Fund and manager domiciles in a state of flux
By Simon Gray – A perfect storm of factors over the past four years has upended many of the traditional assumptions of asset managers, particularly those active in the alternative investment field, about how their business should be organised. The relative merits of different fund domiciles is a long-standing area of debate, but the past couple of years have seen management firms increasingly raise questions about where they should themselves be based.
The debate has been sharpened by a number of intertwined factors stemming from the global financial crisis and economic downturn. On one hand the crisis, together with the role in it perceived – not necessarily accurately – to have been played by alternative investment funds and/or by supposedly poorly regulated and tax-opaque offshore financial centres, has prompted a raft of new regulation around the world, including measures that will impose substantial compliance and reporting burdens on managers.
At the same time, many governments are casting round to maximise their tax revenues at a time when economic activity is subdued, social transfer payments arte high and rising, and banks have either received or still need substantial support from the public sector. That is often squeezing fund management firms (and their employees) at a time when the performance of many alternative asset classes is in the doldrums, investors are hesitant about committing capital and profitability concerns are again pushing some firms out of business altogether.
In this environment it’s not surprising that fund managers are re-examining their current jurisdiction and carefully assessing the benefits that might accrue were they to move all or part of their operations to a new domicile. At the same time, individuals in the industry are examining their own situation, to some extent with tax considerations in mind, but quality of life is also high in the list of drivers.
The country that probably has most to lose in this process is the UK, as home to something between three-quarters and four-fifths of the European hedge fund management industry, depending on who’s doing the counting and how, and a dominant player also in the private equity, property and infrastructure fund businesses as well. The potential beneficiaries include a number of offshore jurisdictions that are already significant fund domiciles and/or servicing centres and that would like to attract managers as well to give their financial industries greater depth.
“At the moment a lot of fund managers are thinking about their domicile and where they want to be located themselves in future,” says Robert Milner (pictured), a partner in the corporate group at law firm Carey Olsen in Jersey. “It’s a combination of things, including the increase in the top UK income tax rate to 50 per cent, but also regulation. The EU is taking a much more active interest in the activities of fund managers, particularly in the alternative investments sphere.
“Managers are actively reflecting on whether what they are getting out of their jurisdictions is worth what they’re putting back in. A lot of the time there’s a particular spur for this thought process, which might be getting a tax bill or talking to their compliance people and realising the extent of the regulation that they will have to fall into line with in the years to come.”
Much of the manager relocation discussion over the past couple of years has identified Switzerland as one of the main possibilities for firms looking for an alternative to the UK. Several Swiss cantons are offering attractive tax deals to incoming firms and highlighting their combination of business infrastructure and asset management clustering effects together with an outstanding natural environment and high standard of living.
However, there has never been an exodus to Switzerland in the numbers sometimes touted by consultants. In addition, industry members in other jurisdictions suggest that not everyone who’s taken the plunge to move to the Zurich region or Geneva is completely happy with the outcome. “We are dealing with one firm that moved to Switzerland from London, but found they didn’t like it,” Milner says.
“There seem to be quite a number of people in that boat, and they all have their own reasons. Certain cantons made a play for fund management business, but they are not always the most exciting places. Although there is a tightly-knit community of expatriates in Switzerland, those who come to Jersey are very pleasantly surprised by the more vibrant culture and opportunities to enjoy your leisure here.”
Giles Adu, inward investment manager at industry promotional agency Jersey Finance, also believes that there has been much more talk about Switzerland than concrete action. “There has been a lot of discussion about managers are decamping to Switzerland in the media, but it’s harder to come up with a list of names that have actually gone there,” he says. “Certainly prime brokers I speak to are not reporting that any of their clients have done so.”
In addition, other jurisdictions could benefit from dissatisfaction with Switzerland’s response to the awkward regulatory position in which the country’s alternative investment management industry currently finds itself. “We are receiving a large number of queries from managers in Switzerland who are extremely exasperated with the regulator, and we are very close to signing a number of mandates from these managers,” says David Griscti, senior partner with Maltese law firm David Griscti & Associates.
The Swiss authorities are in the process of bringing alternative managers, most of which are currently self-regulated, under the aegis of the financial regulator, Finma, in part to position the country for compliance with the EU’s Alternative Investment Fund Managers Directive when it comes into force in July 2013. Managers must be regulated in their home jurisdiction in order to be eligible for the pan-European fund distribution passport once it is extended to non-EU firms, in or after mid-2015.
However, Griscti reports that the process of putting in place the new regulatory structure is creating such dissatisfaction among Swiss-based alternative managers that a number are looking to establish a management company within the EU – which has the added benefit of offering access to the AIFM Directive passport from 2013. “They are telling us they want to set up a permanent base within the EU and employ people here,” he says. “We see plenty of scope for Malta in this trend.”
The EU directive is an important factor in the deliberation of managers everywhere about where they should be based in the future. “We have absolutely no doubt that after the introduction of the directive, Jersey will remain an attractive place to do business,” Milner says. “Until it is finalised, we cannot say for certain exactly what advantages would accrue to those coming here, but no matter what happens, we are very confident that Jersey will be at least as appealing as staying onshore.”
