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October 12, 2016  

Compliance Pros: Expect More M&A Activity

Increasing demand for regulatory-consulting services by hedge fund operators appears to be fueling mergers and acquisitions in the compliance field.

Since last year, asset-valuation specialist Duff & Phelps has established a compliance-consulting practice via its acquisition of Kinetic Partners and subsequent purchase of CounselWorks. Following the latter deal, former CounselWorks executive Matthew Okolita bought compliance consultant Sansome Strategies and rebranded it as Greyline Solutions (see Compliance Consultants listing on Pages 6-7).

“The industry is really in its infancy,” said Okolita, who is based in San Francisco. “Those that aren’t in the space want to get in it because they see it as an industry with a lot of room to grow. There is not nearly as much competition when you compare it to accounting and fund administration.”

Recent deals have valued acquisition targets at multiples of 4-9 times net operating income. “I’m sure firms will continue to acquire firms to get access to their client base or personnel or regions,” Okolita added.

Demand for small but established compliance shops likely will come from larger consulting firms with backing from private equity funds, industry professionals said. Among the companies seen as possible suitors are ACA Compliance, Cordium and Duff & Phelps.

“The bigger shops have been buying the smaller firms for a few years now,” said Gregory Florio, managing partner at compliance shop Orical. “But it’s very challenging for a bigger firm to continue to provide the responsive, personalized service that effective compliance consulting requires. I think this is a very interesting development, and one that we have been following very closely.”

The potential for increased M&A activity reflects the emergence of compliance consultants as a separate category among hedge fund service providers — which in turn reflects heightened regulatory oversight of hedge fund managers since the financial crisis.

“I think there is a bit of a trend going on,” said Chip Arvantides, director of business development at FrontLine Compliance in Washington. “I think it’s a recognition that compliance consulting is a necessary component — like hiring an accountant or a law firm.”

But Ben Weiner, director of sales and marketing at Cordium, questioned whether a few deals make a trend. He said Duff & Phelps clearly saw an opportunity to gain a foothold in the compliance-consulting field, but doesn’t expect to see many more such deals.