Ireland has established itself as a leading investment funds servicing jurisdiction.
Ireland has established itself as a leading investment funds servicing jurisdiction. The funds servicing industry has grown phenomenally and is now the single largest employer within Ireland’s international financial services sector. Many factors have contributed to this, most importantly, regulatory and legal norms and skills. The existence of a highly developed fund services industry in Ireland is mostly due to the willingness on the part of the Financial Regulator, the Irish Stock Exchange and the Irish Government to work with the industry to adapt and develop regulation to meet international promoters’ needs.
In addition to the stronghold of the domiciled business – the Ucits products – Ireland is recognised as one of the leading administration centres for hedge funds and funds of hedge funds globally. Its success is derived from experts and professionals in the field with an estimated 15,000 now working across the large number of fund administration and custody/trustee services providers, specialist legal, audit, tax and listing firms, and consulting firms.
Trends that are set to dominate this year include a shift in product and service offerings, as funds accustom themselves to the credit crunch, along with infrastructural and technological developments that are fast seeing a lot of attraction, as speed and turnaround times gain priority among managers and their investors. And last but not least, a trend that has been spreading over time is that many in the industry are expanding their administration operations into the regional cities and towns with many of the leading players now having significant operations outside of Dublin.
Ireland’s funds servicing industry is dynamic, with products and services constantly being adapted and transformed, and new ones always on the horizon to meet the changing needs of promoters and investors. With the liquidity squeeze since last year, a lot of change has taken place – and a lot of change is also due to take place. Accordingly, the funds servicing industry is ready to take its dynamism a step up to a higher level.
The industry, which services over EUR 1 trillion in assets, is recognised internationally as a centre of innovation in terms of product development and service levels across all fund types. New product types are always on the radar. Ronan Nolan, a partner at Deloitte Ireland, says there is an increased focus on private equity and ETFs (exchange traded funds). Gary Palmer, CEO of the Irish Funds Industry Association adds, ‘To anticipate market demands and to reflect market developments, the regulatory environment for investment funds requires constant consideration. Some of the areas currently under consideration include property funds and private equity funds.’
Don McClean, head of fund services in Ireland for UBS Global Asset Management believes that QIFs (qualifying investor funds) continue to be popular for hedge fund managers. ‘Also, UCITS (undertakings for collective investment in transferable securities) – because of the Ucits III shorting abilities – could see a major increase in use from traditional as well as hedge fund managers,’ he adds.
Meanwhile, the recent Department of Labor advisory opinion in the US may give some momentum to cross-border pooling. The ruling has essentially given the all clear for US pension plans to invest in tax transparent pooling vehicles. There are signs now of an increase in investment manager interest in this area.
Andrew Dillon, Managing Director at Baronsmead Insurance Brokers Ireland, says that a lot of work is being done on increasing efficiencies in the area of OTC (over the counter) derivatives and fund of hedge funds. ‘These areas are not yet as well processed (at an industry level) as more traditional and mainstream instruments,’ he claims.
Palmer is also witnessing a shift between product types. ‘For example, stable money market funds have become very attractive to investors as their preferences towards equities and bonds diminish. Notwithstanding this shift, Ireland has a wide spectrum of product structures and, accordingly, as investment preference shifts, it can be accommodated in Irish fund structures,’ he adds.
Another trend among fund service providers in Ireland that is gathering momentum is the expansion and setting up of offices outside of Dublin. The main reason for this is the increasing cost structures, especially in real estate, linked to the capital. Many multinational and industry companies have established operations throughout Ireland and are now located in centres outside of Dublin – in Wexford, Waterford, Kilkenny, Cork, Limerick, Galway, Kildare, Meath and Louth. More companies are planning to expand their operations outside of the capital.
David Aldrich, Managing Director of The Bank of New York Mellon, explains, ‘Ireland continues to face two important challenges, capacity and cost. As the hedge fund servicing industry grows apace there are clear capacity constraints in Dublin for experienced alternative fund accountants. Firms such as The Bank of New York Mellon have responded to this by creating full service satellite offices in Cork and elsewhere around the Republic. This has helped create capacity but has not addressed the cost challenge, which has been exacerbated by the rise of the Euro, since most funds serviced are dollar denominated and revenues are dollar linked.’
John Alshefski, senior vice president at SEI, says that companies in the IFSC have for some time been actively looking at options elsewhere in Ireland to set up satellite offices, and many have already taken this step.
In terms of addressing the cost issue, help may be at hand in Northern Ireland, with recent regulatory developments favouring an all-Ireland approach to fund servicing. A recent agreement was struck between regulators north and south of the border whereby satellite offices established in Northern Ireland could continue to be regulated by the Irish Financial Regulator.
Aldrich adds, ‘The province has an advantage in being GBP-based, since sterling has been historically less volatile against the dollar than the Euro.’
