Surging fund business brings new opportunities for administrators
The decision of Citco to shift its hedge fund administration work from the British Virgin Islands to Curaçao around the turn of the millennium seemed to mark the death knell of the BVI's administration sector, which was already suffering from the islands' eclipse as an offshore fund domicile by the Cayman Islands, a modest international profile and a focus by the authorities on the development of the islands' core business, the provision of corporate domicile and administration.
Yet today the outlook appears substantially brighter for the administration business. A small but thriving cadre of firms are offering services at a range of levels, not only to BVI-domiciled funds but those from elsewhere, including US domestic hedge funds. The administrators are seeing soaring levels of business and in several cases are moving into larger premises to accommodate the growth in their volume of work and staff numbers, helping to boost the construction boom that has turned much of Road Town into a building site.
The rebound for fund administrators is due in considerable part to the revived fortunes of the jurisdiction as a hedge fund domicile. Once trailing a poor third to Cayman and Bermuda, the BVI has now regained second place among offshore domiciles, aided by Bermuda's problems with the European Union's Savings Tax Directive and an appreciably lower cost base than its rivals. The turnaround is also signalled by the development of the accountancy and audit sector, with established practices such as Deloitte enjoying strong expansion, KPMG eturning to the islands after a brief absence and the establishment of several of the socalled 'second-tier' accounting firms in Baker Tilly, BDO and RSM.
'We've seen the emergence of a small but growing fund administration industry,' says Robert McIntyre, managing partner and head of funds at the BVI office of leading Cayman law firm Maples & Calder. 'We're seeing more substantive administration business being done on the island than there was five or six years ago. Hopefully, as the nfrastructure of the BVI develops generally, people will see it as more like Cayman in the sense of having something substantive, not being just a corporate domicile and nothing else.'
Members of the BVI administration sector caution that it seems unlikely ever to reach the scale of its counterpart in Cayman, if only because of a shortage of the human resources that would be required to achieve substantial growth. The jurisdiction's service providers, for the most part, focus on smaller and start-up funds, which not only appreciate the personal style of service as they seek to establish themselves but might also struggle to find administrators in other jurisdictions willing to take on their level of business at an affordable price, or indeed at all.
However, those involved in the hedge fund industry in the islands, from auditors and lawyers to the Financial Services Commission and the financial promotional body, the BVI International Financial Centre, are unanimous that the administration sector has received a vital shot in the arm with the arrival just over a year ago of Fortis Prime Fund Solutions, which acquired one of the leading independent firms, Hedge Fund Services, and has equipped it to take on much larger clients.
The presence of Fortis, one of the leading global administrators of single-manager funds and funds of hedge funds, has cast the BVI in a completely different light as a centre for administration. 'Their arrival is very beneficial to the jurisdiction,' says Conyers Dill & Pearman partner Robert Briant. 'You don't have to be here to administer BVI funds, but the BVI buzz continues to grow, as I see when I go on the road. When I arrived seven years ago, it was all about Cayman and Bermuda, and the BVI was never mentioned. Now, with all the offshore magic circle firms here, it's Cayman and the BVI in the hedge fund or any corporate law context.'
Says Mark Lancaster, director of new business development with Fortis Prime Funds Solutions: 'Fortis has probably put the BVI on the map for administration. People are taking the jurisdiction a bit more seriously. With the BVI incorporating a large proportion of offshore hedge funds, albeit still behind Cayman, it helps the reputation of the jurisdiction. The Commission is happy to see a big name - it has been trying to attract amajor administrator here for a few years, and now you might see more big players coming in.'
So far no internationally renowned administration groups have announced their intention to follow the example of Fortis but there is confidence that this is more likely now. 'Historically one of the main criticisms of the BVI was the lack of infrastructure in terms of well-known and recognised fund administration,' says Heidi de Vries, managing partner of the BVI office of Walkers, the Cayman-based international law firm. 'That has certainly changed over the past few years.
'The biggest coup has been Fortis acquiring Hedge Fund Services, a deal Walkers advised Fortis on. I think that after that we will see some of the larger players taking a fresh look at the BVI. The people working in the administration companies now are very good. All of them are qualified accountants, and there are staff arriving from all over the world, bringing with them international experience.'
