By James Williams – Ireland has had a lot to contend with, economically, in recent times. Earlier this year the Irish Central Bank identified that an additional EUR24 billion was needed on top of the EUR46 billion bailout package to Ireland’s failing banking system agreed upon back in September ’08. Allied Irish Bank, Bank of Ireland, building society EBS and Irish Life and Permanent all received emergency funds. Bank of Ireland now remains the only Irish bank not to be fully nationalised. Finance Minister Michael Noonan said that the country’s banks would be turned into two new “universal pillar banks” with AIB merging with EBS.
The efforts by Irish Central Bank to overhaul the banking sector are commendable, yet the country still isn’t out of the woods. The Greek sovereign debt crisis continues to threaten Ireland and just last month AIB defaulted on its debt, although admittedly this was on a small number of bonds. Nevertheless, it meant CDS holders were entitled to pay out. A default is exactly what the Irish government strived hard to avoid. Whether there will be repercussions for Bank of Ireland debt down the line remains to be seen.
Against this gloomy backdrop one might be forgiven for thinking that Ireland’s financial services industry is floundering, caught up in the domestic maelstrom. In fact, the opposite appears true. Ireland’s funds industry saw AuA grow from EUR1.4trillion to EUR1.9trillion in 2010, helping create 400 jobs. An estimated 900 to 1000 jobs are expected in 2011.
The country is able to enjoy robust growth in its funds industry precisely because it remains isolated from domestic problems. International funds domiciling there are serviced without issue. "Our financial services business, when you put domestic issues aside, is all very internationally-driven. It’s an industry that has developed well over the last 24 years," says Mark White, partner and Head of the Investment Management Group at law firm McCann FitzGerald.
People were concerned that Ireland would see a fall-off of new funds being domiciled and/or administered because of the domestic banking crisis, says White, "but thankfully that didn’t happen and we managed to get that message across in a positive way as evidenced by the growth in new funds under management."
"I think Ireland’s funds industry has been quite robust the last few years, it’s ring fenced to the rest of the economy and perhaps even to the rest of the financial services sector given that it’s completely focused on clients and servicing funds that are controlled by international parties," comments Stephen Carty, partner in the investment funds group at the Dublin office of international law firm Maples and Calder.
Carty says that whilst Ireland may still be tainted in light of how catastrophically overheated its economy became in recent years, its funds industry has always stood up to scrutiny. He cites the 12.5% corporate tax rate as an example. France and Germany would like to see this increased and Ireland could bow to EU pressure. The matter is yet to be resolved but as Carty points out: "The issue is largely detached from the funds industry because there’s no tax on funds domiciled in Ireland. There’s never been any question marks over the tax status for investment funds."
Stretching back to the 1950s, Ireland’s policy of low corporate tax was crucial in developing itself as an open economy and jurisdiction to provide inward investment. This partly explains why the economy imploded. In the halcyon days of ’05 and ’06 before the financial crisis hit, Ireland was booming. Wage levels skyrocketed, along with real estate prices. It all got rather out of control. Fund managers looking at Ireland started to worry about cost levels.
"An issue that may have impacted the funds industry competitively was that Ireland had become regarded as an expensive place to do business. There was a high turnover of staff and people expressed concerns about continuity in terms of service. Those issues are no longer a concern," explains White.
Clients doing their due diligence three or four years ago would have viewed staff turnover on the administration side as a negative because relationships are important in Carty’s opinion.
The fact that wage levels have fallen across Ireland has helped further bolster the funds industry.
"We don’t see high staff turnover in administrators being such a concern for clients anymore. I’m sure administrators would tell you that staff retention numbers are now extremely high and that’s paid off for the clients because relationships are much more stable," says Carty.
In July 2011, the Irish government announced an ambitious five-year plan to create 10,000 new jobs in the financial services sector. Taoiseach Enda Kenny said the target was a "credible estimate", although as the Irish Times astutely pointed out, only 5,000 to 6,000 jobs were created over the last five years. "The 10,000 is well within achievement within five years based on rebuilding that reputation (as a global leader in financial services)," said Mr Kenny.
