Guernsey fund administration building solid reputation

Channel Islands: Surviving and thriving (supplement August 2010)

guernsey-lighthouse

The fund administration industry in Guernsey has grown and prospered as a result of regulation requiring a Guernsey fund to have a local administrator. That has encouraged the development of the expertise to administer funds based on and off the island.

By the end of the first quarter of 2010, Guernsey administrators were administering a total of 35 Guernsey-domiciled hedge funds and 43 non-Guernsey hedge funds, plus 103 Guernsey funds of hedge funds (FoHFs) and 130 domiciled outside Guernsey in addition to a large number of other  investment vehicles.

Administrators based in the island range from small independent companies with a few billion dollars under administration to the large global fund services giants. This range of service providers gives managers a good choice.

Praxis Fund Services director Stephen Cuddihee says fund administrators on the island are seeing a pipeline of enquiries develop as momentum returns to the London hedge fund market.

However, Cuddihee notes that while enquiries about setting funds up in Guernsey have increased recently, the rate of conversion to actual launches is still slow.

“I think it’s still difficult for investors and promoters to raise money,” Cuddihee says.

At Legis Fund Services, managing director Martin Tolcher agrees the time from enquiry to launch is much longer than it used to be.

“It’s all very well having a fund established but the thing for every service provider is when it launches. It still seems that it’s taking longer to establish the fund and then launch it,” Tolcher adds.

He says Legis is getting enquiries from a range of fund managers including a continued stream from funds of hedge funds (FoHFs). Existing FoHF clients are also doing better than they were over the past two years, according to Tolcher.

The same is true at Kleinwort Benson, which provides both administration and custody services. Guernsey head of business development Joseph Truelove reports the company is receiving work from sources including open-ended FoHFs as well as funds looking at strategies such as infrastructure and renewable energy.

Truelove also believes the closed-ended listed funds which helped build Guernsey’s funds industry are also coming back into fashion. He says the evidence for this is a greater number of managers based in emerging markets such as India and Singapore who are using a Guernsey-domiciled vehicle listed in London to access institutional money from the UK.

Fund administrators think the closed-ended listed structure, which is most commonly used for private equity but has also attracted a number of single-manager hedge funds and FoHFs to Guernsey, will remain popular.

Listed open-ended funds could also grow in popularity as investors seek greater transparency and more information following the financial crisis, thinks Tolcher. Secondary trading of both open and closed-ended funds is another development that can give investors access to liquidity if required.

Truelove admits Guernsey is likely to stay a small funds domicile, particularly for hedge funds. The island will not be able to compete with jurisdictions like the Cayman Islands or the British Virgin Islands in terms of the size of its industry.

Like other service providers, administrators think the threat of the European Union’s (EU) alternative investment fund managers (AIFM) directive has slowed down business in Guernsey as managers wait to find out what the legislation means. The delay was extended recently thanks to continuing deadlock by EU legislators.

“The good news is that they haven’t said no to Guernsey and the bad news is that they’re waiting until September,” comments Tolcher.

He is expecting business to pick up towards the end of the year once a decision has been reached on the directive. “You would be naïve to think that in October, November and December there’ll be a sudden rush but I’d hope that over the next six months because of the certainty we’d see more,” Tolcher adds.

Tolcher and other fund administrators think Guernsey will be able to respond quickly to the outcome of the directive. Truelove reveals he is part of a team of service providers working alongside Guernsey Finance to promote the jurisdiction in the light of the -eventual agreement.

“At the moment we think it’s not going to be the end of Guernsey. It’s potentially an opportunity for Guernsey to become more dominant,” he says.

He believes the island is well set up to attract more business as it already promotes itself as a jurisdiction with regulated or authorised funds and should be able to meet any equivalency criteria imposed by the EU.

Tolcher agrees. “As far as I can see we’re still perceived, quite rightly, as being in the top echelon of jurisdictions and that has a lot to do with the regulated element,” he believes.

However, Truelove says Guernsey must be careful not to go too far down the regulated route.

