The credit crunch and its aftershocks may be wreaking havoc in the global financial markets and institutions around the world may be tottering, but for at least for now the fund services industry i
The credit crunch and its aftershocks may be wreaking havoc in the global financial markets and institutions around the world may be tottering, but for at least for now the fund services industry in Jersey is continuing to thrive. While growth in the island’s assets under administration came to a halt in the second quarter and some promoters are hastily rethinking their investment strategy, service providers say their outlook continues to look promising given the troubled backdrop.
‘Our sales funnel still looks very strong, and we are still getting significant inquiries from promoters interested in setting up funds in the Channel Islands,’ says Alan Brint, head of RBC Wealth Management’s corporate and institutional business in the British Isles. ‘There has obviously been an effect from the credit crunch in terms of more cautious investment focus. We’ve seen a number of funds liquidate positions that might be considered at the more risky end of the spectrum, but so far the effects have been relatively limited.’
Brint acknowledges, however, that this outlook may reflect the particular nature of RBC’s clientele. ‘The clients we deal with are fairly conservative and are in the market for the long term, unlike other types of fund that might react negatively to falling stock markets and the credit crunch. The investors in our institutional funds tend to take a more long-term approach.’
He is echoed by Daniel O’Connor, a senior associate in the corporate group of Carey Olsen, who says the law firm has not seen much impact in terms of the number of new launches. ‘A lot of promoters in the more traditional areas tell us that fundraising is difficult, a much tougher environment than they’ve found in the past,’ he says. ‘But there seem to be asset classes where capital-raising is less difficult – we’re seeing a lot of money going into Eastern Europe, China, India and South Africa. We are as busy as we have ever been, and we’re hearing the same from many administrators as well.’
PricewaterhouseCoopers partner David Pirouet says: ‘New hedge funds continue to come in, many from large promoters that know and have used the island already. I’m aware of a couple of private equity funds that have been stalled because money hasn’t come through from investors, but otherwise growth still seems to be continuing, and several big players are continuing to raise new funds.’
He also notes a switch to more opportunistic types of strategy as well as a changing geographical focus. ‘Several big funds have been raised to focus on distressed debt,’ Pirouet says. ‘Private equity and property funds in Jersey have traditionally focused on the UK but now are turning more to Eastern Europe. A couple of recent funds from Jersey are investing into China, and I’m dealing with a large one going into India.’
Jersey’s emergence as a specialist and increasingly expert centre for a wide range of alternative funds over the past four years has prompted a boom in new administration firms on the island, some of them spin-offs from existing service providers, others the product of expansion from firms already operating in fund centres such as Luxembourg, Dublin and Guernsey.
Pirouet points to newcomers such as Alter Domus from Luxembourg, IFG Fund Solutions, part of an Irish-based group that also has operations in the Isle of Man, LaSalle Fund Services, which is based in Chicago with European operations in Dublin, and Heritage, Investec and International Private Equity Services, which have launched operations in Jersey after establishing their businesses in the sister island.
At the same time, Jersey firms are themselves spreading their wings in other markets. ‘A number of Channel Islands providers, even relatively small and newly-established ones, are expanding into other jurisdictions,’ Pirouet says. ‘Aztec, a local firm that has grown very rapidly, has opened in Guernsey and Luxembourg over the past year. Mourant, which is much bigger, has opened in several jurisdictions, and Capita has just opened in Guernsey following Dublin and Gibraltar.
‘What has helped the new firms in Jersey, apart from the market for administration services continuing to grow, could be greater flexibility in the labour market than in Guernsey. Resources have always been an issue for the Channel Islands and will continue to be, but generally firms in Jersey have been able to cope – in several cases by using processing resources elsewhere, like State Street, which uses a back office in Ireland, and LaSalle.’
The constraints of a small island will always be an issue for Jersey administrators (and other firms), but it is broadly under control for the moment, according to Mourant partner Edward Devenport. ‘The market for fund experts, whether they be lawyers, accountants or administrators, is definitely a hot one, but the industry is responding to that by becoming more efficient. For instance, new entrants into the market are driving up competitiveness and efficiency.
Devenport points out that almost all the major fund jurisdictions around the world, including Guernsey, Dublin and the Cayman Islands, share the same capacity constraints and cost issues. ‘One of the great things about the unregulated fund regime is that it doesn’t impose requirements on where you put service providers, but enables the users to choose the most effective jurisdiction,’ he says.
Voisin partner Bill Gibbon says the authorities have responded to Jersey’s growing need for skilled staff by relaxing its rules on bringing in experts from outside the island. ‘Jersey is more willing to allow extended licences for specialised employees now,’ he says, adding: ‘Staff turnover in the fund management industry doesn’t seem to be as high this year as maybe two or three years ago. That may well be because people aren’t willing to keep pushing salaries up, but also probably because of the influx of staff from abroad.
‘Staffing issues are still a problem in certain areas, and a well-known specialist fund administrator will find work anywhere in Jersey. But people are not only looking for the best deal but for the most interesting work. One of the biggest causes of staff turnover recently has been people leaving to join start-up boutique-type administrators. Some established firms have lost three or four staff at one go.’
LaSalle managing director Michael Rothwell argues that the Jersey Financial Services Commission already offers plenty of leeway to fund administrators to outsource functions, as long as ‘mind and management’ stay on the island. ‘We’ve very much part of a growing trend, not only as one of the many new administrators coming into the island, but as an office that uses Dublin operations as part of an outsourcing model,’ he says. ‘A number of Jersey administrators now outsource work to Dublin.
