24 January 2011
Despite the country’s economic malaise, Ireland’s funds industry is at an all-time high. Joanne Harris reports
One of Ireland’s greatest unsung successes over the past few years has undoubtedly been the growth of its funds industry.
Back in 2000 the assets under management (AUM) of funds domiciled in and administered from Ireland amounted to barely e300m (£253m). By the end of 2010 AUM was at an all-time high of almost e1.8tr. Irish fund administrators were looking after nearly 11,000 funds and there were 4,768 Irish-domiciled funds.
By any standard, the growth has been extraordinary, but the addition of e300m of AUM in the year between the end of 2009 and the end of 2010 - at a time when Ireland’s economy was at rock bottom and investors could easily have lost confidence in the country - beat everyone’s expectations.
“While I don’t want to be arrogant about it, if you’d offered me where we are now back in 2008 I’d have bitten both your hands off,” says Matheson Ormsby Prentice asset management head Michael Jackson.
“The funds industry’s flown in the face of the slowdown we saw in late 2008 and 2009 - it’s gone from strength to strength,” agrees William Fry corporate head Bryan Bourke.
Funds lawyers are at pains to point out that Ireland’s domestic economic problems are in no way connected with the financial crisis. Indeed, the Irish government has specifically ringfenced investment fund assets, guaranteeing that those held in custody by Irish financial institutions will be safe no matter what.
“I’d like to think the growth is sustainable and a lot of it’s been because of an extremely competitive environment here,” says Jackson. “I think the biggest benefit to our industry of the financial crisis is that it’s refocused the government and the regulatory authorities on the importance of international business in Ireland. Now there’s a realisation that this is an industry that can ride through the good times and the bad, and it makes sense for the government to focus on it.”
Jackson, who was chair of the Irish Funds Industry Association in 2009, says the industry as a whole now enjoys closer links with the government and the Irish Financial Regulator than it did before.
The regulator’s pragmatism is praised by lawyers, who feel that efforts made to keep funds regulation up to date have helped make the jurisdiction competitive. However, one such piece of legislation has not yet taken off.
In September 2010 the government enacted a law enabling the redomiciliation of offshore funds to Ireland in a simple process. Unlike previous redomiciliations, whereby the offshore vehicle had to be closed before the assets were moved to the new jurisdiction, the new rules allow an offshore vehicle to be picked up, complete with assets and performance history, and moved lock, stock and barrel to Ireland.
Despite significant publicity, there have to date been few redomiciliations. A&L Goodbody advised on the first, moving a Bermudan vehicle across to Ireland. Other firms say they have one or two each in the pipeline.
“I think the first wave of redomiciliations is underway. The process has been made hugely more efficient and Ireland has benefitted from that,” says Fionán Breathnach, head of Mason Hayes & Curran’s investment funds and financial regulation practice.
Arthur Cox asset management head Kevin Murphy, who advised on the redomiciliation of a Bermudan unit trust using the new law, praises the regulator’s attitude to its application.
“The legislation was principally introduced to deal with the migration of corporate funds, but the Central Bank of Ireland said it would apply the same rules to a unit trust,” he explains.
Asset management lawyers think Ireland has become more attractive to fund managers and distributors for a number of reasons. The financial crisis led many investors to examine whether they can continue to run the perceived risk of putting money into a lightly regulated product. Onshore funds, particularly those found in Ireland and Luxembourg, are seen as less risky due to the increased regulatory requirements involved.
As Ireland is an EU state it can offer managers the well-established Undertakings in Collective Investment in Transferable Securities (Ucits) product. The jurisdiction also has a Qualifying Investor Fund (Qif) vehicle, which has few investment restrictions. The minimum investment in a Qif was recently lowered to e100,000 from e250,000 to bring it in line with a Ucits fund.
Some managers began looking at Ireland as the EU Directive on Alternative Investment Fund Managers (AIFMs) was under negotiation, in the belief that offshore jurisdictions would be affected adversely by the legislation. In the event this proved not to be the case, but lawyers think more people are inclined to consider Ireland as a funds domicile than before.
“The initial reaction to where things ended up has been positive towards Ireland,” says Jackson. “You’re seeing managers who traditionally toyed with Ireland and then went to Cayman coming here.”
