Big players look to Guernsey as service providers consolidate
Guernsey’s alternative fund sector has emerged from the crisis of the past couple of years in good shape, according to industry professionals – in part thanks to a new focus by service providers on delivering quality to their clients. But the ultimate endorsement is that some of the biggest names in the fund services industry are expanding their presence on the island or establishing a foothold there for the first time.
“On balance, we’ve come out of what has been a pretty dire situation reasonably well,” says Peter Niven, chief executive of promotional body Guernsey Finance. “Business flows are down, but we’ve been out there marketing very strongly, so when people are ready to come back into the market, we will be seen as the place to go. Over this period firms on the island have been able to take stock, consolidate and get themselves back on an even keel in terms of service levels, which dropped somewhat during the ‘frothy period’ when lots of business was coming in.”
Niven is echoed by Gavin Farrell, a partner at law firm Mourant Ozannes, who adds that the hostile spotlight turned on the offshore financial industry also played its part. He says: “The crisis has had a positive effect by removing any complacency among Guernsey service providers from when business was always plentiful.
“The fact that the crisis hit the stream of new business coming in has obliged providers to reassess the quality of service that they were delivering to their clients rather than just focusing on quantity. It’s never a bad thing for people to go back to basics and concentrate on the quality they are providing to existing clients rather than putting the emphasis on new business.”
Niven also acknowledges that the crisis helped to take a bit of the steam out of an overheated jobs market in which salary and other costs were rising rapidly. “Because we’re a small island, the one resource we do have difficulty with is people,” he says. “That was certainly very difficult during the heady days that lasted up to two years ago, but we have seen something of a shake-out, with firms such as HSBC moving functions to Dublin and Luxembourg, and Investec Trust closing with the loss of 60 jobs.
“That is disappointing, but there is a bonus in that it is releasing resources back into the marketplace. The people coming onto the job market are in many cases needed by companies trying to get their headcount up to the ideal level. Unemployment is currently around 1.5 per cent, which is high compared with what we’ve seen over the past few years. There are around 500 to 600 people unemployed, but I suspect a lot of them are between jobs, because there are companies taking people on.”
Carey Olsen partner Ben Morgan notes that while new business is coming to Guernsey, funds tend to be significantly smaller than they were a few years ago, although he believes that might change before long. “Guernsey was seeing a far greater number of very big funds before the crisis set in, but it’s anyone’s guess what will happen next,” he says. “My view is that the mega-funds will return sooner rather than later if the recovery continues, because we have a good following among some of the biggest fund promoters, and their interest in Guernsey hasn’t really abated.”
According to Alan Brint, head of corporate and institutional business for the British Isles at RBC Wealth Management, new alternative fund business coming to Guernsey is in some case rather different from the products launched up to 2007. “The alternative fund strategies we’re seeing have changed quite a bit over the past 12 to 18 months,” he says.
“Then the focus was on closed-ended funds of hedge funds, but there’s now more interest in private equity and property funds, which seems as a sector to have made a comeback. We’ve had some enquiries about more esoteric alternative structures investing in assets such as art and fine wines, but funds of hedge funds haven’t yet returned to pre-crisis levels.”
In addition, Brint says, investors are seeing managed accounts as an alternative to the traditional fund of hedge funds structure because of the advantages of transparency and liquidity. “We’re seeing a quasi-managed account requirement involving segregated accounts for investors that hold their own pool of hedge funds, as opposed to managed accounts on platforms such as Lyxor’s that hold the underlying assets of a hedge fund. This represents an evolution of the fund of hedge funds structure.”
Farrell is also seeing an increase in more esoteric asset classes, which he says reflects the island’s track record as a jurisdiction offering skilled and high-quality service in a diverse range of areas. “Guernsey stands out for its quality of service providers as a platform for launching products ranging from private equity structures and professional open-ended structures similar to Cayman mutual funds to the large market of closed-ended products listed on AIM in London,” he says.
“Once you’ve done one or two of these products, it gets out to the market that a particular jurisdiction has administrators specialised in dealing with similar products. There’s a consistent approach because people do not want to reinvent the wheel by going to another jurisdiction. So we continue to benefits from the experience built up in Guernsey over the past 10 to 20 years.”
According to Morgan, whose firm acts more than 50 per cent of all funds domiciled in Guernsey, funds of hedge funds continue to dominate the hedge fund sector on the island. “Our clients are continuing to use Guernsey structures, which historically have been mainly protected cell companies, to which they continue to add cells. There’s also a lot of ongoing activity to restructure and consolidate existing vehicles.
“We haven’t seen clients ceasing to use Guernsey structures; our core clients as well as some new entrants are still looking to establish funds of hedge funds here. The sector has rebounded from the difficult period it went through in 2008 and 2009. They did feel some pain, but their performance came back extremely strongly last year, and that has continued this year. It remains a key asset class for a lot of investors.”
