Following a year in which the hedge fund business boomed as rarely before, service providers in Dublin are simultaneously optimistic about the jurisdiction's future as Europe's pre-eminent centre for administration of alternative investment products yet concerned that at least one aspect of Ireland's competitive advantage has been sacrificed to its success and growth.
Dublin made its name in the international financial services industry in the early 1990s as a lower-cost alternative to Luxembourg as a hub for cross-border business, at that time principally investment funds and life assurance, within the fledgling single European market. But today, having won acceptance as a repository of expertise and experience in a number of financial services markets, soaring salary levels, property expenses and other overheads have decisively taken Dublin out of the low-cost category.
No conversation with a hedge fund service provider in Dublin fails to touch on the issue of staff, their availability and cost. Virtually all market players agonise over whether the industry can remain competitive. However, to some extent this is a rallying cry to avoid complacency. None of Dublin's actual or aspiring competitors in the sector, from the Cayman Islands and Bermuda to Luxembourg and the Channel Islands, could be described as low-cost themselves, and potential future centres in eastern Europe or further afield are years away from acquiring the breadth and depth of skills to become serious rivals.
However, the industry is not resting on its laurels. Today's breed of administrators tend to offer a wide range of sophisticated services to their hedge fund clients that stretch well beyond the booking of investments and the noting of net asset values to capital provision, risk management and pricing of obscure and exotic investments, in some respects stepping onto the turf usually occupied by prime brokers. The logic is that if in future some less complex tasks are outsourced to lower cost centres, Dublin firms can concentrate their resources on higher value-added services. In the meantime, service providers are learning to live with the price of Dublin's success by efforts to increase their levels of staff retention through training and career development programmes, and also by channelling expansion efforts into satellite offices in other towns and regions around Ireland, which not only keeps cost levels down but offers access to a broad range of potential new recruits provided by Ireland's much-admired education system.
Says Pascal Lambert, chairman of Bear Stearns Bank, which provides custody and trustee services in Dublin: 'People within the fund administration industry are concerned about rising costs in Ireland, but at the same time it still has a huge pool of talent that will continue to emerge in the future. We are very impressed with the quality of the young graduates that come out of the universities, but the issue is how you keep them motivated after three or four years to climb to career opportunities within your organisation. Administrators just have to accept that there will be significant staff turnover and cope with it, hopefully managing to retain the best people.'
Says Raymond O'Neill, a founding member of fund consultants and advisers Kinetic Partners: 'We have to make sure we keep jobs interesting, keep people motivated and build their careers, so that they don't find themselves continuing to do routine tasks. It's lack of variety that drives them from one organisation to another, so employers are now being challenged to make their positions more attractive, whether it involves doing NAV calculations, processing trades or carrying out shareholder record-keeping.'
Country manager Clara Dunne says CACEIS Investor Services puts a great deal of effort into staff training and retention. She says: 'There is a lot of turnover in the market, and we see investing in people, both in terms of training and recruiting the right kind of people to begin with, as very important. Staff at CACEIS get a very good experience because we haven't functionalised our operation, so particularly on the fund accounting side, they are responsible for a fund from start to finish. 'This is more attractive to young people who are trying to build their career since they aren't obliged to specialise in one narrow area, but deal with the whole picture. We believe it's also attractive to clients because they have someone they can talk to, an operational contact who genuinely understands their product. This is an approach that works both from a staffing point of view and from the client's point of view.'
Industry professionals acknowledge there is a danger of competition for skills turning into an inflationary spiral that starts to make Ireland less attractive for administrators and their clients. Says Karen Tyrrell, managing director of BISYS Hedge Fund Services Europe: 'There's probably zero unemployment in financial services in Ireland at the moment, if such a thing exists. 'It's definitely an employee's market - people can go travelling for a year then come back and get a pay rise - so companies need to be careful that they don't cannibalise each other by being taken hostage by staff. Without there being a cartel, we all have to be sensible about taking staff from each other. There's no point in everybody pricing each other out of the market.'
As Tyrell notes wryly, unfortunately Ireland did not experience a baby boom in the 1980s to match the growth of the hedge fund industry 20 years later, but the demographic news is by no means all bad. For the past few years, Ireland has been enjoying a reversal of the emigration tide that has characterised much of its recent history, as Irish people who went abroad in the 1980s an 1990s in search of career opportunities then unavailable at home return to the country, many of them with invaluable financial services skills and experience gained in centres like London, Luxembourg and New York.
Says Tyrrell: 'Ireland has started to do a better job in terms of attracting people to the country. That includes Irish people who went to London in the 1990s when the job market wasn't so great and who are coming home now, but also foreign nationals. Being part of the EU has brought a lot more freedom on the labour market.'
