Ireland Roundtable: Invesco’s Ireland CEO Adrian Mulryan says funds industry “Rroccs”!

Talent entering the country is a phenomenal opportunity for Ireland’s cross-border funds industry – but the industry is keeping its eye on this year’s general election for signs of change, hears Nicholas Pratt.

Ireland roundtable participants

  • Nicholas Blake Knox, head of asset management and investment funds, Walkers and vice chair, Irish Funds
  • Paddy Walsh, head of business development, Ireland, Caceis
  • Mary Ruane, partner and asset and wealth management leader, PwC Ireland
  • Ken Somerville, head of global fund services, Ireland, US Bank
  • Adrian Mulryan, CEO, Invesco Investment Management

When asked about the biggest challenges facing management companies in Ireland, the answers amounted to an acronym for Adrian Mulryan, CEO of Invesco Investment Management. Resourcing, reporting, oversight, challenge, culture and sustainability – or “Rroccs”!

Speaking at a Funds Europe roundtable in Dublin, Mulryan initially focused on the first of these – resourcing – saying: “Hiring always takes time but we’re getting to a position where we’re getting a lot more talent coming into Ireland which is turning into a phenomenal opportunity. We had almost got to a tipping point in terms of Irish graduates but in the last four to five years we’ve seen an influx of well-educated talent from around Europe and elsewhere.”

The resourcing issue in Ireland was significantly impacted by CP86, a directive from the Central Bank demanding that an Irish fund management company has half of its directors and managerial functions resident in Ireland. However, what started as a challenge has become a positive, said Mulryan.

“CP86 required us to up our game in terms of substance which in turn has been a catalyst for further growth and development. If you have meaningful AuM, you should have meaningful expertise on the ground. So now, firms have built out business units which are generating more opportunities within their organisations. Talent is global and mobile and Ireland is at the centre of a global industry. We speak fluent ‘American’ so we sit in a very nice position!” said Mulryan.

Substance requirements

The Central Bank mandated a minimum headcount requirement for the entities it regulates. Some firms are exceeding that as they start to see the advantages of using Ireland as a hub for fund operations, said Nicholas Blake Knox, vice chair of Irish Funds.

“Often they start with the intention of meeting the minimum regulatory requirements but end up investing in other areas as they establish their presence here and this is increasingly extending to higher value roles across middle office, investment operations or risk management. For one of our clients, their global head of operational risk now sits in Ireland,” he said.

However, there can still be a shortage of senior risk and compliance professionals at times, he said. “When somebody senior leaves, it can sometimes be challenging to find a replacement that is locally based in short order. But we are seeing more people coming back to the jurisdiction from other financial services centres such as London, which is maybe not the case for domiciles that have a more captive population.”

In some ways, Ireland has been a victim of its own success and therefore there was excess demand in certain roles and areas, said Paddy Walsh, head of business development, Ireland, at Caceis. “In the wake of Brexit, there was a huge influx of new companies, third-party ManCos especially, all of which required a head of legal, head of risk and head of compliance. So those firms had to be more resourceful to fill those roles.”

Despite the influx of new companies, there has been significant consolidation in the funds industry, and in the third-party ManCo space specifically, which has created a concentration risk, said Ken Somerville, head of global fund services, Ireland, at US Bank. “There are large-scale firms in this space, which can be a problem, because when you combine that with the increased regulation, it means those firms are manning the front-line for the whole industry and they become the prism through which regulation is implemented rather than the marketplace.”

A ManCo – or management company – is the regulatory infrastructure for a fund manager and the funds they provide. A fund manager can outsource its ManCo to a third-party provider, typically a fund administrator.

A corporate governance survey conducted by PwC at the end of 2023 asked Irish ManCos about their priorities for the next 12 to 24 months. ESG was the first choice.

“It is the onslaught of new regulation but it is also upskilling,” said Mary Ruane, a PwC partner and asset and wealth management lead in Ireland. “The market is constantly changing and so is the focus for resourcing. Some firms may be well placed in terms of staffing numbers but others have to go outside for help.”

