By Simon Gray – The success of Malta in becoming established as an alternative to the established European Union domiciles for both traditional and alternative cross-border funds, Luxembourg and Ireland, is underpinned by the growing breadth of capacity and depth of expertise of service providers to the industry, from law firms and accounting and audit practices to fund administrators and custodians.
The administration sector has grown substantially in recent years and still has plenty of room for further development, given that the net assets of funds domiciled in Malta, EUR8.3bn at the end of 2011, was larger than the volume of assets administered on the island, at EUR6.2bn, even though the latter included 164 non-Maltese funds with assets of EUR1.4bn, mostly from the Cayman Islands and other offshore jurisdictions in the Western hemisphere.
There are currently 26 recognised fund administrators active in the Maltese market, including a global financial services player in HSBC and the headquarters of the Custom House group, a number of specialist service providers active in various European and offshore fund centres including Abacus, Alter Domus, Apex, Folio, Heritage, and Trident, and various local firms such as the fund services arm of Bank of Valetta.
Some of the firms in the sector have come to Malta with an existing client base, such as IDS Fund Services, which specialises in serving South African managers that are offering funds to a global market. “We have enjoyed booming business this year, mostly from South African fund managers looking to mirror their domestic fund offerings or to launch completely new products in Europe,” says director Andrew Frankish (pictured).
“Because of the AIFM Directive, managers from outside are scrambling to establish a presence in the EU, which opens up opportunities for local providers to provide services to managers, helping them obtain a investment management license and setting up the sub-advisor relationship with the manager outside the EU. We have also seen plenty of new funds established over the past year, especially smaller launches from managers starting out with their personal seed capital.”
Malta’s focus on boutique-scale providers suits demand in the marketplace, Frankish argues. “The country offers lower set-up and ongoing running costs, and smaller managers don’t necessarily want to go to the brand-name providers that dominate in larger jurisdictions,” he says. “That is when Malta really competes at the moment, enabling it to nip at the heels of those longer-established centres.”
Anthony O’Driscoll, managing director of Apex Fund Services in Malta, says the number of local structures launched over the past 12 months has slowed somewhat, but the slack has been taken up by demand for the servicing of offshore vehicles. “We continue to get enquiries about Maltese funds, but the conversion rate is lower than it has been over the previous three years,” he says. “This year we have been doing more offshore business, traditional Cayman Islands and Bermuda structures, than Maltese PIFs and UCITS.”
One factor, he believes, is the continuing uncertainty surrounding the detailed AIFM Directive rules, but another is attitudes among Swiss managers, who have played a significant role in the growth of the Maltese fund industry. “Unless they have a large European investor base, a lot of managers will continue to look at offshore vehicles,” O’Driscoll says. “And then there’s the fundraising issue. Seed capital is still scarce on the ground for the launch of new funds.”
The test will come, he believes, once the directive and its implementing measures are fully in place. “Once it is operational, a lot of managers, even of the traditional US master-feeder structures, will have to decide whether they are going to cater for European investors, who may want their alternative investments to use an onshore domicile,” O’Driscoll argues. “They will have to look at how they access European money and whether they want to put in place European structures. Then the question will arise whether they want to be in Luxembourg, Dublin or a newer jurisdiction like Malta.”
A couple of the island’s administration firms have been established by providers from the British Virgin Islands, another jurisdiction in which niche firms have carved out a market serving small and start-up managers. According to general manager Roger Buckley, Castlegate Fund Services was established in Malta after an existing client decided to restructure its offshore fund as a UCITS, but the firm’s main focus is on providing back office services in Malta for BVI funds, although it also administers locally-domiciled UCITS and PIFs.
He notes that an important source of growth in Malta has been the revamp of fund legislation in Switzerland, which is set to place an onerous compliance burden on managers of non-Swiss funds that up to now have not been regulated at all, even if they wanted to be. The AIFM Directive – the catalyst for the regulatory changes in Switzerland – has also prompted managers of offshore funds to examine the merits of different European centres.
“Malta has a number of advantages, starting with its location,” Buckley says. “It’s close to the Middle East and North Africa, and has marketed itself as a centre for Shariah-compliant funds, which is something we’re positioning to do further down the line. We decided on Malta for our European hub because it is an up-and-coming jurisdiction and well suited to smaller managers, our target market. We do a lot of hand-holding and walk managers through all the processes necessary to set up a fund.”
The newcomers from Switzerland include Geneva-based law firm Lecocqassociate, which decided to establish a Malta office two or three years ago when investors in funds run by Swiss managers became less comfortable with funds based in the Cayman Islands and other Caribbean jurisdictions.
“These investors wanted EU-domiciled, regulated funds,” says managing partner Dominique Lecocq. “The EU jurisdiction that offers funds most like those in Cayman is Malta, in the sense that they can use service providers based outside the jurisdiction. A lot of clients were banks happy to be able to keep custody of the fund assets in Switzerland, whereas with a Luxembourg fund they would have needed to use a custodian there.”
That advantage is set to disappear in 2017, when Malta’s derogation from the AIFM Directive’s local depositary bank rule expires, but for the time being this factor is a counterweight to the much-discussed impact, particularly on UCITS fund business, of the relatively small number of custodians on the island. As it happens, Lecocq says the firm has three applications for the establishment of UCITS in the pipeline.
