Isle of Man Hedge Fund Services 2006

Transcription

1 Jul 2006 Isle of Man Hedge Fund Services 2006 Quality assurance pays for island s administrators Getting the message to fund gatekeepers Playing the growth card

2 CONTENTS In this issue 03 Island s administrators set out stall on quality By Simon Gray 05 Building on financial tradition By Gordon Wilson, Caledonian Fund Services 09 Awareness grows among fund gatekeepers By Mike Simpson, PriceWaterhouseCoopers 10 Isle of Man flexes its competitive muscles By Simon Gray Publisher Special Report Editor: Simon Gray, simon.gray@hedgeweek.com Sales Manager: Simon Broch, simon.broch@hedgeweek.com Publisher/Editor-in-Chief: Sunil Gopalan, sunil.gopalan@hedgeweek.com Marketing Director: Oliver Bradley, oliver.bradley@hedgeweek.com Graphic Design (Special Reports): Siobhan Brownlow at RSB Design Photographs: Courtesy of Isle of Man Finance Image Library Published by: Hedgemedia Limited, 72 New Bond Street, London W1S 1RR Tel: +44 (0) Web-Site: Copyright 2006 Hedgemedia Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. ISLE OF MAN Hedgeweek Special Report Jul

3 OVERVIEW Island s administrators set out stall on quality By Simon Gray The alternative investment fund services industry in the Isle of Man may not yet be on the same scale as the sector in Dublin, Europe s largest centre for hedge fund services, but new business is flooding in. There are signs that the island is starting to win mandates from other jurisdictions, as fund promoters look for a higher level of service quality and personal attention than is available elsewhere. Over the past three years, the assets of funds domiciled and/or administered on the island has grown more than threefold, from USD9.8bn to around USD30bn, according to Brian Donegan, business development manager with Isle of Man Finance, the department of the island s Treasury responsible for promoting the financial services industry. The island appears to be on track to reach its target of USD50bn in fund assets by 2008, and Donegan adds: We now have a target of USD100bn for 2010, and we feel very confident we re going to achieve that objective. p6 ISLE OF MAN Hedgeweek Special Report Jul

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5 CALEDONIAN FUND SERVICES Building on financial tradition By Gordon Wilson The Isle of Man has a long tradition in international financial services, primarily as a centre for international banking and life insurance business, but more recently in providing hedge fund services. The hedge fund industry in the island is focused on providing a servicing alternative to centres such as Dublin based on a highquality personal service, and following the introduction of new legislation in 2002, there has been significant growth in the number of non-manx hedge fund structures (typically Cayman or BVI) being serviced in the Isle of Man. The island offers a number of distinct advantages. These include the continuity of personnel which providers here can offer as a result of significantly lower levels of staff turnover compared with other centres. In addition, the Isle of Man has a generally lower cost of operations and cost of living compared with most big cities, not to mention lower levels of personal and corporate taxation, and these contribute to the cost-effectiveness of the Manx fund services offering. It should not be overlooked that the technical infrastructure in the Isle of Man, vital to the efficiency of service providers and their communications, is second to none. The island has benefited greatly from its role as a test-bed for innovations in communications technology before their rollout in the United Kingdom. This has given the island a head start in adopting and capitalising on developments such as 3G mobile technology and broadband internet. State-of-the-art technology has also played an important role in attracting businesses such as online gaming, which relies entirely on the quality and resilience of the technical infrastructure, and where the Isle of Man is a recognised world leader. It has also Gordon Wilson is managing director of Caledonian Fund Services (Europe) interested certain Caribbean based service providers, including Caledonian, who, with regulatory approval, use the Isle of Man as a primary disaster recovery location for their Caribbean operations. The island enjoys a high reputation for the rigour yet flexibility of its regulatory structure, which offers comfort to investors without adversely affecting managers and promoters of funds with unnecessary bureaucratic burdens. For example, there is no additional regulatory burden placed on funds domiciled in Cayman or the BVI resulting from their being administered in the Isle of Man, an important consideration when assessing the merits of different fund servicing options. Ultimately though, the attraction of the island is primarily about the service providers and people that operate in the fund services sector and the skills and experience they possess. It is therefore an important question for jurisdictions such as the Isle of Man to answer whether they can scale up and add capacity as demand from managers of alternative funds continues to grow. In this regard, it should not be overlooked that the island enjoys much more available space than many of its competitors as well as a single property market, open to all. This, combined with a progressive immigration system that balances the needs of industry as well as encouraging the development of the local workforce, means that the issues of attracting and maintaining the necessary expertise are not as complicated in the Isle of Man as they are in various other hedge fund servicing centres. What this means is that as the hedge fund industry continues to grow, the island is capable of meeting new demand with expertise and a level of quality that is increasingly recognised throughout the fund industry worldwide. ISLE OF MAN Hedgeweek Special Report Jul

