Ireland may be in desperate financial straits but its funds industry is diverged from the macro storm. Nicholas Pratt
examines why this is and how the industry seeks to expand
Ireland, one of Europe’s principal fund services centres, has endured a torrid time since the financial crisis began. Unemployment has hit 13%, repossessions have increased and businesses continue to file for bankruptcy. Even recent good news was marred by bad news. Latest GDP figures, released in July, showed that Ireland is officially out of recession after enjoying two successive quarters of growth. But then in the same month, Ireland saw its credit rating downgraded by rating agency Moody’s.
Ireland’s fund industry, however, has performed very well during the same period. According to figures released by the Central Bank of Ireland in June, the value of the funds domiciled in Ireland increased to €861bn while the value of assets under administration in Ireland rose to €1.6 trillion. Both figures are all-time highs, in excess of the levels that Ireland reached during any peaks prior to 2008.
The contrast in fortunes between Ireland’s general economy and its funds industry is epitomised by a firm like Bank of Ireland Securities Services (Boiss). Whereas the parent company Bank of Ireland, like all other domestic banks, has been bailed out by public funds, the securities services division has thrived. “The existing business has remained largely intact,” says Paul Heffernan, head of UK and European business development. “And in terms of new business, there are as many opportunities today as there were before the crisis.”International focus
In many ways it is obvious to see why the Irish funds industry has been so untroubled by the macroeconomic problems of the country. It is an export-led industry where almost all of its business comes from other international jurisdictions. “All of our business comes from overseas so we are reliant on the international economy rather than Ireland’s,” says Paddy Walsh, business development director of French bank and investor services firm Caceis in Ireland. Like Caceis, the majority of the service providers operating in Dublin are international banks. “Most of the issues in Ireland have been around the domestic banks so it is helpful that we are part of a non-Irish bank with a strong balance sheet,” says Walsh.
It is also fair to say that the economic woes of Ireland have helped to ease some the problems that faced the funds industry prior to 2008. “Resources were tight in the industry, there was a high turnover of staff and property prices were high,” says Gavin Nangle, head of business development at State Street Ireland. “But now there is very little turnover and an availability of affordable labour so we have greater ability to support new opportunities that are arising.” And reduced property prices have helped, as demonstrated by State Street’s recent opening of a new seven-storey office building in the heart of the IFSC to house all 1,200 of its Dublin-based employees that were previously working in numerous smaller offices dotted around the capital. Call for transparency
Dublin has also benefited from some of the global trends that emerged in the last two years across the investment industry, notably a desire to work in more regulated jurisdictions and with more regulated fund structures. This trend has been driven, in part, by investors’ demands for more transparency and openness and also from an uncertainty among alternative fund managers about what impact new regulations will have, particularly the European Union’s proposed Alternative Investment Fund Managers (AIFM) directive.
Ireland has moved quickly to capitalise on this regulatory uncertainty by making it possible for offshore funds operating in the likes of the Cayman Islands to redomicile in Ireland, underlining the flexibility and accommodating nature of the financial regulator. But is there any concern that this good nature could be open to abuse or misinterpretation by less scrupulous investment managers, particularly at a time when Ireland, like other fund domiciles, is making great efforts to attract new business?
“No I don’t think so,” says Barry O’Rourke, head of the Dublin office of investment services firm SEI. “The regulator has developed a good reputation for being firm but pragmatic. For example, there are very few restrictions on Qifs [qualified investor funds] and what they are able to do, but there are significant barriers to entry [the minimum investment needed is €250,000]. So I think it is a good balance. And for any managers or promoters redomiciling in Ireland from the Caymans or any other unregulated off-shore jurisdiction, the rules of the Irish regulator are very well known so there should be no room for misunderstanding and they should know exactly what they are getting into.”