‘There are some significant revisions afoot that will make outsourcing arrangements even more flexible, but as it currently stands our model has been able to outsource all the back office fund administration work to Ireland. A lot of the hedge fund work in the island is outsourced fully to Dublin, where there is greater hedge fund expertise, although Jersey is particularly strong in private equity and property work.’
Rothwell notes that what remains in Jersey is the management and control of the administration company. ‘The outsourcing rules are being amended to allow greater flexibility,’ he says. ‘Since I came to Jersey in 2000, the island has focused on being recognised as a well run and well regulated jurisdiction, and that has meant that a primary objective of any rule changes has been to strengthen regulation and boost quality. What we are seeing now is an acknowledgement that this has gone far enough and that there is space to relax the rules for administrators.’
The strength of this reputation, Rothwell says, will mean that in the longer term promoters will continue to establish regulated funds in Jersey, the availability of the unregulated alternative notwithstanding. ‘The quality of administration will count for something,’ he says. ‘Even with unregulated funds, which could double or triple the number of Jersey-domiciled funds, perhaps 25 or 30 per cent of the administration business could stick in the island, on top of the company secretarial and legal work. Even 25 per cent of a doubling of the industry would represent significant growth.’
Says O’Connor: ‘There are a lot of very serious players here in trust and company administration and in fund administration, but Dublin is more established in terms of hedge funds. Unregulated funds won’t necessarily bring more business to Jersey, but it’s an opportunity to compete. If a fund is established in your jurisdiction, you will get a look in, the chance to pitch for the work. Jersey providers have to be competitive not just with each other but in the global market, but it puts them in the frame.’
According to Rothwell, one factor that will for the time being protect the local administration industry is that promoters of existing funds are not allowed to convert them to unregulated status. ‘This is because it would be unreasonable for an investor that signed up to a fund on the basis that it was in the regulated sector to subsequently find that it’s been taken out of that framework and was now unregulated,’ he says. ‘This was not done to protect the administration industry, but it inevitably will do so.’
Brint believes that in future more administrators will copy RBC’s structure, which is based on operational hubs of excellence and avoiding duplication of functions across the Channel Islands. The businesses notably enjoy access to the resources of sister business RBC Dexia Fund Services in Toronto and Luxembourg, which have greater capacity to provide fund administration and custody services.
‘This means the Guernsey and Jersey fund administration units are more focused on ensuring that the funds are being administered in accordance with the local regulations, and more importantly with client service level expectations,’ he says.
‘It’s now more of a front office function in the Channel Islands, while the back office is elsewhere. This effectively means we have a volume-insensitive business model. In the past we were constrained in the business we could take on by the ability to find and employ relevant expertise in fund administration and custody services, but that’s no longer the case, so it is helping us to expand the business.’
‘The lower added value processing functions are an important part of the overall machinery, but it’s more important to be able to service the client’s needs and be proactive to their requirements. We don’t have to spend too much management time and resources on looking at the processing element.
‘The other advantage is that we are using the technology resources of a bigger organisation, RBC Dexia, which has a global footprint and makes significant investment in IT. We enjoy the best of both worlds, using their IT and people, while here in the Channel Islands we concentrate on mind and management function, servicing the clients and developing the business.’
A growing service area for the fund industry is the provision of office and other support services to alternative fund managers that are increasingly anxious to be able to demonstrate, mainly to their home tax authorities, a substantial presence in the jurisdiction in which their funds are domiciled.
At the same time, last November’s financial services amendment legislation required providers of management services to Jersey funds to be regulated. One of the leaders in this area is Capita, which following a series of acquisitions now has a total of around 250 people active in Jersey in private client business, corporate and financial services.
‘We are seeing an increasingly number of clients wanting to establish a presence in Jersey,’ says Rob Ayliffe, director of fiduciary services at Capita Fiduciary Group. ‘A management company in Jersey for a hedge fund or private equity manager will need a whole suite of services. To find your own compliance officer, a couple of resident directors, office space and so on is hugely expensive and time-consuming. Hedge fund managers doesn’t want to be bothered with all that, so they approach service providers such as Capita who have the skills, experience, people and system to set it up.’
Members of the industry say that the pressure of tax authorities on managers to justify the validity of their offshore arrangements is a particular driver for the creation of substantial activities by fund promoters from countries such as Germany and Switzerland, although Ayliffe says new business in this area is not coming especially from the UK.
He predicts that managers based in emerging markets will soon start discovering the benefits of Jersey as a domicile and a service centre. ‘It’s only a matter of time before managers from emerging markets want to set up a presence here,’ he says. ‘The jurisdiction sees India and China as markets where there will be increasing need to draw on Jersey’s expertise. Jersey Finance has affiliated with Indian Angels, which seeks to help facilitate business waves in both directions.’
O’Connor expects demand from hedge fund managers to continue growing, the travails of the global financial environment notwithstanding. ‘The island may have been more attractive to private equity and property funds but now it’s equally attractive to hedge funds,’ he says. ‘The fund administration sector is maturing – there’s been a lot of investment and huge growth, which reflects the island winning business through investment in systems, in client service and in sensible outsourcing.’
He believes the goal of challenging Cayman for hedge fund business is attainable. ‘As more institutional money comes into the market, we are seeing hedge funds geared to institutions being established in Jersey,’ he says. ‘That brings greater corporate governance requirements to bear and attention on whom the service providers are, what the service levels are, and especially how risk is managed. Jersey is well placed to meet the requirements of those institutional clients, partly because of its excellent regulatory regime, but also because of the reputation of its service providers.’