Deal focus: Corporate services consolidation play

TMF, a Doughty Hanson portfolio company since 2008, is the largest, having absorbed the likes of Equity Trust and KCS. It is followed by Intertrust, which was bought by The Blackstone Group in 2012 and has subsequently bolted on ATC Group, while fourth-placed Citco is part-owned by General Atlantic.

Third spot is occupied by Vistra Group. The company took on its current identity in 2011 when IK Investment Partners acquired the Offshore Incorporations group of companies from The Carlyle Group in 2011. The business was combined with existing portfolio company Vistra Group. There have been a further 20 acquisitions in the last three years, and this will continue under new owner Baring Private Equity Asia. IK ran a dual track process and at one point Vistra seemed headed for a Hong Kong IPO at a mooted valuation of $900 million until Baring stepped in to secure its largest-ever buyout.

IK claims that Vistra generates annual sales of EUR244.4 million ($273 million) through a network of 46 offices across 35 jurisdictions, but CEO Martin Crawford envisions an even bigger business. "The increasing complexity of the regulatory environment is requiring industry players to make substantial investment in compliance and IT systems. These costs are not easily passed on to clients and so it favors larger global players that can spread such costs across a broader base," he explains.

At the same time, clients are increasingly gravitating towards service providers with large global footprints, whether it is a corporation in need of a one-stop shop solution or a Chinese high net worth individual that wants to set up a Jersey trust to hold London real estate assets.

According to market research commissioned by Vistra, the Big Four service providers will see their combined market share rise from 25% to around 50% over the next 5-8 years. The accounting industry survived as the Big Eight for much of the 20th century before a spate of mergers from the 1980s onwards led to the current Big Four. The process by which they extended their geographic reach and developed specializations in certain verticals is expected to be mirrored by the corporate service providers.

With geographic diversity also comes lower risk - these companies are not reliant on just a couple of jurisdictions, so they are less likely to be hit by sudden changes in regulation - and therefore higher valuations.

"Private equity firms have played a big part in the consolidation of the industry, taking advantage of the valuation differential and the excellent cash-flow profile of corporate service firms to access debt markets," Crawford adds.

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