Several years ago, when Citco stopped carrying out fund administration in the British Virgin Islands and consolidated its operational services in Curaçao, the islands’ fund services business
Several years ago, when Citco stopped carrying out fund administration in the British Virgin Islands and consolidated its operational services in Curaçao, the islands’ fund services business looked at best vestigial, at worst heading for oblivion. Today, however, the sector is bursting with health following the emphatic endorsement provided by the acquisition of two years ago of Hedge Fund Services, the jurisdiction’s largest hedge fund administrator, by Fortis Prime Fund Solutions.
Fortis is expanding the business and has just moved into new offices, as has Folio Group, another home-grown administration firm that is benefiting from growing demand for fund services within the BVI. Conifer Fund Services has been launched by Hedge Fund Services alumnus Peter O’Connell in partnership with San Francisco-based Conifer Securities, while firms such as International Financial Administration and Circle Partners are carrying out key accounting functions at onshore locations in the UK and the Netherlands respectively.
While participants acknowledge that the BVI’s administration industry will never be able to service more than a limited proportion of the funds domiciled in the jurisdiction – although vehicles from the Cayman Islands, Anguilla and the US are among the foreign-domiciled funds administered in Tortola – they believe there is considerable scope for expansion, especially among smaller and start-up funds whose managers particularly appreciate the personal service and genuine sense of partnership offered by the BVI providers.
Fund administration is the most obvious reflection of the BVI’s development as a fund jurisdiction over the past five years, but the growth of the industry is prompting the offering of other services. For example, Simon Owen at Belmont Risk Solutions is looking to provide insurance services such as directors and officers coverage and manager liability from specialist underwriters to investment managers registered in the jurisdiction.
Industry members say the BVI and the fund sector would benefit from a broader choice of business banking services, but with the government and the BVI Financial Services Commission wary – with some reason – of the reputational risk entailed by offshore banks, any significant expansion seems unlikely for the foreseeable. However, there is more hope for development in the accounting and audit sector, which currently includes what are wryly referred to as the ‘Big One-and-a-Half’.
According to Sherri Ortiz, chief operations officer of the government-backed promotional organisation, the BVI International Financial Centre, the development of expertise in the services sector is an attraction in itself to potential users of the jurisdiction. However, it also dovetails with the positive reports the BVI has received from supranational regulatory initiatives launched by organisations such as the Caribbean Financial Action Task Force and the International Monetary Fund.
These examinations focus not only on the quality of a jurisdiction’s legal and regulatory framework but the ability of practitioners as well as regulators to implement it effectively. Says Ortiz: ‘To get a clean bill of health from one of those international and regional agencies helps to justify our place in the international community as a reputable jurisdiction. In addition, if we have any problems with a particular country or marketplace that is unsure of us, getting ourselves off any black list comes that much easier because we can show them, for example, a clean bill of health from the IMF.
‘Reputational management is very important as a matter of fact. It’s one thing to have good products and good service, but they count for nothing if people don’t trust you and believe in you. We must always remember that the range and quality of services go hand in hand with the good name of the BVI. We need a good reputation to promote our products and services, however good they are in themselves.’
Members of the fund services industry would agree that a good name counts for a lot. In this case it was the arrival of Fortis, one of the largest global providers of administration and other services to the hedge fund industry, which has forced managers and promoters to look again at the BVI as a jurisdiction for the servicing as well as the domicile of funds. ‘Fortis coming in is a huge positive factor,’ says Kay Reddy, managing director of Blenheim Fund Services (BVI). ‘It will be interesting to see whether other big names follow, as we have seen in the trust sector.’
The assets under management of funds serviced by Fortis in the BVI have grown from USD2.3bn at the end of 2005 to more than USD7bn, even as the number of investment manager clients and their funds has decreased from 53 to fewer than 40. Meanwhile, the number of staff has grown from 18 to 24, with room for expansion to more than 40 in the company’s purpose-built modern offices.
The changes reflect Fortis’s new focus on servicing a smaller number of clients with larger asset bases, with some of the company’s previous clients in the BVI moving to other administrators and new ones arriving, including the manager of a USD400m fund that became a client in January. However, Fortis also remains committed to investment managers who may have started with small asset volumes but which have the determination and capability to grow their business; some of today’s USD1bn-plus funds started life with just a few million dollars in assets.
Managing director Peter Walker says the BVI business dovetails with the Fortis Prime Fund Solutions network in the western hemisphere, which includes commercial operations in New York and data management and investment accounting in Curaçao. Shareholder services and fund accounting is carried out in the BVI and (along with banking and custody) in Cayman, and the group has just opened a fund accounting facility in New York for US funds.
Fortis’s rivals are growing rapidly too. ‘There’s still not a huge amount of administration actually being done on the island, but it’s expanding quite rapidly,’ says Folio managing director Daniel Cann. ‘We are now around USD6bn in assets, having roughly doubled in size over the past 18 months. Folio now has more than 30 staff and, like other firms, is continuing to recruit heavily. ‘We are putting in place the resources to handle the extra work in order to be able to take on more new business.’
Conifer Fund Services was launched in January 2007 with the aim of replicating Conifer Securities’ partnership-based approach to client relationships. ‘We focus our activity on funds in the USD10m to USD300m range, although we have three or four bigger as well as a number of smaller funds, run by managers we think have potential and with a history of raising assets,’ says O’Connell, the firm’s managing director.
