Fund administration, like auditing, is not the sinecure we thought. The UK’s Financial Conduct Authority plans to land Link Fund Solutions with a bill of up to £306mn for its part in the Woodford scandal. Dye & Durham of Canada may therefore walk away from a takeover giving Link’s Australian-listed parent an enterprise value of some A$3.2bn ($2.2bn).
Link Administration shares fell 20 per cent on Tuesday. Investors have evidently been as complacent about regulatory risk as fund paper shufflers themselves.
LFS is one of a tight group of “authorised corporate directors” in the UK. They are supposed to monitor investment managers on behalf of fund investors. As with auditing, there is a conflict of interest: the scrutineer is beholden for its appointment and its fees to the asset manager.
For Link, this was Neil Woodford, a star stock picker who lost his mojo. LFS was supposed to monitor the liquidity his flagship Equity Income Fund needed to cover sales by retail investors. Woodford funds collapsed spectacularly in 2019. Investors lost out partly because Woodford favoured illiquid investments.
Dye & Durham said in scheme documents that it could walk away from the Link Admin acquisition if the FCA imposed tough conditions. Until Tuesday, Aussie investors underestimated the willingness of the UK watchdog to do so.
If the Canadian acquirer still wants to make the takeover, it should ask for a discount. Shares in Link Admin are a quarter below its base bid price. Costs may not be limited by the ceiling of £306mn proposed by the FCA. Woodford investors are bringing group lawsuits against LFS in the UK.
LFS had profits of only £7.2mn and net assets of just £30mn in the year to June 2021, according to Companies House. But if it failed financially, the FCA would surely ask Link Admin to cover any shortfall.
Retail fund scandals are rare. Auditing debacles are common. Even so, fund administrators should train a beadier eye on the investment managers they oversee. Link shows how expensive apparent complacency can be.
