Citigroup's acquisition of BISYS for $1.47 billion last May, with a subsequent spin off of two units to private equity firm J.C. Flowers appeared to be a done deal. But one last under-the-radar acquisition took place two weeks ago.

Citigroup acquired the entire firm, including BISYS' prized alternative investments/hedge funds servicing business, its insurance and retirement services units, and its troubled mutual fund servicing unit, which had been fined by regulators for essentially accepting kickbacks.

Upon closing of the sale, Citigroup then simultaneously sold off BISYS' insurance and retirement servicing divisions to J.C. Flowers, a private equity firm in New York.

Now, new details reveal that simultaneous to Citigroup's completion of BISYS acquisition on Aug. 1, BISYS Fund Services Funds Distributors, and two other private labeled broker/dealer subsidiaries operated by BISYS as the underwriter and distributor of clients' mutual funds, were sold in a private transaction to Foreside Financial Group, the mutual fund servicer headquartered in Portland, Maine. Although not specifically named, those two private label broker/dealers appear to have been Performance Funds Distributor, and Heartland Investor Services.

The acquisition included the provision that Foreside keep three BISYS offices based in Boston, Bethesda, Md., and Columbus, Ohio. Additionally, all 20 former BISYS employees remain with the firm.

Financial details of the four acquisitions were not disclosed. A BISYS spokeswoman had not returned a call seeking comment by press time.

BISYS' former fund clients, many of which recently had distribution agreements approved by their boards of directors, were busy alerting their shareholders. "BISYS has determined that it will cease to serve as a principal underwriter to mutual funds shortly after the consummation of the merger," revealed an Aug. 3 prospectus amendment from the Heartland Funds Group.

Foreside is the successor firm to Forum Fund Services, originally organized in September 1998 as a subsidiary of Forum Financial Group. Ironically, in 2003 it was Citigroup that acquired a majority of Forum Financial Group, and in 2004, two executives agreed to acquire the fund servicing unit of Forum Fund Services that Citigroup had not acquired. The deal brings a collective $125 billion in fresh assets under distribution to the firm, more then tripling Foreside's asset servicing base from $50 billion.

Foreside operates two subsidiaries, broker/dealer and mutual fund underwriter and distributor Foreside Fund Services and Foreside Compliance Services, which provides various compliance tasks on an outsourced basis to investment companies. Those two functions are all the company wants to do. Unlike other outsource service firms that will bundle distribution with transfer agency, fund accounting, and other back-office tasks, Foreside will only distribute funds and provide compliance services-period.

"We're not permitted to discuss the [BISYS] transaction," said Simon Collier, president and partner of Foreside Financial Group. "It's complementary to the business we have," he added.

The deal makes sense because Foreside has taken on the distribution for many of BISYS' former bank-sponsored fund clients. "We don't compete with any of the banks," Collier noted. That suggests that there could have been a conflict of interest if Citigroup had absorbed BISYS' bank fund clients' distribution duties.

The original BISYS sale was publicly announced in May, nine months after the firm turned to Bear Stearns to help it explore strategic alternatives. Although industry analysts had expected that the company would be sold off in pieces to several buyers, BISYS entered into an exclusive negotiation arrangement with Citigroup for the sale of the entire firm in April. Post-sale, business pieces were parceled off separately, as predicted.

Distribution has increasingly become an area of interest for service providers.

ALPS Fund Services of Denver handles an array of outsourced behind-the-scenes tasks. The firm, which has been majority owned by private equity firm Lovell Minnick Partners of Rolling Hills Estates, Calif., since September 2005, has carved out its particular niche with the "active distribution" of open- and closed-end funds, as well as exchange-traded funds.

"We act as marketing agent; a partner with the investment advisor to bring out a fund," said ALPS President Ned Burke. That includes everything from helping coordinate a closed-end fund's road show and working with the underwriters to creating sales collateral materials for clients, he said. That active distribution is in addition to the "statutory" distribution services that ALPS has offered for years.

Among its successes, in January 2007 ALPS helped launch the closed-end Alpine Total Dynamic Dividend Fund with a record-breaking $4 billion of initial assets.

ALPS also recently added hedge fund administration to its repertoire, as well money management with the launch of a series of asset allocation portfolios utilizing ETFs.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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