The rising reliance on third parties can be seen in the other corporate governance priorities highlighted in the PwC survey: the outsourcing of governance and risk management. But it is also a reflection on the competitive disadvantage facing smaller firms in terms of the expertise needed to understand the current expectations of the regulators, said Mulryan.

“Most large firms have a product development team sitting with the investment team, looking at how they measure their performance against sustainability targets,” said Mulryan. “There is a lot of knowledge to acquire and given the vastness of the regulation, it may give a competitive advantage to some of the larger players – which also relates to the concentration risk.”

Eltif 2.0 and private markets

Earlier this year, the Central Bank introduced a framework for establishing European Long-term Investment Funds (Eltifs) in Ireland. Eltif 2.0 is designed to be more attractive than its predecessor and generally is intended to expand the universe of investments smaller or less sophisticated investors. Retail investors potentially could get better access to longer term and higher yielding assets such as private equity and infrastructure.

There is an opportunity to try and tap into the growing interest in private markets and develop Ireland as a hub for the asset class, said Blake Knox. He said Irish Funds, the local funds industry association, had conducted a capability review across all product types and business lines within the Irish funds market and identified the areas that could be enhanced to make Ireland more attractive for private assets funds.

There were issues for both the investor and the investments with the first Eltif, said Blake Knox. “From the investor side, there were minimum subscription amounts and complex suitability tests and then from the investment side, there were restrictions in terms of investable assets and concentration limits. These have all been addressed now with Eltif 2.0, meaning we have a product that can invest in a wide range of asset classes, including the ability to originate loans that can be used for private credit strategies.”

Referencing the regulation for alternative investment managers – the AIFMD – he added: “And with AIFMD II coming down the track, there is going to be a harmonised loan origination regime across Europe, so any advantages that specific domiciles are perceived to have from a product perspective will gradually diminish. This is a positive from an asset manager and investor-choice perspective and not being restricted to investing in funds in only one European domicile.”

In addition to changes to fund structures, Ireland also has an experienced fund-servicing capability, said Blake Knox. “We are already servicing these types of funds on a cross-border basis. The feedback we get from UK and US managers, in particular, is that they are very keen to use Ireland for these product types. I’d be optimistic that the use of Ireland for private markets funds is going to grow significantly.”

Blake Knox’s optimism was shared by Ruane. “The product suite and the regime are fit for purpose. And we have got a spectrum of capabilities now from public to private assets. But these things can take time. We have seen 100% growth in the investment limited partnership (ILP) last year but it was from a small base.

“And the Irish Collective Asset Management Vehicle (ICAV) took some time to develop. If you look at the servicing of private assets, the Irish market has grown by 500% in the last two years. While the fund structures are still developing, there is a lot of expertise in terms of servicing, across the asset class.”

Furthermore, the success of Luxembourg at gathering private assets products led to custodians and administrators outsourcing some of their business to Ireland, which has enabled Ireland to build up its expertise in private equity, real estate and similar asset classes, said Caceis’s Walsh.

“At Caceis, we are doing this for two reasons: one is to help relieve the staffing issue; the other is to develop the expertise in Ireland so that we can begin to get a bigger share of the market. A key part of this ambition is the US and UK markets and it is still felt that Ireland is closer to both countries in terms of culture, language and legal systems than Europe.”

There is a socioeconomic element to ambitions around the expansion of private assets, said US Bank’s Somerville. “In Ireland we are proud of our budget surplus but I’m not sure we should be. Public spending on infrastructure, energy and housing is far behind where it needs to be. So, there is a degree of self-interest inherent in developing a private-markets fund regime in Ireland.

“The new Eltif framework gives us a trajectory into bridging some of the public spending gap. We have a real opportunity to address these issues without too much external influence. But we have gaps and if we don’t get this right, the next 20 years will not look as rosy as the last 20 years.”