The Irish funds industry itself has also undergone a tremendous amount of work over the last two years to ensure that it is able to remain competitive. Gary Palmer, chief executive of the Irish Funds Industry Association (IFIA), says that a comprehensive roots-and-branch review of Dublin’s market was carried out in 2009 and 2010. The review identified four areas of critical importance: the tax regime, specifically the 12.5% corporation tax rate; experience and expertise within the workforce; the working relationship between the industry and the regulator; and the international reach for funds distribution.Global reach
While the review found excellent causes for encouragement in all four areas, it was the international reach that was identified as one area where more success could be achieved, says Palmer. “The increased internationalisation of the industry has led many asset managers to look beyond their regional borders and has presented significant opportunities for domiciles such as Ireland that specialise in international funds distribution.”
The popularity of the Ucits brand has been critical in these efforts, says Palmer. No longer do Ucits funds simply represent a way to create a pan-European fund, they are increasingly used by managers as far away as Australia as a gateway into Asia. Consequently, the IFIA has embarked
on a number of international roadshows in Hong Kong, Korea and Taiwan to promote Ireland’s position as the Ucits centre of choice.
“In Ireland our primary focus to date has been the US, UK and Europe rather than the Far East and the Middle East,” says Gerry Brady, head of Northern Trust’s business in Ireland. However, the growing asset management market in the Middle East has led to the formation of a Sharia regulatory unit within the regulator.
“The US has overtaken the UK as our most important market but we have to be aware of the opportunities elsewhere. Ucits funds will still be the main driver of business but the financial crisis meant that we have had to go with renewed energy to other areas.”
Another positive development for Ireland’s funds industry has been the number of international law firms looking to establish an office in Dublin. Maples and Calder set up its Dublin practice in 2008 and now looks set to be joined by the likes of Eversheds, Simmons & Simmons and Walkers. Decherts opened its Dublin office in June and has recruited Declan O’Sullivan, a long-term member of the IFIA and a prominent figure on the Irish funds market, to head up the practice.
According to O’Sullivan, the practice will focus mainly on advising managers and their service providers on establishing new funds. The fact that so many law firms are following in Dechert’s footsteps suggests there is an anticipation of many new fund launches. “Our setting up may increase the competitive pressures for existing law firms, but it will also increase the number of fund establishments in Dublin and this will be good news for the domicile,” says O’Sullivan.
While the bulk of the work will be focused on Ucits funds, O’Sullivan anticipates more new fund types such as life settlement funds, distressed loan funds and anything broadly credit-focused. Private equity and property will also be areas of growth for the Dublin market, says O’Sullivan. “In previous years we did not really play the private equity game, leaving it to domiciles like Jersey and Guernsey, but, with the advent of the AIFM directive, there is likely to be more onshore demand for these type of funds. The tax arrangements in Ireland now facilitate these structures and we have the regulatory infrastructure in place.”Intellectual input
So what else can be done to forward the prospects for Ireland’s funds industry?
Aside from the energetic marketing efforts of the IFIA, the accommodating nature of the regulator and the goodwill of a government which is desperate to protect an industry that employs 12,000 and makes a significant contribution to the exchequer – even if much of the profit that it generates is repatriated – what needs to be done to sustain Ireland’s success?
According to Padraig Kenny, managing director of RBC Dexia’s Irish office, the industry has to move away from focusing only on administration and processing roles in Ireland and focus more on the intellectual expertise and know-how it has built up over the last 20 years. “Staying attached only to these purely administrative activities is not the best long-term service model or market proposition for Ireland. There is already, and there will continue to be, an increasingly higher intellectual input that is more client facing and that adds more value than manual processes.”
Furthermore, Kenny does not believe that adopting such a strategy will threaten the current levels of employment provided by the funds industry. “I think the risk is if we stick with the value propositions of the 1990s and we don’t change. Our clients are changing and have their own economic pressures and their own operating models. The only way we can present value for money is by moving up the value chain within the context of an evolving global operating model.”
For others the important point is to remain hungry while keeping complacency at bay, something which should be easy to do given that Dublin is still only a young market and has not had the time to develop the sense of entitlement that may exist in other more established and traditional financial centres. Endlessly liaising with the regulator to create an environment suitable for any and every new fund type that may become fashionable and making regular pilgrimages to the Far and Middle East in hope of securing new investment may be exhausting work, but for now the Irish funds market and its participants seem prepared to make these efforts.©2010 funds europe