‘But being part of the wider Conifer organisation enables us to serve larger clients, for instance by providing us with a very robust, top-notch IT infrastructure. That enables us to tick all the boxes clients are looking for in areas such as business continuity, disaster recovery and redundancy of systems.’
Other administrators are happy to taken on smaller funds that big international players find it hard to accommodate into their business model. Blenheim provides licensing, incorporation, advice and maintenance for funds mostly with up to USD25m in assets. It carries out some administration in the BVI, although Guernsey sister company Louvre handles some of its larger daily-quoted and active funds. ‘We had a very good year last year, although our business has moved away from predominantly hedge funds toward mutual funds, funds of funds, property and private equity fund,’ Reddy says. ‘We’re also seeing a lot more creative structures.’
International Financial Administration director Derek Adler says that while share registry maintenance and regulatory filing is carried out by the firm’s fully-staffed office in the BVI, it decided to carry out its accounting functions in Southam, a market town in the English Midlands, because of the shortage of sufficiently-qualified local staff in the islands and the high cost of bring in expatriate staff.
‘What we like about the BVI is the fact that the regulator appreciates our input,’ he says. ‘We’ve never been frightened of dealing with them. I think we respect each other, and they know that when we submit a file, our own due diligence is extremely tough. The job of the administrator is to act as a policeman. We’re effectively the compliance people, and if we pick up something we’ll tell the regulator immediately. We have nothing to fear from regulators, nor should anyone else if they’re doing a good job.’
Circle Partners, which came into the BVI in 2006, carries out incorporation and filing work for funds of behalf of mainly European clients from its picturesque office at Road Reef, on the edge of Tortola’s capital Road Town, while accounting work is carried out at the group’s head office in Amersfoort. Circle currently has around USD2bn in assets under administration.
Says managing director Monique Cova: ‘The principal attractions of the BVI are its balance between investor protection and efficiency, and its much lower costs. The regulatory and legal environment is very sound, all the top legal players are here, and people here are highly qualified and professional. The BVI may be second as a fund domicile behind Cayman, but that’s because the regulator here is very cautious. They prefer to grow more slowly than to ruin everything with a big scandal, and I can see that point of view.’
The undisputed champion of accounting and audit provision to the fund industry is Deloitte, the only one of the ‘Big Four’ professional services firms to have a full-fledged presence in the BVI, having declined to bow to pressure to divest non-core activities and what were perceived to be more risky business portfolios in the wake of the implosion of Arthur Andersen and the passage of the Sarbanes-Oxley legislation in the US.
KPMG, whose original practice switched to the Baker Tilly network and is now the second largest audit firm in the BVI, has now returned with a branch of its Cayman practice, while PricewaterhouseCoopers, which sold its business to the head of its BVI office, Meade Malone, has put a toe back into the water with the launch of a two-person insolvency practice and has not ruled out going back into the audit business. Ernst & Young, which dissolved its Lex Caribbean legal practice and sold its trust company to Kroll around five years ago, has not so far indicated any plans to come back to the BVI.
All this is currently to the benefit of Deloitte. ‘Our business is growing substantially on the back of hedge funds,’ says managing partner Mark Chapman. ‘We now have 50 people, of whom probably 40 are in involved in audit and tax work for hedge funds. We are building our audit and accounting presence to serve BVI-domiciled funds, even though there is no requirement for a local audit sign-off.’
Bronwyn King, head of investment funds at Ogier, says that if the expected extension of an audit requirement to most of not all BVI funds results in an expansion of the local accounting and audit sector, this can only benefit the islands’ international standing. ‘In Cayman the audit sign-off attracted service providers that made it appear a more sophisticate jurisdiction,’ she says. ‘I would approve a fund needing an audit somewhere, and it would be an advantage for the BVI if all the Big Four were here. Having all the big service providers would be very good for the jurisdiction.’
In the absence of a legal requirement for an audit, Chapman says that pressure comes anyway from investors, such as institutions that may be required to invest only in audited funds, or from other service providers. ‘Administrators are starting to require longstanding funds to get audits,’ he says. ‘Everyone’s due diligence thresholds are getting higher, and some administrators are reviewing their compliance, which is good for our business.’
His view is confirmed by Peter Reichenstein, managing director of VP Bank and Trust Company (BVI) and currently head of fund services for its affiliate ATU Fund Administrators, who says: ‘We insist that the fund mandates we accept have an external audit. It may not be actually required by law here but we think it is sound business practice to have an external audit once a year in order to give all parties involved peace of mind.’
Baker Tilly, which has around 40 staff in the BVI, is enjoying vigorous business growth, too. Says audit director Nigel Macphail: ‘The market continues to expand, and last year our business increased by as much as 25 per cent, even after giving up a large part of our insurance portfolio. That business been replaced by mutual funds.’
KPMG re-opened its doors in late 2005, according to Roy McTaggert, managing partner of the Cayman practice, who has oversight responsibility for the BVI. ‘We decided we definitely need to have a presence in the BVI, so the Cayman office got approval to re-establish a practice here,’ he says.
Senior audit manager Tanis McDonald, who arrived in September 2007, adds: ‘My focus is on servicing hedge fund clients and local administrators. We’ve noticed a positive swing in the number of new hedge fund audit wins in the islands. Many of them are one- or two-man teams with start-up funds, with limited amounts of capital but some very interesting investment strategies and geographical focus, such as one investing in Turkey and another in Iraq and Kuwait.’