His point was welcomed by Invesco’s Mulryan. “Everyone is more familiar with the lexicon of the funds industry and there is more interest in developing our sovereign wealth funds and investing in infrastructure investment and offshore wind. This has really helped in terms of focusing government departments on how you use these structures internally, which then reflects how you use it externally for users.”

It’s not about ‘vulture’ funds

The messaging will be really important though, says Irish Funds’ Blake Knox, in terms of things like the conflation between mutual funds and ‘vulture’ funds. “There is a housing crisis in this country and sometimes that is linked to our industry. But if we take a step back, the funds industry services the long-term investment and retirement needs of retail investors and everyday savers. Pension funds also allocate heavily to investment funds to enable retail investors the ability to manage their retirement.

“It is incumbent on all of us in the industry to get this message out. Otherwise, the risk is that policy is formed on these misperceptions. So, when industry says that a product needs some enhancements from a tax perspective, for example, that is not to enable tax evasion or avoidance, but rather to make sure the product works efficiently and doesn’t result in double layers of taxation being applied to investors in multiple jurisdictions.  It is really important that we can advocate for these types of changes without there being a misperception that this is solely to benefit so-called vulture funds.”

The target market for Eltifs will initially be high net-worth and private wealth channels. But the hope is that private markets will become more accessible to a wider range of investors. In some ways, this echoes the origin of the ETF which was initially designed to enable investors to invest in small and medium sized listed companies.

“There is a way to resist a wealth gap developing. Get rich slowly. With the Eltif 2.0, we have a chance to do something now,” added Somerville

The panellists agreed that it would be a welcome development if, in ten years’ time, investment in private assets had spread. “It is not just saving for your future but also solving the country’s social issues,” said Ruane.  However, this would require greater investment in financial literacy and the importance of saving. “It is not just private assets where retail investment lags our US counterparts.”

Innovation and inflection points

The theme for the Irish Funds annual conference this year is ‘innovation’. But what does this mean and is Ireland truly at an inflection point?

Pointing out that a number of global financial services firms with operations in Ireland have been increasing technology operations over time and set up ‘innovation labs’, Mulryan said this was partly due to the growing importance of data – and because Ireland had not only a asset management sector, but also a successful technology industry.

“We have those two areas conflating and we now have talent pools for both areas and for research and development into areas like digital assets.”

In addition, the growth of low or no-code technology and greater affinity with coding languages like Python means that portfolio managers and other staff outside of IT departments are able to build their own tools.

“That is leading us within the jurisdiction to have a much greater skillset to help us service the new industry, because this industry is changing. We are at that point now where the digitalisation agenda is sufficiently developed both from a promoter perspective but also from a regulatory perspective. The regulators are very focused now in terms of how do we actually map to the next decade,” said Mulryan.

There is also a feeling that a ‘changing of the guard’ is taking place as a new, more tech-savvy generation of fund industry professionals emerges, said Walsh. “Some very successful fintechs have set up in Ireland whether that be on the regtech side or reconciliations.” He pointed out that the technology hub for Amundi, Europe’s largest asset manager and a sister company of Caceis, is based in Dublin.

Walsh added: “The next generation is much more comfortable with social media, as an example, and over the next ten years we will see huge advancements. But there needs to be a better balance between the regulations and the technology. We have been too slow to approve crypto funds or the use of tokenisation and digital assets, or the development of central bank digital currencies.”

On the other hand, Ireland’s position as a ‘fast follower’ rather than ‘front-runner’ gives Mulryan huge confidence in terms of the ability to be at the centre of change. “There’s a transition coming in our industry and you are either a net taker or giver of transition. Our experience in fundamentally understanding the pipes and plumbing of global asset management means we will be at the centre of that transition. We saw that back in 2016 in terms of ETFs and I can see the same thing happening in terms of the transition to a more digital landscape.”

