Home / Link shines a light for all on the value in admin

(pictured: John McMurtrie)

The Link Group maiden full year result as a listed company did not disappoint. Perhaps the biggest surprise was how well Link has integrated the formerly troubled SuperPartners with its own super admin system. Administration, once the poor cousin to fund managers and banks in the service provider space, has a bright new future.

With other recent positive news from much-smaller listed admin companies, such as MainstreamBPO, OneVue and HUB24, the Link result has shone a light on the potential of modern technology to re-apportion the rewards to various parts of the industry’s value chain.

In fact, with the continued rise of low-cost investment strategies – from plain vanilla passive through to factor investing and goals-based products – and the subsequent pressure on fund manager fees, the back and middle office providers seem to be at last staking a claim for their fair share in the industry’s growth.

In a nutshell, Link beat prospectus forecasts in all its important metrics. The revenue of $776 million for the year to June was 3 per cent above forecast, pro-forma EBITDA of $191 million was 5 per cent above, net profit after-tax and before one-offs of $103 million was 8 per cent above, and even the 8c partially franked dividend was above forecast.

Much of this came about because of the apparently smooth integration of SuperPartners with Link’s AAS super admin business. John McMurtrie, Link’s managing director, said the group had managed to migrate its new big clients between three and six months ahead of schedule.

This was more than a systems merger though. SuperPartners had more than 2,000 employees including a big IT department of its own. The result shows Link as having 2,400 employees in its admin business now, although the company says the IT people were absorbed within Link’s Digital Services division so the numbers are not strictly comparable. McMurtrie says Link tried to rely on natural attrition where possible for the consolidation.

The share market didn’t seem to readily understand the result. Link shares, trading at $8.40 the day before the announcement, initially jumped 40c, then fell back 40c, climbed back again only to fall again. They ended last Friday at $8.28.

In contrast, small-cap full-service funds management admin company MainstreamBPO, announced last week that it would expand in North America through the purchase of a New York-based hedge fund administrator for cash and shares. Its shares jumped from 62c to 75c on the news. Normally an acquirer’s stock gets discounted by the market for a while.

For Link, super admin makes up 57 per cent of group revenue. The final and largest piece in the SuperPartners integration program is underway and the company has made it known that it is a potential buyer of the NSW-Government-owned Pillar Administration.

McMurtrie said: “AustralianSuper, as the largest of the five shareholder funds, was always going to be last [to migrate systems], so they were concerned that any delays with the others would delay them. We signed the contract virtually on Christmas eve 2014… We rationalised the head office functions by June 30, 2015 and migrated MTAA in October, HESTA in December, HOSTPLUS in April [2016] and Cbus in May. We are probably three-to-six months ahead of schedule… We’ll complete AustralianSuper by the end of the year.”

The proposed Pillar purchase will be subject to a review by ACCC, to which Link – and no doubt other industry participants – will make submissions. The interesting thing about Link is that while it has about 10 million super admin accounts in its system, this is only 34 per cent of the total super fund admin market as measured by number of members. That is because there are about 30 million accounts for the 11-12 million Australian workers. By funds under management, Link accounts for only 16 per cent of the super market.

The biggest share of admin, by number of members, is taken up with in-house systems. These include the big retail funds and some of the largest government-controlled funds. Of the 10 largest funds in Australia, Link administers only two – AustralianSuper and REST.

Pillar, which administers the two big NSW schemes First State Super and State Super, accounts for 4 per cent of the market by number of members. Mercer accounts for 2 per cent.

McMurtrie points out that the admin business is not “one size fits all”. Each fund has different requirements. Two of Link’s clients, HOSTPLUS and ClubPlus, have internal contact centres, for instance.

A slight glitch in the Pillar sale process recently arose, however, which is the proposed sale of its systems partner Financial Synergy. Financial Synergy has been offered as a trade sale for more than $100 million and market sources suggest there are at least four potential buyers which have expressed interest – all other systems companies. While in theory a Financial Synergy change of ownership should not hurt Pillar’s prospects, the additional uncertainty is never good for due diligence.

With the results out of the way, McMurtrie and other senior Link executives embarked on an investor and broker roadshow last week, ahead of the end to the escrow period for the company’s two big private equity shareholders, PEP (Pacific Equity Partners) and ICG (Intermediate Capital Group), which account for about 29 per cent of the stock.

That 29 per cent, plus another 7 per cent held by senior management, is able to be sold after September 7. McMurtrie says he believes the management stake – a chunk of which is his – is not for sale and that even if the private equity holders sell theirs the market should be able to absorb this. The sale of the first 15 per cent of escrowed stock in April didn’t impact the sale price, which was about $1.50 lower back then, he says.

Meanwhile, listed administrator and platform provider OneVue, which has the largest independent unity registry business in Australia, announced last week that Steve Knight, the former chief executive of NSW Treasury Corporation – which oversees the combined $80 billion of investments of three NSW funds (State Super, Workcover and T-Corp) – will join its board.

– Greg Bright