The recent US-NI Investment Conference held in Belfast was actively supported by both the Irish and UK governments, with the Taoiseach and Prime Minister attending, one of the primary goals being the development of a securities servicing industry in the North, in partnership with the established market in the Republic. ‘If this latest initiative leads to the fund administration industry being able to tap into the supply of talent in the North as effectively as it has in the Republic, then this may bode well for a continued expansion of the activity in the south to the benefit of the whole of the island of Ireland,’ Aldrich says.
Alshefski believes that the factors that make Northern Ireland so attractive mirror the factors that led to Dublin’s success. ‘The highly-educated and eager workforce, coupled with a lower cost environment, will certainly lead outsourcers to consider Northern Ireland as a prime location when expanding,’ he adds.
A major initiative in Ireland was that in February 2007, the Financial Regulator stopped carrying out its pre-authorisation reviews of QIF structures and revamped it into having a new QIF structure authorised on a filing-only basis within one business day. Since this groundbreaking change in approach, dialogue has continued with the Financial Regulator and the funds industry to further improve the QIF product from the perspective of fund managers and investors.
Now, another move is underway which will help the funds industry to cope with higher capacity and, at the same time, save time. The SWIFT initiative is poised to change the landscape for funds of funds. SWIFT allows standardisation and automation of many business flows including account openings and maintenance, orders, transfers, reporting on price and cash flow.
Don McClean at UBS explains, ‘The industry has been dogged by manual processes since inception – unique identifiers coupled with a standard messaging platform will reduce costs, reduce risk of error, enhance trading and settlement efficiency and may force greater activity and liquidity in target funds as the industry is able to cope with larger volumes in a greatly reduced timeframe.’
Another trend is the industry’s increased focus on best practices, which is being driven by more institutional asset allocations, the recent credit crisis and increased regulatory scrutiny. The UK Hedge Funds Standards Boards touched upon five general areas that funds should focus on, which include disclosure, risk management, valuation, shareholder conduct and fund governance.
‘SEI is providing the infrastructure, technology, and expertise to help our clients strengthen their operating environment. For example, we’ve established controls, automation and workflow processes to mitigate risk. Our clients also appreciate the annual SAS 70 audits we undergo, as it serves as another way for them to facilitate their compliance needs and increase their transparency into our operations,’ Alshefski says.
As the financial market place becomes ever more complex, the regulatory regime which exists in Ireland for the creation of investment fund structures is responding accordingly.
The regulatory perspective is seen as very positive, in that the Financial Regulator clearly recognises the imperative to combine a reputation for first class regulation with competitiveness and responsiveness to innovation. The recent encouragement for activity in Northern Ireland as well as regional locations in the Republic is a good example of this.
In general the funds industry believes that Ireland, from a regulatory point of view, is in good shape. ‘The regulator encourages successful business activity in a strictly regulated environment – it’s an attractive environment for both investors and service providers,’ says McClean.
Institutions are continuing to invest in alternative investment funds, albeit more cautiously, given market conditions. In such a situation, firms with experience, financial capabilities and critical mass stand out. SEI’s Alshefski says that they are increasingly concerned about risk in all forms – headline risk, performance risk, regulatory risk, etc. ‘We are also seeing institutions influencing more outsourcing decisions and conducting more thorough due diligence on administrators. In our experience, institutions are looking for an administrator that has name recognition and is a strong, stable and financially healthy company,’ he says.
Consolidation is expected to continue to occur this year, mainly because it’s becoming more difficult for smaller providers to provide the level of technology and services that hedge funds are increasingly demanding. ‘Considering we’ve grown to our current size organically – over USD 115 billion in alternative assets under administration and more than USD 400 billion worldwide – we know the level of investment in technology and resources it takes to reach critical scale. As institutions demand more from their hedge funds, such as enhanced reporting, greater transparency and customised solutions, that means outsourcers are also facing pressure to enhance their capabilities, which is often more difficult for smaller providers with limited resources,’ Alshefski adds.
However, due to the vast spectrum of products and services in demand, smaller, boutique fund administrators will also play an important role.
The global economy has had, and will have, a direct impact on the funds industry. New providers continue to enter the Irish market and this is balanced by consolidation in the industry. New jurisdictions are moving into the alternative investment space and these jurisdictions are carving their own niche. McClean says that the outlook for Ireland is continued growth. ‘As always, the alternative investment industry continues to invent new products and new investment types, and push the boundaries. Ireland’s success will be determined by continuing to meet these ever increasing demands,’ he adds.
Ireland clearly continues to be a very attractive funds servicing location and, given recent developments to tap into the Northern Ireland market, will remain a cornerstone within the investment funds industry. Alshefski believes that, given Ireland’s success in the funds industry, it has been a tighter market when it comes to finding employees to support rapid growth. However, he remains upbeat about this situation and notes: ‘The amount of foreign nationals working in Dublin has increased and, with their high level of education and strong work ethic, this is a positive development for the industry.’
Deloitte’s Ronan Nolan emphasises that avoiding any hint of complacency has to be a key requirement [in the development of the funds servicing industry]. ‘The challenges of retaining talent and managing service provision in a rising cost environment can be managed, but requires unrelenting focus,’ he says.