Gary Palmer, Chief Executive of the Irish Funds Industry Association (IFIA), welcomed the strategy, saying that it clearly demonstrated "the Government’s ambitious plans and commitment to Ireland as a domicile and administration centre for internationally distributed investment funds".
Changing regulatory conditions in Europe with AIFMD and the recently introduced Ucits IV Directive are causing fund managers, both within the traditional and alternatives space, to re-think their strategies. Institutional investors want more non-benchmarked products, fund managers want the big tickets: one of the solutions is alternative Ucits that meet the stringent regulatory requirements pension funds etc look for, but QIFs are also becoming a favoured structure. That Ireland has such deep expertise in the alternatives space makes it ideally placed to take advantage of the regulatory evolution.
"Ireland is seen as a leading jurisdiction for alternatives based on its legacy business of supporting non-Irish funds going back 20 years," says Carty, confirming that Maples & Calder has seen sustained interest in Ucits across the range from ETFs and index-based Ucits through to alternative Ucits with clients ranging from investment banks to small hedge funds. "Ucits are certainly the success story and I think there’s scope for the sector to grow further."
Palmer points out that in 2010, total assets in Irish funds grew by 29%. Within that, Ucits assets grew 27% and QIF assets grew 35%. "This growth has continued into 2011 and through May the latest available figures show that assets have grown by a further 2.5%. Ireland is the fastest growing internationally distributed Ucits centre," says Palmer, adding that a recent industry survey showed that investors from 170 countries were serviced by Ireland’s funds industry.
In White’s opinion, Ireland could well benefit, especially given that QIFs are AIFMD-compliant. Non-EU managers who need an EU platform could look beyond Ucits because of the constraints it offers. "The QIF has always needed a custodian so it’s not a shock to the system. The nuts and bolts are already in place," says White. "It fits nicely between the Ucits and Cayman because it can pretty much offer a direct replication of the offshore strategy. It’s like a Cayman fund, in terms of product flexibility, but the key differences are that a QIF is regulated by an EU Member State regulator and required to have an independent depository."
Carty agrees: "The QIF is well positioned and the opportunities with AIFMD are more on the marketing side in terms of being able to develop a product that replicates the success of Ucits as a cross-border product. Provided everything goes to plan as AIFMD is implemented you might see a replication of what Ucits did in the alternatives space. It’s certainly something to keep an eye on."
Right now, Ireland has 63% of the regulated hedge funds market. It’s not inconceivable that figure could rise over the next few years.
Under Ucits IV managers can now, for the first time, act as manager to different Ucits funds on a cross-border basis. This could benefit Ireland if, for example, a large manager with operations in Dublin, the UK and Germany decides to consolidate its management activities in the city, says White. And whilst Carty believes it’s still early days in terms under Ucits IV, he does think large-scale institutions could avail of the master/feeder structure long term. "Then again, with the Ucits product being more and more homogenised and hardwired at the EU level you could argue that there would be no need to have a number of country-specific feeders."
The upshot of more funds choosing to be domiciled in Ireland is that it’ll create more jobs on the service side. Employment levels grew by 5% in 2010 and are expected to grow by 8% in 2011. There’s a lot to be bullish about. "With increased labour productivity, the employment survey also reported increased levels of continuous company service and significantly reduced industry mobility, down 66% on the 2006 levels," adds Palmer.
One area that’s yet to fully develop, however, is the asset management industry. Ireland has all the right ingredients: infrastructure, favourable tax regime, industry support from IDA and Enterprise Ireland, talented people. The regulatory side of starting up asset management businesses "could be a little easier" in Carty’s opinion who adds: "If there were large numbers of asset managers opening in Ireland you’d see the procedures and requirements run much more efficiently and smoothly."
Given the domestic chaos, Ireland should be applauded for the way its funds industry continues to strive forward. There will be challenges ahead, of course, but with commitment from the highest echelons of government and changing European regulation potentially playing into its hands, Ireland is well primed to succeed.
"To strengthen our growing partnership with the international fund community, as an industry we need to continue providing product solutions, operating efficiencies and distribution opportunities. In this regard Ireland was one of only a few countries to be fully Ucits IV compliant by 1 July this year," concludes Palmer.
Please click here to download a copy of the Hedgeweek Special Report: Ireland Hedge Fund Services 2011