Increased flexibility for funds is likely to continue, as well as more work for lawyers, when the next iteration of the Ucits directive - known as Ucits IV - is implemented in July. Among the changes to the directive is the introduction of a ’key investor document’ (Kid) which every fund must provide.
“A lot of time will have to be spent with clients to ensure they meet the deadlines of the Central Bank for producing that Kid,” Murphy says. “It’s unfortunate that there’s a lot of stuff coming down the track in a short space of time.”
Another growth area is that of exchange-traded funds (ETFs). Because ETFs are listed on a stock exchange they are becoming an increasingly popular choice for institutional investors as well as retail investors. Several of the largest ETF platforms, including that run by HSBC, are domiciled in Ireland.
The positive story is tempered with a recognition that the world has changed. Although Ireland is undoubtedly attracting more AUM than previously, the asset management industry globally has enjoyed a good year. Predictions of the death of the Cayman Islands were premature and generally the trend is for funds to launch rather than close.
However, the extra work has encouraged the firms with established funds practices to grow, as well as being the primary reason for new entrants to the market. Trainees and young lawyers are encouraged to join funds teams, while some firms are moving partners around to boost their capabilities.
As part of its ongoing efforts to diversify away from practice areas such as property, which have struggled in recent years, Eversheds O’Donnell Sweeney launched its funds practice in April last year. Financial services partner Peter Fahy says the delay in reaching agreement over the AIFM directive means the development of the practice has been slower than the firm would have wished.
“It takes time to develop the offering and also it’s client-driven,” notes Fahy, adding that the practice is now “beginning to gain a lot of traction”.
But the O’Donnell Sweeney team, led at the moment by a single partner in Stephen Carty, could struggle against the much larger funds practices of other firms.
Last year finally saw offshore giant Walkers and US firm Dechert - a leading funds adviser in the UK - set up Irish offices. Both firms have begun life in Dublin with focuses on funds.
Dechert poached William Fry’s alternative investment head Declan O’Sullivan and added Michelle Moran, previously in-house at Invesco. Walkers, meanwhile, is following a model similar to that of its offshore competitor Maples and Calder. Maples moved into Ireland in 2006 and is now a 140-strong full-service office with a funds services arm.
Maples Irish managing partner Andrew Doyle says the office hit all its targets in 2010 and scored work on a number of corporate deals as well as its core funds business. Doyle agrees that the firm’s fiduciary business, Maples Funds Services, has helped.
“The ability to offer a one-stop shop range of services has been an important factor in our growth, particularly in areas such as asset and structured finance,” says Doyle. “Andrew Quinn, our head of tax, is seeing a lot of activity in the aircraft finance space, particularly from China, as well as in the use of funds for the holding of US assets such as life settlements, and renewed growth in the foreign direct investment sector, particularly from US technology companies.”
So far, four months after establishment, Walkers has five partners - in funds, tax, asset finance and structured products - plus its own funds services group.
Rivals believe it will take the new entrants several years to truly get up to speed. Doyle thinks it took three years for Maples to establish the presence it wanted in Dublin and estimates a similar timeframe for the newcomers.
Lawyers think the arrivals of Dechert and Walkers are a good sign for the Irish market.
“They’re coming because their existing client base is moving to onshore regulated Europe,” says McCann FitzGerald chair John Cronin. “From our perspective, touching wood, so far it hasn’t impacted adversely on our practice.”
Some would argue that the biggest problem faced by firms trying to break into Ireland is the limited pool of talent available to be hired. Ireland remains a small jurisdiction with a number of talented lawyers, but persuading them to move firms can be tricky.
Simmons & Simmons, Dechert’s biggest competitor on the London funds scene, has found this to be the case. Despite several advertisements in Irish newspapers, and, sources say repeated efforts to lure partners away from their current firms, Simmons’ Dublin launch remains elusive.
The arrival of more firms is a faint possibility. If Walkers’ venture proves a success, and if the trend in the funds industry continues to be upwards and onshore, other offshore firms may seek footholds.
Whatever happens with regard to new entrants, existing legal players in the funds sector are confident that this industry will continue to provide fruitful work for many years to come. n