The alternative investment fund services industry in the Isle of Man may not yet be on the same scale as the sector in Dublin, Europe's largest centre for hedge fund services, but new business is flooding in. There are signs that the island is starting to win mandates from other jurisdictions, as fund promoters look for a higher level of service quality and personal attention than is available elsewhere.
Over the past three years, the assets of funds domiciled and/or administered on the island has grown more than threefold, from USD9.8bn to around USD30bn, according to Brian Donegan, business development manager with Isle of Man Finance, the department of the island's Treasury responsible for promoting the financial services industry. The island appears to be on track to reach its target of USD50bn in fund assets by 2008, and Donegan adds: 'We now have a target of USD100bn for 2010, and we feel very confident we're going to achieve that objective.'
The island is benefiting from a growing perception that while Dublin's hedge fund administration sector has grown in tandem with the upsurge in the alternative investment market over the past few years, the Irish capital has become a significantly more expensive place to do business, removing its one-time cost advantage. At the same time a high level of staff turnover has caused problems with customers concerned about the quality and continuity of the service they receive.
These issues give the Isle of Man a significant opportunity in competitive terms. Says Mike Simpson, the partner in charge of investment management work at PricewaterhouseCoopers: 'Quality of service is where the Isle of Man is trying to set out itsstall. The labour market in Dublin is very tight, and the feedback is that staff turnover is very high, which always has a direct knock-on effect on service quality. The workforce is much more stable on the island.'
There are no official statistics on the size of the fund administration sector, but it numbers more that 15 firms and accounts for a significant proportion of the 12,500 full-time professionals currently employed by the island's financial services industry. At the end of 2005, an estimated 70 per cent of assets were serviced by the two largest administrators, HSBC and Fortis. Says Donegan: 'The funds administered here range in size of assets from USD5m to several billion dollars, and are mainly hedge funds and funds of hedge funds, but also private equity, property and emerging market funds.'
Until recently the Isle of Man's fund services industry had maintained a relatively low profile, especially by comparison with the island's banking and life assurance sectors. However, the funds business is starting to shake off its anonymity largely thanks to two developments: the unveiling of new fund structures, including notably the Experienced Investor Fund, in 1999, and the removal four years later of what Donegan describes as 'impediments' to growth, such as the levying of VAT on fund administration services. 'In 2003 the Treasury took a number of initiatives to remove some of the obstacles that were holding the industry back,' he says. 'In addition to a VAT-free, tax-free regime for the funds business, we also introduced a 50 per cent capital expenditure grant, which means that anyone coming to the island can potentially get half of their start-up costs such as office rental or construction, recruitment, IT systems and equipment paid upfront by the government.'
The Isle of Man fund administration sector has been in existence for more than a decade and a half - predating that of Dublin - and its two largest members, HSBC and Fortis, are long established in the island, Nevertheless, there is considerable satisfaction at the recent decision of Anglo Irish Bank, which already has an extensive banking operation on the island, to add a fund administration operation.
Donegan says the dramatic growth in funds business over the past two years has been down to a combination of strong asset growth in existing funds and the arrival of new funds, both start-ups and mandates transferred from other administration centres. But there is a lively debate on the relative importance of Isle of Man-domiciled structures, notably EIFs, and administration work for funds registered in the Cayman Islands and British Virgin Islands, the world's dominant offshore alternative fund domiciles. At the end of March this year, the Isle of Man Financial Supervision Commission regulated a total of 173 collective investment schemes, of which by far the largest proportion (135) consisted of EIFs. However, according to Richard Vanderplank, a director with the island's leading law firm specialising in funds, Cains, the regulator's figures do not give a full picture of the island's fund business.
'Areas that aren't fully listed by the Commission, but in which we do a lot of work, consist of closed-ended vehicles, including AIM listed companies, and exempt schemes, the latter being a small unregulated private equity institutional-type arrangement which has long been popular among promoters,' he says. 'It's difficult to gauge the numbers and full volume of funds under administration within those sorts of structure, because they're not subject to a prior approval or universal notification process, but they're quite a significant area of business.'
While the use of EIFs and other Isle of Man fund structures has been booming over the past few years, some administrators believe that overseas-domiciled funds offer an equally attractive market. Says Gordon Wilson, managing director of Caledonian Fund Services (Europe): 'The choice of domicile is all about the relationships of lawyers setting up these funds, and there is a tried and tested Cayman fund product. We need to market the things that are unique to the Isle of Man and compete globally.' Caledonian, which has been active in the Isle of Man since 1999, was founded in Grand Cayman in the 1970s and also has an operation servicing US onshore funds in Chicago. Wilson says the island is increasingly benefiting from consolidation among Dublin administrators because the large operations that now dominate the market there have become less interested in smaller and start-up funds.
He says: 'Our target market is the smaller start-up fund, and we are very busy with new business that is coming here because bigger firms in Dublin are focused on bigger funds. All the big hedge funds themselves started out as small outfits five or 10 years ago. As the funds grow they become more institutional themselves, but at a cost in terms of flexibility. Most hedge fund managers want to be at the cutting edge, doing riskier business to make bigger returns, which is why there are always spinoffs out of these big shops as managers reject the shackles and want to do it for themselves.'
According to Simpson, the Isle of Man of Man has always been an important location for start-up funds, but it now offers significant cost advantages over other jurisdictions. For example, he says, the minimum fee charged by administrators on the island might be around USD20,000, compared with as much as USD50,000 in Dublin.
However, he insists that the EIF remains a valuable tool. 'We've got a sound product, it's a case of marketing it effectively,' Simpson says. 'EIFs can be used for a number of products, not just hedge funds but private equity and property, where we're also seeing plenty of growth.'