Slowly but surely, investment services powerhouse State Street, the biggest of its kind in Luxembourg, is undergoing a transformation. The upcoming integration of Brown Brothers Harriman, data management, ESG requirements, digital asset management and the rollout of its upgraded Alpha business platform are on top of mind for country head Ricardo Lamanna. “We create an environment where we progressively shift from being an operational organisation in Luxembourg to being a client-facing organisation.”
Lamanna, in an interview with InvestmentOfficer.lu, spoke enthusiastically of the business climate for financial services in Luxembourg. In particular, he noted solid growth in private equity in the post-Brexit era. Private markets, he said, are experiencing a significant push, and State Street is following clients in this direction.
“Luxembourg is very important for State Street because Luxembourg itself is an ecosystem where the various participants - the asset managers, the providers, the management companies, the authorities, regulators - are supporting, in a very mature way, the development of the market,” said Lamanna, who joined State Street in 2010 from Italian bank Intesa Sanpaolo.
Luxembourg market share of about 20%
State Street, whose services range from depository banking to transfer agency and asset services with global assets under custody of some 41.7 trillion dollars, employs about 900 people in Luxembourg, on a total of some 39.000 staff worldwide.
In Luxembourg, the firm holds about 1.500 billion euro in assets under management for clients across Europe, the Asia-Pacific region and Latin America. That is the equivalent of 20 percent of all fund assets with a legal home in Luxembourg. Its 3.5 billion dollar acquisition of BBH - announced in September - will add another 400 to its Luxembourg staff once regulators have given their green light.
“Luxembourg is key to the strategy of the bank,” Lamanna said. “It is the place where asset managers and alternative asset managers have developed their business for a very long time. Asset managers for the last 30 years have developed fantastic trade marks with their Ucits funds, recognised all over the world.”
“More recently we have seen the strong development of the private markets on the back of Brexit, and the shift that many US and also European giants have had from the UK to Europe, where Luxembourg is proving to be more effective than other countries when it comes to supporting the development of these private markets.”
Luxembourg ecosystem ‘effectively nurtures culture’
“So everybody has an interest to continue to develop the market. And this ecosystem effectively nurtures this culture and these ideas and supports it. I think that it is managed like a corporation, in addition to being a state.”
For State Street, it is fundamental to be in Luxembourg, Lamanna said. “We need to continue to consolidate our position. We are obviously looking at hosting some of the most complicated investment patterns of our clients. We are supporting the development of the private markets.“
“At the same time we create an environment where we progressively shift from being an operational organisation in Luxembourg to being a client-facing organisation. So we are the door of our clients to a wider organisation, with a global footprint, with scale, and the ability to support a wide range of products.”
New products are emerging in ESG, said Lamanna, as challenges stemming from regulatory requirements need to be managed. These solutions are being embedded into State Street’s Alpha platform, which enables clients to integrate State Street’s services into their systems, “ingrained in the entire investment cycle, front to back,” he said.
‘ESG as a cultural shift’
“The fast-evolving ESG environment challenges many of our clients,” he said. “You know, clients obviously have to host ESG as a cultural shift. It has to be basically spread out across all their activities, which is a very long process. It requires significant change in system application infrastructure, to embrace it across all the various aspects of the investment cycle.”
Considering client needs elsewhere, State Street has decided to become a custodian of digital assets, a development in which Luxembourg is seeking to carve out a new niche. Particularly loan markets, Lamanna said, stand to benefit from this development, while State Street is also supporting a few projects to establish funds investing in digital assets.
“A lot of discussion is going on about projects that we have yet to see materialise,” he said. “So we still need to continue work on these, and support our prospects and our clients in the development of these assets, help them understand how they should integrate an asset like cryptocurrency. We are working with third party custodians to understand how to best satisfy the needs that we have in terms of depository bank and funding restrictions.”
Digitised loans ‘more fluid and more liquid’
In particular for some very complicated products, the digitalisation of assets can become very complicated, although State Street has high hopes for digitised debt markets.
“The thing about loan markets, trading loans across different trade institutions, is that it is very slow as far as the asset is physical,” Lamanna said. “As the assets become digital, you gain significant leverage, and then the market becomes more fluid and more liquid. This then generates a trigger for growth in the digital asset space. It is just a matter of time. And Luxembourg is really pushing hard to get ahead of the competition.”
On top of ESG and digitalisation, State Street needs to stay abreast of the latest requirements in terms of disclosure, reporting and analysis. “And you need to balance between the speed shifts that we serve effectively through our Alpha platform, and the more short-term type of requirements still in a very high quality and reliable way like we do with the other applications,” said Lamanna. “Clients have woken up and are looking at us for implementation.”
State Street eyes green light for BBH integration by Q3
Regulatory approvals are in process for State Street’s 3.5 billion-dollar cash acquisition of BBH, the biggest-ever merger in the global asset services sector. The transaction is subject to regulatory approval, which turns out to be more complicated than initially expected. State Street hopes to receive the green light on regulatory approval in Q3 and to close soon thereafter.
Luxembourg’s banking community is cautious when it comes to commenting on the impact of the merger. “This will have repercussions in any country where these two players have operations. At some point, there will be a merger of activities, which will certainly also have repercussions in Luxembourg,” Yves Maas, speaking as CEO of banking association ABBL, said last month. “Luxembourg is not the driving force behind this consolidation, but is dependent on what is happening at international level.”
Japan and Latin America
In geographic terms, the integration of BBH gives State Street a better presence in Japan and Latin America.
With BBH, State Street seeks to accelerate the execution of its strategy of reinforcing its leadership in financial services by expanding its range of operations to all three areas of its financial services value chain: front office services, middle office, as well as back office, through its Alpha platform. The takeover of BBH is State Street’s third in a few years and follows the acquisitions of Mercatus Front Office last summer and Charles River Development in 2018.
“We think we can give our clients an open platform, with a professional and sizeable way of managing the data which are surrounding the investment cycle, and then link this data platform to the different application services functions that they want to use,” said Lamanna.
White-gloves-touch
“Obviously, we would prefer the client to use our front office, middle office and back office services. But if for whatever reason the client is chosen as a different front office application, we just simply integrate there, and we create for the client a smooth environment.”
State Street offers these integrated services to a global market. “The capabilities that we give our clients is much wider than any other provider, because obviously we have the back office side that they don’t have. And the flexibility in the openness of our architecture is the widest. So we are the leading provider, and we have a financial strength, which is somehow beautiful.”
Culturally speaking, Lamanna said State Street is confident BBH is a match. “Their culture is very near to ours, but implemented a little bit in a different way. We like the way in which they serve their clients, what is sometimes referred to as white-gloves-touch.”