Morgan also believes that listed alternative funds, which became a substantial area of business for Guernsey in 2006 and 2007, are set for a revival. “We expect a resurgence in the establishment of permanent capital vehicles that invest in hedge fund-like assets, entities like BH Macro,” he says. “Guernsey has carved out an niche for itself in the structuring of offshore listed vehicles.”
Change is also afoot in the island’s administration sector, where trends toward consolidation and outsourcing of non-core functions have been accelerated by the crisis. While there is growing interest in the island among global institutions that are seeking to build up their fund services activities, it’s not yet clear whether this will be at the expense of smaller administrators such as the businesses launched by a number of local trust companies over the past few years.
“The turbulence of the past couple of years has caused service providers to think pretty hard about their business,” says Ernst & Young partner Mike Bane. “Professionals such as law firms and accountants are all finding times have been harder. There’s still a lot of activity about, and there aren’t many redundancies, but it’s harder to make each extra dollar than it was two or three years ago. But the professional services sector is probably no more affected than other members of the industry such as fund managers, administrators and custodians.
“The administrator community has reshaped itself to a significant degree over the past two or three years. That includes increased onshore-offshoring – functions being taken out of the offshore environment to more cost-effective jurisdictions – particularly among larger providers, something that applies equally to Luxembourg and Dublin. Some functions and activities are moving to low-cost jurisdictions, including eastern Europe, India, where a number of service providers now have well-established models, or South Africa.”
Paul Keltie, head of fund administration at HSBC Securities Services in Guernsey, argues that the industry in Guernsey is in a state of flux. “Fund administration houses are coming into the hands of new owners, and big global players are entering the market, while private equity firms or management teams are picking up some of the niche players,” he says. “All of them are looking to extend their global capabilities and to change the firms’ business models. Previously they were very island-centric, but now they are leveraging off their global operating models or capabilities they may have elsewhere.”
He notes that this process has been underway at HSBC Securities Services for as long as four years. “As firms move to a global operating model, back-office work has moved away from the island to other jurisdictions,” he says. “There is still value in fund accounting, financial reporting, corporate secretarial and compliance skills, but for certain functions you can find a larger, more scalable and more cost-effective workforce elsewhere.”
HSBC was an early contributor to the wave of consolidation in the industry with its acquisition of Bank of Bermuda, including its Guernsey fund services business, six years ago. Over the past couple of years deals affecting the island have included the merger of Butterfield Fund Services with private equity-owned Fulcrum, the acquisition of the Mourant Group’s fund services business by State Street, the purchase of Kleinwort Benson from Commerzbank by financial holding company RHJ International, and most recently the absorption by JP Morgan Worldwide Securities Services of Schroders’ private equity administration business.
According to Morgan, at least two other deals in the pipeline may bring other global institutions into the Guernsey administration market over the coming months. “It does suggest that Guernsey has really made a mark for itself when big institutions now regard the island as a key component of their offshore offering,” he says. “A few years ago, generally speaking, the administration sector wasn’t dominated by the big names. A growing trend for Guernsey is that the big international fund administration houses seem to be setting up here, whereas in Jersey – at least historically – the marketplace has been dominated by locally-owned administration companies.”
What is less certain is the future of some of the smaller players in the market, those with more limited international networks or that mostly serve small and start-up funds. “Some of them might struggle,” Morgan says. “There’s always a place for the small administrator, particularly for smaller funds that may be looking for cheaper servicing arrangements, but the greater leverage enjoyed by the big fund administration houses in terms of manpower, technology and processes is pretty difficult to compete against for larger pieces of business.”
“Many of these niche firms are run extraordinarily well by people with very strong contacts in the City. Provided they keep their existing clients base happy and people continue to bring business to Guernsey, they may continue to do well. But some of the less well run companies may give up because the big newcomers need to build a foothold in Guernsey, and you can only really do that by taking out some of the existing providers.”
Farrell says a number of the smaller administration businesses launched over the past few years have diversified or been acquired. “One or two of the smaller new entrants to the market have already divested themselves of their fund administration business because they reached a level where they either had to invest heavily because of their new client base or divest themselves of it,” he says. “They decided to concentrate on their traditional core business of trust and fiduciary work.”
However, Bane is more optimistic. “The outlook is quite good for the smaller players,” he says. “We talk to a number of managers that to start with have found it hard to get a global provider to take on their business. They have also recognised that it would be very hard for them to get the attention, focus and service they want from a big administrator, and that a smaller firm is probably a better solution, because they’re a more important client.
“Some smaller providers are starting to grow, they are gaining a higher profile in the marketplace, and smaller alternative fund management businesses are interested in them because they get a more personal service.”
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