“You have got to tread a fine line between demonstrating greater regulation and being over-regulated. The Guernsey Financial Services Commission has got a difficult challenge to respond to the requirements of the EU and meet their expectations without becoming so cumbersome that we’re too difficult to do business with. It’s a challenge and it’s one where there’s an ongoing dialogue between practitioners and the regulator,” he notes.

One area in particular where administrators are watching the line between adequate regulation and over-regulation is corporate governance. The ongoing review of corporate governance is welcomed but providers do not want it to impede the way they work.

“To my mind we need to be very careful because corporate governance is like compliance. We don’t want to go completely over the top and become obstructive to doing business,” says Tolcher.

Cuddihee adds: “Most of the top tier administrators already perform governance to a high level. The review will strengthen what’s already there.”

Nevertheless, local fund administrators are happy with the relationship they have with the regulator and the local promotional agency, Guernsey Finance.

“Having looked to connect in the past with regulators in other jurisdictions, it’s fair to say it would appear that the pragmatism and the ability to engage in dialogue with the Guernsey regulator is an advantage,” says Tolcher.

Legis has found that supporting Guernsey Finance on its roadshows abroad has been useful, bringing in work as well as building relationships with clients in a variety -of jurisdictions.

The increased marketing effort in Guernsey has come at a time of development and change in the way fund administrators work. Before the financial crisis, when mandates were flooding into the island, they found themselves stretched and many decided to outsource elements of administration to -cheaper jurisdictions.

Those include places like India. However, outsourcing has also been done to countries that are now starting to compete with Guernsey for work. Cuddihee explains that Praxis outsourced the back office administration for open-ended funds to Malta, keeping company secretarial duties, share dealing and closed-ended administration in Guernsey.

“As Malta has become better known as an offshore fund jurisdiction, we have picked up some small fund mandates there,” he adds.

Outsourcing has not met with universal approval. Tolcher thinks some managers come to Guernsey specifically for the bespoke service that several administrators on the island specialise in and that kind of work is not easily outsourced.

He says there are other ways to increase capacity without sending work to other jurisdictions, such as investing in systems for valuation or accounting. “That makes us more efficient in terms of labour-intensive activities,” says Tolcher.

The ability for administrators to build their workforces locally has also improved recently. Companies praise the work of the Guernsey Training Agency, which offers professional qualifications for financial services providers. As business returns to normal following the financial crisis, movement between companies is likely to increase again.

Recent months have seen a shift in ownership of fund administrators including Mourant International Finance Administration and Kleinwort Benson. Mourant was bought by State Street and RHJ International (RHJI) acquired Kleinwort from Commerzbank.

Truelove is enthusiastic about Kleinwort’s change in control. The transaction is part of a growth plan by RHJI that has included the acquisition of Irish company KBC Asset Management. Truelove thinks this will give Kleinwort an “extra distribution outlet for fund administration and custody”.

Kleinwort has also shifted its banking licence from Jersey to Guernsey due to a Jersey regulation requiring entities to be owned by a bank in the world’s top 500. Truelove explains this will not result in any change for fund administration or custody clients on either island.

Although Truelove expects more administrators will move into Guernsey in coming years, he believes the island already has a good range of companies providing fund services. “Investment managers can choose what style of administration best applies to them,” he says.

“I think in a vibrant industry there’s always going to be acquisition. I think there’ll always be new entrants to the market,” -adds Cuddihee.

He thinks a natural barrier to entry in Guernsey is the cost of doing business on the island coupled with the housing regulations limiting the number of properties available to non-islanders.

Administrators think independent companies will continue to thrive even if the market does experience more consolidation through take-overs by larger businesses. Indeed, the smaller administrators such as Legis and Praxis also have growth plans. Tolcher says Legis already has an Isle of Man base and “might need to be in Europe” in the future.

Those plans could well depend on the outcome of the AIFM directive. In the meantime Guernsey’s administrators are confident they will continue to benefit from the island’s well-established funds industry.

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