Today Dublin is acquiring a multinational culture and a range of linguistic skills that would have been unimaginable a decade or so ago. According to a recent survey, a total of 169 languages are now known to be spoken in Ireland, and Dermot Butler notes that the 108 Dublin-based staff at Custom House Administration, where he is chairman, speak 16 languages between them.
'From our experience, staffing doesn't appear to be a major problem at the moment,' he says. 'We have problems filling some posts, but it helps that unlike most other existing European Union countries, Ireland has allowed citizens of the new EU member states free access to the national labour market.' There are understood to be more than 200,000 non-Irish immigrants, including at least 100,000 Poles, and one leading evening newspaper publishes a Polish-language supplement each week. Says Deirdre Lyons, head of international financial services at the country's economic development promotion body, IDA Ireland: 'We were the first developed country to open the barriers and accept everybody, and that openness has paid dividends. Many of the financial services companies that operate both inside and outside Dublin are now very multicultural. There is a strong belief that cultures that don't discriminate against outsiders and are accepting of new ideas and faces are more successful.'
If the people required to handle the influx of new hedge fund business aren't available, or not at the right price, in Dublin, there's a strong likelihood that they may exist somewhere else in Ireland. The IDA has played a leading role in encouraging some of the biggest administrators in the market, including Citco, BISYS, PFPC and State Street, to create satellite offices not only in the hinterland of the capital but in regional centres such as Cork, Drogheda, Galway, Kilkenny, Waterford and Wexford. There firms have been able to tap into pools of labour and to forge links with local educational institutions in order to ensure that the skills and qualifications they need are readily available.
One interesting development is that last November HSBC opened up an office in Sandyford, on the outskirts of Dublin, which predominantly provides training for people from all over Europe,' says O'Neill. 'Organisations are now looking to capitalise on the expertise in the Irish market not only for day-to-day operations but training and IT centres.'
According to Tony McDonnell, head of business development for HSBC's Alternative Fund Services, the European Training Centre has been designed to offer graduates a comprehensive training programme before they enter the 'live' office environment, and to provide existing staff with a development matrix in order to identify the skills and training required to further their career. He says: 'Investment in development is vital to ensure employee retention and performance and to create a constant pipeline of talent into the business to meet industry growth
The IDA is also examining what Ireland could do to encourage research and development activity linked to the funds industry. Says Lyons: 'We are talking to industry players about the whole concept of research and development within the sector, how we might harness and actively support that. The initiative is in its very early stages, but we believe this is another area where we can build in more advantage to be in business here and to maintain it in the future.' In general, industry players believe that Ireland's legal and regulatory infrastructure is an important asset for the hedge fund services sector. Says McDonnell: 'One of the biggest drivers of growth in Dublin is regulation. Funds targeting institutional clients are becoming increasingly aware of the benefit in having the fund domiciled in a highly regulated environment and/or having the fund listed on a recognised exchange.
Furthermore, by choosing an Irish-based service provider to administer an offshore fund, investors also benefit from an additional layer of regulation that the administrator must adhere to. Both these factors are attractive to institutional investors and can be a key component of the fund's marketing appeal.' However, the praise is not unqualified.
There is a widespread belief, for example, that the approval process for Irish-registered hedge funds needs to be speeded up considerably if the country is to offer an attractive alternative domicile to the Cayman Islands - although industry participants recognise that this is probably dependent on increasing the resources available to a regulator, the Irish Financial Services Regulatory Authority (Ifsra), which also has to monitor activities ranging from investment management to distribution of retail products.
Says Ronan Nolan, partner in charge of investment management services at Deloitte & Touche Ireland: 'There is continuing debate about the degree of regulation for Irishregistered and Irish-regulated entities. There has also been quite a lot of discussion about corporate governance and the role of independent directors, and the requirement for a minimum level of activity here, which is probably more relevant to the Ucits end of the market but also applies to Irish-registered hedge funds. It is placing something of a strain on the independent director sector.'
Predictably, companies in Ireland have few complaints about the corporate tax rate of 12.5 per cent - 'as good as it gets,' says Butler - but for some industry players the jurisdiction's capital adequacy rules somewhat take the gloss off. Says Citco Fund Services managing director Declan Quilligan: 'Of the 11 jurisdictions in which Citco has operational centres, Dublin is the only one where there is a capital adequacy requirement. We're talking about money sitting in the bank account, and this is a barrier to growth because as your operation grows, the capital adequacy requirement becomes more onerous.'
In other respects, however, hedge fund services firms are resigned to a growing regulatory burden, knowing that much of it stems from the EU and is outside the hands of either the industry or the government, and that to a large extent it is an imposition shared with competing jurisdictions. Says O'Neill: 'Ifsra is actively looking at the rules governing Irish-regulated business and examining ways to relieve stresses an strains on the industry, such as outsourcing or offshoring. Clearly the environment is going to remain challenging in terms of new regulation and its impact, but what we ask of the regulator is to be sensible in terms of how it's handled.'