Ireland's regulated fund market grows apace
By James Williams – It's no exaggeration to say that Ireland, as a jurisdiction, punches above its weight.
According to the Irish Funds Industry Association (IFIA), the total asset value of funds domiciled in Ireland, as of May 2011, was EUR987 billion; a 2.5% increase on 2010 (EUR963 billion). Add to that the EUR828 billion in non-domiciled funds being administered and the figure comes to EUR1.8 trillion in AuA based on figures released by the Central Bank of Ireland.
Continuous commitment from the Irish Government and strategic focus from the likes of IFIA and other industry bodies has seen the industry grow nigh-on every year over the last decade: the only blip being 2008 when assets pared back from EUR808 billion to EUR647 billion. It is Europe's leading alternatives jurisdiction. Over 60 per cent of European hedge funds are based there. Some 45% of global hedge funds are administered there.
Given the sheer volume of funds - over 10,700 - global administrators must surely view the funds industry as the 'Emerald' of the Isle'. As Patrick Hayes, Senior MD and Head of Hedge Fund Operations, State Street Ireland, explains: "There's plenty of work to go around. Ireland's funds industry has been built up over the last 15 years and for us it's a key market for alternatives."
State Street has seven offices spread across Ireland. It sees growth coming not just out of Dublin but also in places like Drogheda, Naas and Carrickmines where it is looking to capture the demographic of Ireland's skilled labour pool and give people a better work/life balance. It's disingenuous to think that Dublin alone is the home of Ireland's fund services industry.
"There's a lot of emphasis on Ireland (within State Street) because of the potential market that's out there. It's an extremely important jurisdiction. Outside of the US we have nearly 2,000 people in Ireland," says Hayes.
There are myriad reasons why asset levels in Ireland are rising but certainly the continued growth and popularity of ETFs coupled with an increased proliferation in alternative Ucits are bolstering its reputation and playing to its strength of expertise in servicing alternative funds.
BNY Mellon is ranked Ireland's number one fund administrator where it currently employs over 1,800 employees. Like State Street, it's a key market. Last month, the firm launched BNY Mellon Clearing International. Headquartered in Dublin and regulated by the Central Bank of Ireland, it's the first MiFID-authorised futures and derivatives clearing operation in Ireland.
"BNY Mellon could have established that operation in any country, it's domicile agnostic. Ireland was selected as the best place so that's great news," comments Mark Mannion, head of relationship management for EMEA, BNY Mellon Alternative Investment Services. The new operation, headed up by Tim Murphy, already has 15 people but is expected to grow significantly over the next twelve months according to Mannion.
This is precisely the kind of news Ireland's politicians will welcome as the government drives through plans to evolve the financial services industry and create 10,000 new jobs over the next five years.
Stability of labour force and cost profiles are two of the reasons BNY Mellon chooses to focus on regional offices. In places like Cork and Wexford they're the only significant player. Mannion says that the expansion they're currently seeing is in terms of the higher value-added roles within the fund administration spectrum, pointing out that, "In Dublin, we focus more on client-facing roles at the higher end of the business."
An estimated 1,000 new jobs are expected in Ireland's financial services industry in 2011. Growing numbers of fund mandates and tightening regulations are putting the onus on accurate independent asset valuation, timely fund reporting and custodial services, not to mention legal advice on fund structuring and compliance issues.
Ireland is doing well to respond to these dynamics – more international law firms like Walkers are moving in, and for the first time in a long time, according to Mannion, large global institutions like BNY Mellon are increasing headcount: "I think this year has really proven that there's no link between the domestic challenges that Ireland is facing on a sovereign level and the continuing success of the Irish funds industry. We welcome the fact that new entrants have come into the market to set up their alternatives hubs."
"In Dublin City Centre you're seeing large fund administration operations expanding and new operations opening up. What we've seen over the last couple of years in the financial services world is a move away from emigration and the skill set is now returning to Ireland. The talent pool at senior level is here and to continue that growth we need to ensure that Ireland remains an attractive place to work," adds Hayes, noting that State Street themselves target annual growth of 10-15% depending on the type of mandates they win.
"I'd say Ireland is our engine room for fund accounting and transfer agency work. That's where our European hedge skill set is based: and it would be one of our growth areas within State Street," says Hayes.
State Street Ireland currently services over USD500billion in assets (as of 31 March 2011), of which around USD360billion are in alternative assets. By comparison, BNY Mellon AIS currently has USD94billion in AuA in Europe.
Hayes says that the firm is happy with its growth in 2011. Globally, it has won around 84 new mandates across all product types, which are serviced out of the US or in offshore jurisdictions like Ireland.
Technology is becoming an ever-more important consideration with service providers. Those that continue to re-invest and develop cutting edge solutions across product lines for their clients are likely to grow, if for no other reason than the fact that investors today are putting pressure on fund managers to strengthen their operational infrastructure. Being able to cite a tier one administrator is good business, both for the fund manager and the administrator. That Ireland has significant expertise in back-office IT support is another feather in its cap.
One of the biggest growth areas over the last few years at BNY Mellon AIS, says Mannion, is its Global Prime Custody service, which last month reached USD120billion in assets. "This is a specific custodial effort focused around hedge fund managers' need to ensure sufficient diversification of where they hold assets. We offer a high level service around their unencumbered assets. Most of the big players use multiple prime brokers and counterparties. We sit in the middle and they can place all the cash and assets they wish with us that they don't need for collateral purposes," explains Mannion.
BNY Mellon has also rolled out its global middle office offering into Asia and the US this year, handling back office activities that include trade matching, reconciliation, real-time P&L etc. A one-stop shop for derivatives support – Derivatives360 – was also launched this year.
Getting information to clients and their investors by providing more transparent reporting and "for us to be able to confirm to our clients' investors what we've independently reconciled" is important says Hayes. "Without giving away the secret sauce of the portfolio you're giving investors the necessary risk-related information on the fund."
It's all about giving clients more intraday data and building it from a front-office perspective to develop better risk tools according to Hayes. And with Ireland shaping up to service more regulated hedge fund products – EUR156billion in QIFs as of May 2011 – administrators are aware of the growing emphasis being placed on post-trade compliance, especially in the alternative Ucits world.
"It's in our DNA. We've been operating in a 'daily' environment from day one. The focus now I think is on the mediums through which we deliver that information," explains Hayes. State Street is moving away from the traditional paper and email model of communicating with investors with Hayes adding: "We're in the process of building a web portal to allow us to send subscriptions, redemptions and where investors can look at their funds and statements."
Around 35% of clients use State Street for full-service and interest is rising. This is likely to apply for all administrators in Ireland as fund managers farm out support functions in a bid to stay operationally watertight.
The benefits of more regulated funds coming to market in response to AIFMD are well documented, both in this report and others. But perhaps a degree of caution should be exercised. The current depository liability wording in AIFMD places significant onus on the custodian to the extent where the price of offering the service would need to radically change for it to remain attractive according to Mannion.
"We haven't decided what that price change would be but the days of offering this kind of service for a couple of basis points would be long gone. AIFMD-compliant products could become very expensive to offer – it'll give investors comfort, but at a price," warns Mannion. That aside, alternative Ucits, as an asset class, have reached critical mass and Mannion expects BNY Mellon AIS to be well placed to capitalise on their continued growth under Ucits IV.
Hayes is slightly more cautious. He hasn't seen any significant uptake in Ucits or QIFs amongst existing clients but thinks this may change when everyone knows what the final version of AIFMD will look like. "Our clients know we have the expertise to operate in this environment. Should there be significant changes, we'll be well placed to support our clients but it's a little bit 'wait and see' at the moment."
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