successful funds management company of the past two decades, was clearly a defining moment for Mainstream. Another was the decision, largely Smith’s, to expand into Asia the hard way – through organic growth.

After looking for an established business to buy, they decided to build their own. Smith established the Singapore office and fund admin business in 2012, followed by the Hong Kong office the following year. The Hong Kong office was bolstered in 2014 with the acquisition of a middle-office provider, HFO.

Asia and the prospects for other jurisdictions, especially the US and Europe, gave them the dream of accessing the whole world to sell to the market at the IPO stage in 2015. It also gave them a first-hand look at the realities of that market through their meetings with fund managers from the front, rather than back, office staff; analysts and portfolio managers rather than operations, systems and efficiency specialists.

Johnston says: “We had a classic administration business. It was not really a technology business and fund managers were not as interested. OneVue and Link had both IPO’d before us. We had a good solid business which wasn’t getting sufficient airtime.”

After listing in September, 2015, having raised $8.7 million from new shareholders constituting 26 per cent of the stock, the Mainstream founders “went shopping”, buying businesses in the US, Cayman Islands, Ireland, Malta and Isle of Man.

“When I was CEO, the worst part of my job was meeting with institutional shareholders,” Johnston says. “I’m personally down on the Australian market. I think [with the Apex takeover] the shareholders are getting what they would have if we’d listed on the Nasdaq. We couldn’t, of course, because we were too small. But these numbers blew the minds of Australian fund managers. In the US, good assets like ours are trading at 4-5 times revenue. As it is now [at $2.80 a share], we’re probably about 5-6 times next year’s revenue.”

He said that the Australian fund managers tended to look at three-four isolated factors and not at the longer-term prospects for the company. And they did not seem particularly interested in the fact that the company paid dividends from day one.

“When we were trading at 90c we thought that we should have been trading at $1.20. When the bid came at $1.20 we thought it was worth more so we got the ‘go shop’ clause inserted.”

Smith agrees. He said: “I think it’s a shame the Australian public market didn’t believe our story. I spent a lot of time trying to tell them. We showed them all the M&A activity in the space globally.”

Alicia Gill

In 2014, prior to the IPO, Mainstream BPO, as the company was then called, recruited its first experienced marketing and communications person, Alicia Gill. She had been a marketing manager at Macquarie Group and then van Eyk Research before spending four years working in Japan for family reasons. Her first task was to “spruce up the website” because of the impending listing. She was also involved in dropping the ‘BPO’ from the group and several other business names for global re-branding.

“People warned me when I joined that it was ‘only just the start of the journey’,” she says. “Where we differentiated ourselves started with Martin and Byram being very involved in the day-to-day business and the culture, which reflected their management consulting background. Other administration companies were more like sausage factories.”

She says that Mainstream was flexible with its operations, in that it was willing to take on different clients requiring different solutions. “It was a bit like saying ‘yes’ and then wondering how we were going to make it work. That model becomes more challenging as scale goes up,” she says.

Her own job became more challenging quite quickly when she was asked to take on the company secretary role as well in 2017. The CFO brought in to take the company public was also company secretary, but he became COO after listing. So, for the time being at least, she has the unusual title of ‘head of marketing and company secretary’.

“A lot of people who have been here since the early days started leading small teams and have been promoted to lead large teams,” Gill says. “There have also been plenty of opportunities to move around. People could stick with Mainstream and develop their careers.”

Employees have been encouraged to connect with their peers in the respective organisations and the company is holding town halls for all staff. After the court process, shareholder votes and regulatory formalities, “it’s all about clients and staff’, Smith says.

The future with Apex

Smith predicts that there will be about three-six months of “the status quo”, followed by up to 18 months of integration. There has never been a question raised about staffing levels, he says, except that Mainstream needs more people right now to cope with its growth.

Thanks in part to the final onboarding of some of the Pendal funds won last year, the company increased its assets under management by $40 billion in the last quarter, taking the total to $270 billion. In 2012, less than 10 years ago, the funds under management totalled $10 billion, Smith says.

He is looking forward to the opportunity to increase the rate of automation in Mainstream’s processes following the takeover. “I really want to take us from about 80 per cent to as close to 100 per cent as it’s possible to achieve,” he says. “It’s not for the synergies; it’s for the client experience. Less chances for error leads to greater client satisfaction.”

With its client Magellan, Mainstream led the way in opening up the Australian listed market to all fund managers as a new form of distribution. Magellan, with Mainstream, was a pioneer in the active ETF market and the first manager, with Mainstream, to have an unlisted fund quoted on the ASX – for subsidiary Airlie Funds Management.

At the launch of the Airlie quoted managed fund with an industry breakfast in February last year, Mainstream’s Smith described it as “an Uber moment” for the industry. He could have added that it was an Uber moment for Mainstream too. The company spent about $1.6 million on the infrastructure to administer quoted managed funds and delivered, with the Airlie fund, 7,800 new investors.

“It’s a sad state that our managed funds sector still requires an investor to fill in a 24-page form to make an investment,” Smith says. “The regulations are not making [the form] any shorter. They’re making it longer. Some of our processes are from the 1980s.”

The one major area where Mainstream did not have as much success as it would have liked is superannuation. Johnston says the super admin sector continued to grow and both Mainstream and OneVue decided to buy into that growth. Looking back, he said, they probably would not have done so.

“People said [in super] that you don’t have to be big, but over time you tend to get squeezed out. We were doing some of the more specialised [super] funds that disappeared over time and our service was not needed,” he said.

“In super admin you only deal with members when they are leaving or on death and/or disability. They are very different clients than funds management investors and we learned they’re very different businesses.” He believes super admin will go through “another massive change”, with the contraction in the number of very big funds.

Link Group, the biggest in the market through its major industry fund clients including the country’s two largest by member numbers, AustralianSuper and Rest, has often said that its main competition comes from insourced admin systems, particularly among public sector funds.

And Martin Smith said of super: “My experience is that I can sell $10 worth of managed funds work in the time it takes me to sell $1 of superannuation work.”

But Apex’s Peter Hughes may have other ideas. He said in response to a question on the subject: “The superannuation market is certainly of interest as a potential area for growth, and one which is unique to the Australian market. We are looking at this market closely and would like to develop a strong product offering in this area.”

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