In the past, Lancaster notes, start-up funds that were initially serviced in the BVI often moved to larger administrators in other jurisdictions as they grew in size, but he believes this is now changing given the greater scale and experience of the islands' administrators. 'When Fortis came here we knew that the BVI was serious about funds, and recognised that the client base was an interesting one,' he says. 'We were also interested in the quality of staff available in the BVI.' Adds Ruth Chadwick, director of investment business at the BVI Financial Services Commission: 'I've always believed that Fortis would herald a number of other significant players coming in. There are also some other successful start-ups, like Folio Administrators. I'd like to think a number of larger players would come in, because there's no reason why people shouldn't physically do business here. We want to see a continuing progression from a not so well known jurisdiction to a major competitive player in the hedge fund market.' According to the most recent published figures, there were 36 licensed administrators in the BVI at the ends of the first quarter of last year, although Chadwick acknowledges that some of the firms 'don't do an awful lot'. She notes that while some of the firms carry out transfer agency work, they do not carry out net asset value calculation. Firms, she notes, are not licensed to carry out valuation work unless they have the required expertise, which means qualified accountants.
Deloitte managing partner Mark Chapman says that around half a dozen administrators are currently carrying out a significant amount of work on the island, led by Fortis, Folio, Beacon Securities and ATU Administrators, part of the Liechtensteinbased VP Bank group. 'We now have more administrators than we've ever had,' he says, adding that other licensed firms such as Rathbones are also active administrators but keep a low profile. 'To do it seriously you need to have the critical mass, you need the accountants and the understanding of what the instruments are.'
The growth of the hedge fund industry, Chapman notes, is reflected in the expansion of Deloitte's own business. 'When I came here 10 years ago we had just two funds,' he says. 'Now we audit a lot of funds in the BVI and I have 30 staff who know funds inside out.' He points out that Deloitte has just added Fortis's office to its own premises on the floor above to cope with its expansion, while the administrator's move has increased its office space from 3,000 to 10,000 square feet.
Folio Administrators was launched five years ago and has grown swiftly, from USD700m in assets under administration toward the end of 2004 to USD3.5bn two years later, and is targeting a total of as much as USD7.5bn by the end of 2008. The firm launched an office in Hong Kong two years ago, but marketing manager Daniel Cann insists that the BVI is still 'our bread and butter. We may not be a big player globally, but we are certainly growing. And having bigger administrators coming in will ramp up people's perceptions of the BVI.' Cann argues that what the BVI is currently missing is a broader range of banks and custodians. This situation reflects in part the caution of the authorities toward the potential for reputational damage that an offshore banking sector can engender, as the example of would-be rival Grenada has demonstrated. However, the drawback is that in many cases the financial industry has to use banking facilities in other jurisdictions.
'When I first came here we had Barclays and Chase, which are now First Caribbean and FirstBank respectively, and there is also VP Bank,' Cann says. 'However, we tend to use banks in Jersey and the Isle of Man, Geneva and Zurich. It does gives us the flexibility to go to any bank to help our clients structure their products, as opposed to having a one-stop shop. But hopefully sooner or later a bank or custodian will realise that the business is there, and it's worth being on hand.'
He is echoed by Christopher Bouck, head of mutual funds with ATU Fund administrators (BVI), even though VP Bank currently enjoys a privileged position in the sector. 'It would help the fund services business if there were more banks available to act as custodians,' he says. 'A big international bank like JP Morgan or Credit Suisse would mean that people could obtain all services here.
'For a long time ATU and VP Bank have been the only provider on the island to be able to offer everything in-house. A range of big banks would enable clients to choose between different providers on the island, whereas currently they tend to have an administrator here, banking in the Channel Islands or Cayman, and lawyers somewhere else. Becoming a one-stop provider would enhance the jurisdiction.'
ATU was the first firm to obtain a licence for administration and management services in the BVI more than 10 years ago, and until recently administration has been just one service among many offered in the jurisdiction by the group, but Bouck says that is about to change as ATU takes advantage of the new focus on the BVI funds industry to boost its scale and seek a broader range of clients.
He believes that the industry would also benefit from a stronger commitment to the funds sector from the authorities, who understandably have historically placed greatest emphasis on the islands' core corporate domicile and administration business. 'It would help for the BVI International Financial Centre, for instance, to sponsor trade shows in order to get brand name recognition for the jurisdiction and give local providers the opportunity to showcase their services,' he says. 'A little bit of effort could go a long way.'
Humphrey Leue, chief operations officer at the BVI International Financial Centre, insists that the promotional organisation is fully committed to the development of the fund industry. 'Fund administration is an important part of our strategy and something we have already been specifically promoting in London last year,' he says. 'We offer a regulatory regime as good as if not better than any other, but we have to get the message out and make sure people use the services. But our continued growth and the arrival of Fortis is ultimately the proof of what we are doing.'
'I'm encouraged to hear that,' says Kieron O'Rourke, a partner and head of investment funds at Tortola's largest law firm, Harney Westwood & Riegels. 'We certainly hope the authorities have a vested interest in valueadded services such as trusts, insurance and funds. While there is understandable concern about risks to the jurisdiction's reputation, there is no reason why funds should pose any greater risk of scandal than any of the hundreds of thousands of IBCs and new BCs that are domiciled here.'
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