The shrinking pool of firms offering transition management services expect a sizable increase in business volume this year because of the financial crisis, which has forced competitors out of the business.
"We have found ourselves in a perfect storm," said Mark Keleher, the chief executive of Mellon Transition Management, a San Francisco unit of Bank of New York Mellon Corp. "There is increased demand and fewer competitors."
Transition managers are used when institutional investors restructure their investment portfolios. While they switch from one investment manager to another, a transition manager manages the legacy assets and deals with operational issues until a new manager is in place.
Keleher said Mellon Transition Management has increased its market share considerably in the past year as large competitors such as Lehman Brothers, Bear Stearns, Royal Bank of Scotland and Citigroup have dropped out oft the business. He said Mellon's volume has increased 40% in each of the past three years. In 2008 it transitioned assets valued at more than $165 billion.
"Over the last year and a half, half of the top providers of transition management exited this business," Keleher said in an interview Wednesday. "People are leaving to focus on their core businesses. The financial services industry is under tremendous stress, and financial companies are trying to identify the businesses that they need to focus on."
Analysts said that, though there are fewer players competing in it, the business itself has not shrunk. That means companies like Bank of New York Mellon, Barclays Global Investor, and State Street Corp. will be able to generate a good chunk of revenue from transition management. "As a lot of companies retract, there are opportunities in this market for providers that are committed to this business," said Burton Greenwald, an analyst with BJ Greenwald & Associates in Philadelphia.
Keleher said the credit crisis and market volatility are having a profound impact on the business. "As a result of these factors, transition managers are benefiting," he said. "We are continuing to add market share and our volumes have compounded."
According to Greenwich Associates, a research company in Stamford, Conn., State Street is the largest provider of transition management services, with a 27% market share. Mellon Transition Management is the second-largest, with a 12% share. Ross McLellan, the head of State Street's transition management business, said that his unit is developing additional business because "there is a continued need for transition services even when there are fewer companies providing these services."
"There has been an exodus of providers in most regions globally for a lot of reasons," he said in an interview Wednesday. "The credit crisis contributed to that, and a lot of firms went back to their core businesses and some smaller transition managers shuttered. This is all to the advantage of companies like State Street that have been in this business for a while and remain committed to it."
Keleher said a "logjam" of management changes will begin to clear in the next two months.
"We could see significant gains in volume in the next few years," he said. "There is just a huge, pent-up demand. A lot of institutional investors stopped moving between managers during the financial crisis, because it was just more cost-effective to remain with the same managers. But a lot of managers have significantly underperformed in the last year, and institutional investors are going to begin restructuring portfolios and terminating managers."
In the United States, where it hired four executives last summer, Mellon Transition Management has offices in San Francisco, Philadelphia and Boston. Its international offices are in Sydney, London and Toronto. On Monday it announced it hired a seven-member team from Citigroup Transition Management to be based in the London office, bringing the head count there to 10.
In the short term Mellon Transition Management plans to expand its Sydney office. For the longer term, "we are certainly interested in Asia," Keleher said.
Last year Mellon Transition Management's business in Europe and Australia grew at almost three times the rate of its business in the United States and Canada, he said.
State Street's transition management business has offices in Boston, San Francisco, Montreal, Toronto, London, Hong Kong, Qatar, Sydney, Tokyo and Singapore. It began offering its services in Europe and Asia more than 10 years ago. "We have established large teams in both Asia and Europe and we are offering a full suite of services in both regions," McLellan said. "We have invested significant resources overseas. Right now, 40% of our team is deployed globally."
Keleher said he expects Mellon Transition Management to develop more business globally and domestically as more broker-dealers leave the transition management business. He expects to hire five or six more people in the next six months in the United States in portfolio management and operations, he said.
State Street has hired senior-level executives in London and Hong Kong in the past six months, and McLellan said he thinks it will continue its recruiting.
"We have already seen an uptick in business," he said. "There is a lot of demand for our services. I expect that institutional managers will look to rebalance their portfolios and there will be manager turnover to deal with."