Most clients are looking to set up PIFs, open-ended funds following hedge fund strategies, but the firm is seeing a variety of other business. “We have several gold funds in the pipeline, as well as a number of private equity funds as well, and we have just received a UCITS licence,” Lecocq says. “Malta is a good jurisdiction for UCITS funds because the total expense ratio of a fund here can be lower than in competing jurisdictions.
“A Maltese fund would probably pay between one-third and half of the fees paid by a Luxembourg fund – EUR10,000 to EUR15,000 in Luxembourg, but only EUR5,000 here. If you’re launching a fund with EUR100m, it may not be so important, but if you are having to build a track record with EUR5m to EUR7m in seed capital, it does make a difference. That said, we have also launched a EUR500m fund for a Swiss bank.”
Chris Casapinta, who joined the Malta office of Luxembourg-headquartered Alter Domus in 2010 after a decade with PricewaterhouseCoopers, says the advent of the AIFM Directive next year offers administrators the opportunity to expand their service offering into middle-office areas such as risk management.
“We’ve integrated our administration, IT and compliance systems so as to be able identify issues in the way portfolios are performing, how weightings of investments are leveraged and whether this is giving rise to any risk issues,” he says. “Information is coming straight from our accounting systems into our reporting platform, enabling us to monitor risk management processes in real time and report them to our clients and their investors as necessary.”
This year has been a successful one for Alter Domus in Malta with a dozen new mandate wins, even if the difficulties in the fundraising market continue to keep the island’s assets under management tally lower than the industry would hope. “We are getting significant numbers of fund managers interested in setting up funds in Malta,” Casapinta says. “I think we’re doing a good job of communicating the advantages and disadvantages of the island to the investment management world.
“People are currently finding it challenging to set up funds because of a variety of circumstances, including the general economic climate and the mood of investors, although this is something that every jurisdiction is facing. And while bigger players continue to attract new assets, most of the managers operating funds out of Malta are quite small, and therefore under greater pressure.”
Casapinta acknowledges that the additional burden of liability that will be placed upon custodians of EU-domiciled alternative funds places additional pressure on their working relationships with independent fund administrators. “Because of their myriad responsibilities under the AIFM Directive, custodians need to be more comfortable about other service providers, especially administrators,” he says.
Some analysts believe the cost of compliance with the directive will give an advantage to global financial service group that can provide both custody and administration as part of a one-stop shop package. However, this model does not particularly suit a Maltese clientele dominated by smaller funds and managers, many of which will not meet the minimum asset size requirements of some big players.
In addition, the experience of recent years show that having different service providers that are in a position to monitor each other’s activities as well as those of the fund manager can provide added protection and comfort to investors, too. Says Casapinta: “Not all fund managers and investors want the fund administrator and custodian to be the same.”
It’s a similar story at Sparkasse Bank, an independent custody provider that has taken advantage of the lack of providers in this sector to carve out a significant role in the Maltese fund industry. “The approach of the big institutions is that they will do everything from A to Z,” says managing director Paul Mifsud. “That way, they say, there is no leakage of risk, but we take a different approach.
“We specialise in custody, and concentrate purely on the key aspects such as risk management, monitoring of portfolios and record-keeping. We work hand-in-hand with independent fund administrators that may not necessarily be able to work with the larger custodians. Often their custody systems are not standalone; fund administration and custody are a single module in their IT system. So for independent administrators, we hit the sweet spot.”
It may also hit the sweet spot with some of the Swiss institutions that are now looking more closely at the Maltese market. Says Mifsud: “In special business cases we are sympathetic to requests from institutions that want to look after the assets through sub-custody arrangements – as long as we can control the risks, obviously.”
Katya Tua, head of the investment services department at law firm Simon Tortell & Associates, notes that in any case only one of the three types of PIF – the Experienced Investor PIF, which is designed for more affluent and sophisticated retail investors and has a minimum investment level of just EUR10,000 – is currently required to have a depository bank.
“The other two types of PIF [Qualifying Investor PIFs, which have a investment minimum of EUR75,000, and Extraordinary Investor PIFs, which have a minimum of EUR750,000] are not obliged to use a custodian,” she says. “However, they must satisfy the regulator about their safekeeping arrangements, and in practice most of them do appoint a custodian anyway. However, the fact that the custodian does not have to be local, but like the manager and administrator can be from any approved jurisdiction, does give Malta some flexibility.”
Overall, however, Tua agrees that having a larger choice of custody providers would definitely bolster Malta’s competitiveness as a jurisdiction. “For operational reasons, it is often convenient to have a local custodian,” she says. “For example, the custodian of a Experienced Investor PIF has not only the safekeeping role but a monitoring function as well. This can be an important aspect of the custodian’s duties, and an area that would be strengthened by the arrival of more large providers.”
Frankel says this is essential if Malta is to challenge Luxembourg and Ireland more effectively as a UCITS domicile. “Although some new custodians have come in, I don’t think it’s anywhere near where it needs to be for the jurisdiction to become a competitive force in the UCITS market. Like any fund services jurisdiction, Malta has to offer potential clients a full range of options. From a UCITS perspective – and indeed of any business that requires a custodian – that is an area in which the country is lacking for now.”