The credit crunch and ensuing economic downturn have coincided with significant changes in the alternative fund services industry, both in Guernsey and beyond. This has seen some firms slimming down their operations – although there has been little or no reduction in financial sector employment overall in the island – and in many cases a rethink of the way service providers do business.
Consolidation in the market and a switch away from island-centric operating models is an important step for Guernsey as the industry matures. In the case of HSBC Securities Services this is not a development precipitated by the crisis but a process that has been underway since 2006 as part of a long-term strategy, even though the crisis may have accelerated it somewhat.
The consolidation process is resulting in changes of ownership for a number of fund administrators in Guernsey as other global or regional service providers enter the market. In many cases this involves adaptation of the operations to the models and systems espoused by the acquirer and depends on the ability of management to carry through the restructuring required without compromising the interests of clients or investors.
As elsewhere in the world, the industry is seeing a polarisation between global service providers, which operate through international networks and offer services such as business recovery spread across various jurisdictions, and niche firms specialising in serving smaller and start-up funds that do not require sizable investment in more advanced technical services.
With memories of the crisis still fresh, both fund managers and their underlying investors are paying much closer attention to the institutional solidity and depth of capabilities of fund service providers. This is an important factor in movements of business between administrators as managers, having come through the upheavals of the past two years, start to review their servicing arrangements.
Over the past year or so administrators in the island have seen business growth from traditional avenues as well as from hedge funds domiciled in jurisdictions such as the Cayman Islands, evidence that Guernsey is capable of competing for this business with centres such as Ireland. Its competitive advantage, beyond political and economic stability, is a highly skilled and experienced workforce with particular expertise in alternative funds.
The industry is a global one and clients expect world-class systems and service quality. The island is benefiting from its focus on the high value-added elements of fund servicing, including specialised areas such as compliance and corporate secretariat as well as core fund accounting and financial reporting operations, while more routine functions such as transaction processing are outsourced to jurisdictions that offer lower overheads and/or larger employment pools.
Local expertise is also a factor in Guernsey’s continuing ability to attract alternative fund managers and their businesses. Several private equity firms have had a presence in the island for years, and BlueCrest Capital Management is the most recent example of a hedge fund manager moving part of its business here.
The big unknown, of course, is the European Union’s Alternative Investment Fund Managers Directive. The best scenario would be for Guernsey to receive equivalent jurisdiction status and an EU marketing passport, but the existing private placement route would not be a bad result. Market participants continue to press the island’s case with influential regulators, legislators and industry bodies in a bid to achieve the best possible result.
Paul Keltie is head of fund administration with HSBC Securities Services in Guernsey