Thu, 27/09/2007 - 14:49
The growth of the global hedge fund industry over the past decade to a size variously estimated at between USD1.7trn and USD2.5trn has helped Dublin to become the world's biggest centre for hedge fund administration. But the authorities and business leaders are not satisfied - they want to see Irish funds become the vehicle of choice for hedge fund managers, particularly those serving institutional investors who might be fussy about funds domiciled in Caribbean jurisdictions that carry out little or no local regulation of funds or managers.
The Dublin administration business grew up mainly to serve funds incorporated in Bermuda, the British Virgin Islands and especially the Cayman Islands. Managers, mostly in London or on the US east coast, would have their funds serviced by the growing array of find administrators in Dublin and listed on the Irish Stock Exchange, but until recently the number of hedge funds opting for an Irish domicile remained relatively small. But lawyers, administrators and other service providers hope a more accommodating regulatory regime for alternative funds is on the way to change all that.
Last February the Irish Financial Services Regulatory Authority introduced a new notification-only process for the approval of Qualifying Investor Funds under which applications for authorisation lodged with the regulator before 3 p.m. in the afternoon will be processed for 9 a.m. the next morning. This procedure is designed to remove what was seen as an important obstacle to the use of Irish alternative funds, a wait for authorisation that could last weeks.
'Until the middle of February, when this new procedure was introduced, there was an eight- to 10-week timetable for the authorisation of the fund from the date when you submitted the documentation to the regulator, because it needed to go through a regulatory procedure to benefit from taxexempt status,' says Mark White, a partner with Dublin law firm McCann Fitzgerald. 'It could take even longer, depending on the complexity of the product.
'The Qualifying Investor Fund regime was established to meet sophisticated investor demand for products such as hedge funds, private equity and property funds, or any form of non-traditional asset classes, without the level of investment, borrowing and leverage restrictions imposed on retail funds.Following collaboration between the fund industry and a very proactive regulator, we succeeded in reducing the QIF regime to a one-day filing process. That eight to 10-week delay has effectively been eliminated in its entirety.'
White adds: 'Now we can justifiably say we are in direct competition with Cayman and other unregulated jurisdictions. We can wave a regulating badge that they simply don't have, and we are seeing more and more investor appetite for regulated products, particularly in Europe from institutions such as pension schemes or insurance companies, which are generally required to invest in regulated or listed products.'
Syl O'Byrne, an associate in the Dublin office of Cayman-based law firm Maples & Calder, says: 'The QIF is an excellent regulated product for Ireland. There's no change in the robustness of the product from a regulatory point of view - all the criteria such as approval of directors,promoters and investment managers stillapply - but it has eliminated the eight- to 10-week document review process. Investors still have the comfort of an onshore fullyregulated OECD jurisdiction and EU member state, and all the tax benefits offered by Irish funds.'
The new QIF regime has already attracted more than 100 funds in its first six months, although Brian McDermott, a partner with law firm A&L Goodbody, is cautious about predicting how big its impact will be. 'We have had clients with existing products who've been able to use the process for new sub-finds, but I've also done one for a new client setting up their first Irish product,' he says.
'Previously there was always the uncertainty of the timeframe, because you had to factor in the regulators' response time. In our experience, the new process is working very well, and we have not encountered any particular difficulties. I don't know whether it has generated any new business. Whether people need to domicile their products in Ireland goes back to distribution, their target investor base and whether they want something other than a Cayman fund.'
McDermott notes that in a number of European jurisdictions, such as France, products domiciled in Cayman are a more difficult sale. 'We have a number of French clients who domicile their funds in Ireland for sale back into France,' he says, 'and there are large institutional investors or multijurisdictional bodies that prefer to be dealing with an EU-domiciled product. 'Other investors may prefer a European product for taxation reasons. There do tend to be very tangible reasons why investors prefer an EU-domiciled product, and promoters may well turn to Ireland because most likely they're planning to list here and use a service provider here.'
Capita Financial Group, which established its Dublin find administration business last year, has already seen the QIF structure adopted by a continental European client.'The QIF process helps to facilitate the use of Dublin as a domicile with its speed to market, and our first hedge fund from a Spanish asset manager is using the structure,' says the firm's head of operations for Ireland, Paul Nunan. 'Dublin is seen as a domicile that gives comfort to their underlying investors; some institutions are undoubtedly more comfortable with an EU domicile.'
To some extent the one-day authorisation process is more about sending a signal to potential clients about Ireland's flexibility and pragmatism than shortening time to market as dramatically as the headline timetable suggests. Some of the work that in the past was carried out while the application was in the hands of the regulator now must be completed before the final documentation is handed in. In addition, lawyers say, any features of the fund that appear particularly ground-breaking are likely to be checked informally with the regulator in advance. Says White: 'One thing the application process did lend itself to was not having to bed down every detail at the time the application was made. While the regulator didn't want to you make wholesale changes, there was a bit of slack in terms of settling your investment policy or fee structure that could be slightly movable right up to the end. 'But now you're going to the regulator with a package of documents that you can't change; post-authorisation changes are possible but messy. So everyone is a bit more cautious to ensure the i's are dotted and the t's crossed. Now any delay in getting to market is on the client side rather than to do with the regulator. People want to be sure they have decided exactly what they want the prospectus to say or how the fees work before they push the button.