Hamid Parsa, director of sales and business development at Alceda Fund Management, notes that the Luxembourg is already drafting amendments to its legislation on Specialised Investment Funds, under which more than 1,100 alternative funds have been established in less than five years. “The new SIF law shows how fast Luxembourg is in adapting to new regulatory developments,” he says. “Most management companies are now tending to set up structures in such a way as to comply with the directive. There is also more pressure from investors to have your product in a regulated domicile.”
Tim Morgan, a partner with law firm Ogier in Jersey, says there is measured confidence that the directive should play well to Jersey’s regulatory approach and seems to present few obstacles to the island being accepted as a third-country manager location. However, he cautions: “The development of the rules is still unfolding. A number of managers are confidently planning around the generalities of the directive, in the knowledge that they may have to tweak some details when it is finalised.
“The expectation is that the Jersey model, which provides substance and meets the directive’s strictures on letterbox jurisdictions, differentiates itself from domiciles where management and fund structures lack that substance. But managers that are not targeting European investors will not be forced into complying with regulation set by the EU where it would not be relevant.”
Morgan notes that while even Caribbean island jurisdictions such as the Cayman Islands and British Virgin Islands have proclaimed their readiness to welcome fund managers who want to relocate there, in practice the numbers are likely to be very small. “Simply because of their location, some offshore jurisdictions will not be competition for physical relocation,” he says. “For all their other attractions, not many managers will want to move to the Caribbean.
“There is also the question of how well suited they are physically. Once you get much smaller than Jersey, infrastructure issues become a problem. I would say there will be competition from places such as Monaco, but it is a very different type of environment. The kind of people who might go to Monaco will never come to Jersey anyway, and vice versa. It’s horses for courses.”
He notes that the relocation of managers does not fit a single model but covers a spectrum ranging from the movement of an entire firm and its employees, of which Altis Partners is probably the best example, to ‘supported managers’ that rely on locally-based service providers and that can comply fully with all the regulations and structuring requirements without needing any physical relocation. “In between you may have small teams or parts of teams coming over, perhaps covering part of the governance function or the middle office, without bringing the entire business,” Morgan says.
Fiona Le Poidevin, technical director and deputy chief executive of promotional agency Guernsey Finance, points to an illustrious list of alternative investment firms and individuals who have relocated to the island. “They include high-profile private equity businesses such as Guy Hands and Terra Firma, as well as the leading hedge fund manager BlueCrest, and Jon Moulton of Better Capital has a house in Guernsey.”
Le Poidevin argues that many factors are driving people to consider relocation. “There is evidence that a lot of people are unhappy living and working in the UK,” she says. “They are often looking for a better work/life balance, which is a cultural shift that favours Guernsey. “At the same time, from a business perspective there is a flight to quality. Managers require that the jurisdiction in which they set up businesses be robust, with a combination of good regulation, fiscal transparency and the right expertise, and Guernsey fits the bill.”
Being slightly smaller than its Channel Island neighbour at 65 square kilometres and less populous with some 65,000 people is a constraint but also an advantage, she believes. “Obviously space is finite, but in some respects that’s what makes the island special,” she says. “We have to manage the population simply from a resources point of view, including having a designated housing market for incomers. Those who do not qualify for licences may buy an open market property.”
The licensing procedure for skilled workers allows people moving their fund management businesses to relocate individual staff members to Guernsey, although Le Poidevin adds that the island also boasts a plethora of skilled local staff with specific fund expertise to call upon. She adds: “In addition, our tax cap allows high net worth individuals moving to the island to limit their personal tax liability.”
Human resources are not seen as an issue in Malta, either, especially as the Mediterranean island nation has a significantly larger population than either of the Channel Islands at more than 410,000. It also shares with the Ireland of the 1990s the benefits of being able to call on a diaspora whose members have in many cases gained hands-on experience of the fund industry in other leading jurisdictions, helping it gradually build up its level of expertise in parallel with the development of its business.
“Malta did not go out there with a whole marketing spree about how good the jurisdiction is, but grew gradually,” says Chris Casapinta, managing director of fund administration firm Alter Domus, who himself spent more than five years in Luxembourg. “Malta has been in this business since the mid-1990s and for a long time attracted little attention. That gave us the time to build up industry knowledge and the opportunity to attract home people who had left Malta to work abroad. It means that now resources are not an issue.”
Paul Mifsud, managing director of custodian Sparkasse Bank Malta, believes the AIFM directive will prompt managers to seek regulation in jurisdictions that are sympathetic to their requirements and enable them to get in business as quickly as possible. “Managers are putting people on the ground because brass nameplating is a no-no,” he says. “Offices are being taken up and manned. The business has matured globally, and people realise today that risk management is not a joke, nor is corporate governance.”
While Malta’s attractions as a domicile for managers include a fast establishment and licensing turnaround and modest personnel, office premises and services costs, the country’s appeal also lies in the spirit of co-operation and community within the industry, according to Andrew Zammit, managing partner of law firm Zammit & Associates Advocates. “Professional firms tend to work very closely with each other to develop a quality product,” he says.
“People are willing to share knowledge and solutions based on their experience. Professionals support each other and work together to improve the legal infrastructure for this type of business, and fund managers clearly appreciate this.” This attitude extends to the Malta Financial Services Authority: “The accessibility of the regulator is clearly a big plus, according to our clients, the fact that they are amenable to discussions and available to go over any operational or technical issues.”
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