Ireland’s education sector will also have a role to play, said Somerville. “We have free education which enables us to be nimble enough to focus on areas that have future value and to distinguish ourselves relative to elsewhere in Europe.”

The coming technology transition will be painful for those unable to adapt. “You may not lose your job to AI but you could lose it to someone who is better at using AI than you,” said Somerville. “If we are honest with ourselves, there are still several parts of the process, like anti-money laundering [AML] and client onboarding that remain overly manual in a way that isn’t reflective of where the industry can go. We have the raw materials to do it. And there’s a lot of change coming in Ireland in the next 12 months around policy in terms of technology development and the use of AI.”

There will be a need for greater collaboration between all market participants, said PwC’s Ruane, who added she was encouraged by the establishment of the Central Bank’s innovation hub.

“It is a great indication of the regulator engaging with the industry and wanting to keep pace with international developments. Regulations and laws are changing very quickly. Within the EU, we have DORA, the digital operational resilience act, and MiCA, the markets in crypto assets directive, as well as a recently passed EU AI Act. There is a lot of change and again it will require investment in reskilling and education.”

Blake Knox sits on the innovation forum, a subgroup of the Central Bank’s Financial Industry Forum. “The bank has been very clear,” he said. “It wants to engage with industry to understand how it can facilitate innovation within the industry. It is looking for projects that are not specific to a specific industry but which can provide benefits across financial services industries as a whole – common issues like AML or authorisations. You can be a very innovative company but if the engagement or authorisation process is very off-putting or if there’s additional requirements or burdens here compared to other jurisdictions, it can stop innovative firms coming to this jurisdiction.”

The panel agreed that the industry needs to articulate its needs and embrace change. It always comes back to risk, they said. All stakeholders in government and the regulator want to be part of the discussion and want to be early adopters with appropriate risks managed.  In Walsh’s view, it comes back to the balance between industry, the regulator and the government. “If there’s good collaboration, Ireland can get to the forefront.”

PwC’s Ruane said if an innovation came along that led to lower costs for investors, firms would have to invest in it. But it would also need to have a scalable impact. It would also require governance to ensure the necessary checks and balances were in place. “There needs to be someone monitoring the cost benefit analysis, because it can be very expensive to invest in these areas.”

Security would be important, as would an appropriate level of regulation. As the panellists warned, it only takes one incident like a blockchain that isn’t backed up properly or a crypto fund linked to terrorist financing for the trust and credibility to evaporate in the eyes of investors and to set the industry back another decade in terms of technology and innovation.

“The larger global firms will likely be involved because any significant developments on the technology side will need to be wrapped in trust and consumers/end investors will want the reassurance that the appropriate investment, governance and expertise has taken place,” said Ruane.

Opportunity knocks

Finally, when identifying the opportunities that lie ahead for Ireland’s funds industry, it is important to look at asset allocation, said Mulryan. “We are a client-led industry and allocation is going into ETFs on one side and private assets on the other, so those are the two opportunities for Ireland.

“We are a market leader in ETPs and when you look at the regulatory engagement on private assets, we are a fast follower and Eltif 2.0 is enabling us to have conversations with our client base that we haven’t had to the same degree or depth over the previous years.”

Blake Knox said he wasn’t sure what constituted the greater success – raising $100 billion in ETFs or $10 billion in private assets. “I think the latter enables us to go after a portion of the market that we weren’t in before.”

But perhaps the biggest opportunity for Ireland’s funds industry is the chance to play a greater role in the domestic development of Ireland. “There’s going to be a general election in Ireland in the next 12 months,” said Somerville. “And the next government could look very different in composition to anything that we’ve seen before.

“We need to get close to all of the component parts of the next government to be in a position to make the kind of changes that we’re talking about – to create long-term benefits in a balanced way, real regulatory change and facilitating the social environment that means people can come from Lisbon to live in Ireland on a continued basis.

“That’s our big challenge. And the clock is ticking.”

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