'That also applies if there are any wrinkles to sort out regarding the investment policy. The regulator is no longer reviewing the prospectus, but looking to the lawyers to sign off that they are happy the policy complies with the rules. If the promoter or any of the advisers has any concern at all that the policy is slightly innovative or may not have been approved in the past, they will want to run that past the regulator to get their imprimatur in advance.'
According to White's colleague at McCann Fitzgerald, investment management group partner Máire O'Connor, it will typically take more than four weeks to prepare all the documentation before it is submitted to the regulator. 'Realistically, it will take six weeks and eight in some cases to get every piece of the jigsaw in place, including appointment of the administrator, prime broker and custodian,' she says. 'But at least under the new regime you have the certainty there will be no delay with the regulator.'
What the new regime does is to remove any impression, however unfounded, that Dublin was not particularly concerned about attracting fund domiciliation business, according to Deirdre Norris, director of marketing and communications at the Irish Funds Industry Association. 'Now we are on a fairly level playing field, allowing our other advantages to come into play,' she says. 'We've been hearing from our members that there's huge interest in these developments in the Asian market, for instance.' She is echoed by David Dillon, senior partner with law firm Dillon Eustace, who acknowledges that Dublin had a reputation for tough regulation that is belied by Ifsra's current willingness to take a more 'commercial approach'. He says: 'Sometimes people get a perception that regulation is tough and the word gets around. Take the example of valuation of OTC derivatives, which has been a bugbear for two years or so, but has now been resolved.
'In the past, if two or three promoters had difficulty the perception around town and globally was that it was difficult to get things done. But today the market is much bigger, and even if people have a new type of product or an issue they have to take to the regulator, there are many other things going on. There will always be areas that can be improved, but the regulator does respond.' Dillon says the 'Super-QIF', as the new regime has been dubbed, is a clear barometer of the change in regulatory thinking. 'Eight or nine years ago they would have questioned whether such a product was something they wanted,' he says. 'The lawyers were asking for years to let them certify elements of a fund, but they wouldn't even contemplate it. Its arrival today reflects their sympathy for the business.'
For the time being, however, the main focus of the hedge fund industry in Ireland is likely to remain the administration sector. Participants point out to the ongoing process of acquisition and consolidation of administrators - the latest being the USD1.45bn purchase of Bisys by Citigroup announced in May - as a sign of the keen interest demonstrated by major financial services groups in the sector.
The transaction is also seen as an indicator that the biggest players in the industry are set to continue to get bigger, whether by organic growth or acquisition. That is expected to strengthen an existing trend among the larger administrators to turn away smaller clients unless they clearly demonstrate the potential to grow rapidly, although firms are reluctant to admit that they impose a rigid cut-off.
'Administrators that are part of big global groups increasingly say their primary focus is to serve the strategic clients of those global parents, and others really need not apply unless they've got a very juicy bit of business,' says Ronan Nolan, the partner in charge of investment management services at Deloitte & Touche Ireland.
His colleague Christian MacManus, a director in the financial services audit division, adds: 'A couple of years ago it was always taken with a pinch of salt when administrators said they were not accepting mandates unless they were a certain size. People have always been reluctant to turn away any client, but it is a reflection of the industry's growth that some administrators are actively saying no to new business.'
Funds under management is just one measure taken into account by administrators, according to Gary Enos, executive vice-president and head of hedge fund servicing at State Street. He says: 'Our criteria for business are the pedigree of the client, who they are and where they previously worked, their strategy, their ability to be accepted in terms of gathering assets, and their distribution chain. You could have people with a good pedigree but a distribution scheme we're uncomfortable with, or a lesser-known manager with a strategy we think might be attractive to institutions.'
Enos says the important thing is not necessarily the current size of the client's fund but its ability to grow and thrive. 'To hang it just on numbers is a little unfair, although I read recently that 83 per cent of hedge funds that raise less than USD100m within two years fail, which is probably a good rule of thumb,' he says.
There are signs that the increased focus of larger players on their biggest relationships is creating opportunities for small and medium-sized players, including a regular stream of start-up operations. 'In the past year we've had Admiral come in from Cayman, LaSalle, ABN Amro and RBS, so there's still a drive to get into this market,' says Norris. 'Quintillion also opened up recently to target funds with between USD50m and USD100m in assets, where
they saw a gap in the market.'
Dermot Butler, chairman of long-standing independent player Custom House Administration, says he is delighted that the bigger firms no longer seem interested in clients with less than UD200m. 'We are seeing growth from existing clients that are launching new funds or enjoying organic growth, but for the past two or three years we've also been seeing more business from medium-sized funds that are being turned away by the large players,' he says. Many of today's largest hedge fund managers started out small, notes Paul Heffernan, business development manager at Bank of Ireland Securities Services. 'There are administrators out there that quite openly say they are targeting the small hedge funds, and are looking to grow alongside their clients,' he says. 'I don't think people are having problems to find an administrator to service their assets, irrespective of the size of the launch. It's basic economics - if there's a market there, and money to be made, there will be someone to fill that market.'
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