By Peter Craig – The alternative investment industry is currently seeing a surge in potential new entrants thanks to the shake-out engendered by the financial market turbulence of the past three years and the impact of new restrictions on proprietary trading by financial institutions. As the investment outlook continues to brighten, the alternative fund sector is poised to benefit from a new influx of talent.
However, newcomers to the industry face a number of hurdles. In the wake of the disruption experienced in 2008 and 2009, institutional investors in particular are cautious about placing money with untried managers until they have built up a track record. At the same time they – along with regulators – are demanding that managers demonstrate their commitment to compliance and governance standards as well as commitment to professional operations and procedures. All these developments have pushed up the cost of launching and running a fund management business.
The impact of these burdens on new firms is one of the factors that have prompted a change in the procedures for licensing of managers by the Isle of Man Financial Supervision Commission. Until recently the island’s regulator required managers to demonstrate full compliance with the regime before they would receive a licence allowing them to establish their business.
This created a Catch-22 situation for the principals of new Isle of Man-based firms, who found it difficult to attract key team members, such as compliance managers or risk advisers, without having a licensed business. The regulator was unable even to give such firms the assurance that a licence would be forthcoming once its conditions were met.
That has now changed with the introduction of an interim licence regime that allows managers to build up their operations and make essential appointments before having to meet all the requirements of a full licence.
The Graduated Manager scheme offers an optional two-stage licence process for applicants wanting to act as a fund’s manager, administrator, asset manager or investment adviser. The stage 1 start-up licence is a restricted one that allows a business to be established and start to develop links with funds. At stage 2 a full licence will be considered, and if granted the licence-holder can act for funds under normal regulatory requirements.
The change is part of the Isle of Man’s ongoing efforts to attract managers to base all or part of their operations in the jurisdiction. Already the island is host to a number of well-known management firms, including Laxey Partners and Charlemagne Capital as well as Tufton Oceanic.
The jurisdiction offers attractive personal and corporate tax conditions, including an annual cap of GBP115,000 on taxation of worldwide income for resident individuals and a zero corporate tax rate for most companies. Costs are lower, especially for office space, while the Isle of Man faces no constraints on housing. The island offers as many as eight flights a day to London and daily links to other major cities such as Dublin, Belfast, Liverpool and Manchester.
Recent growth in interest among London-based firms has been compounded by the European Union’s AIFM Directive, which will increase the regulatory burden on managers based within the EU, even those running offshore funds on behalf of investors elsewhere in the world, such as North America or the Middle East, rather than Europe. This new advantage of an offshore management business makes it a timely moment for the Isle of Man to roll out the welcome mat.
Peter Craig is a partner with PricewaterhouseCoopers in the Isle of Man