6 OVERVIEW p3 The island is benefiting from a growing perception that while Dublin s hedge fund administration sector has grown in tandem with the upsurge in the alternative investment market over the past few years, the Irish capital has become a significantly more expensive place to do business, removing its one-time cost advantage. At the same time a high level of staff turnover has caused problems with customers concerned about the quality and continuity of the service they receive. These issues give the Isle of Man a significant opportunity in competitive terms. Says Mike Simpson, the partner in charge of investment management work at PricewaterhouseCoopers: Quality of service is where the Isle of Man is trying to set out its stall. The labour market in Dublin is very tight, and the feedback is that staff turnover is very high, which always has a direct knock-on effect on service quality. The workforce is much more stable on the island. There are no official statistics on the size of the fund administration sector, but it numbers more that 15 firms and accounts for a significant proportion of the 12,500 full-time professionals currently employed by the island s financial services industry. At the end of 2005, an estimated 70 per cent of assets were serviced by the two largest administrators, HSBC and Fortis. Says Donegan: The funds administered here range in size of assets from USD5m to several billion dollars, and are mainly hedge funds and funds of hedge funds, but also private equity, property and emerging market funds. Until recently the Isle of Man s fund services industry had maintained a relatively low profile, especially by comparison with the island s banking and life assurance sectors. However, the funds business is starting to shake off its anonymity largely thanks to two developments: the unveiling of new fund structures, including notably the Experienced Investor Fund, in 1999, and the removal four years later of what Donegan describes as impediments to growth, such as the levying of VAT on fund administration services. In 2003 the Treasury took a number of initiatives to remove some of the obstacles that were holding the industry back, he says. In addition to a VAT-free, tax-free regime for the funds business, we also introduced a 50 per cent capital expenditure grant, which means that anyone coming to the island can potentially get half of their start-up costs such as office rental or construction, recruitment, IT systems and equipment paid upfront by the government. The Isle of Man fund administration sector has been in existence for more than a decade and a half predating that of Dublin and its two largest members, HSBC and Fortis, are long established in the island, Nevertheless, there is considerable satisfaction at the recent decision of Anglo Irish Bank, which already has an extensive banking operation on the island, to add a fund administration operation. Donegan says the dramatic growth in funds business over the past two years has been down to a combination of strong asset growth in existing funds and the arrival of new funds, both start-ups and mandates transferred from other administration centres. But there is a lively debate on the relative importance of Isle of Man-domiciled structures, notably EIFs, and administration work for funds registered in the Cayman Islands and British Virgin Islands, the world s dominant offshore alternative fund domiciles. At the end of March this year, the Isle of Man Financial Supervision Commission regulated a total of 173 collective investment schemes, of which by far the largest proportion (135) consisted of EIFs. However, ISLE OF MAN Hedgeweek Special Report Jul

7 OVERVIEW according to Richard Vanderplank, a director with the island s leading law firm specialising in funds, Cains, the regulator s figures do not give a full picture of the island s fund business. Areas that aren t fully listed by the Commission, but in which we do a lot of work, consist of closed-ended vehicles, including AIM listed companies, and exempt schemes, the latter being a small unregulated private equity institutional-type arrangement which has long been popular among promoters, he says. It s difficult to gauge the numbers and full volume of funds under administration within those sorts of structure, because they re not subject to a prior approval or universal notification process, but they re quite a significant area of business. While the use of EIFs and other Isle of Man fund structures has been booming over the past few years, some administrators believe that overseas-domiciled funds offer an equally attractive market. Says Gordon Wilson, managing director of Caledonian Fund Services (Europe): The choice of domicile is all about the relationships of lawyers setting up these funds, and there is a tried and tested Cayman fund product. We need to market the things that are unique to the Isle of Man and compete globally. Caledonian, which has been active in the Isle of Man since 1999, was founded in Grand Cayman in the 1970s and also has an operation servicing US onshore funds in Chicago. Wilson says the island is increasingly benefiting from consolidation among Dublin administrators because the large operations that now dominate the market there have become less interested in smaller and start-up funds. He says: Our target market is the smaller start-up fund, and we are very busy with new business that is coming here because bigger firms in Dublin are focused on bigger funds. All the big hedge funds themselves started out as small outfits five or 10 years ago. As the funds grow they become more institutional themselves, but at a cost in terms of flexibility. Most hedge fund managers want to be at the cutting edge, doing riskier business to make bigger returns, which is why there are always spinoffs out of these big shops as managers reject the shackles and want to do it for themselves. According to Simpson, the Isle of Man of Man has always been an important location for start-up funds, but it now offers significant cost advantages over other jurisdictions. For example, he says, the minimum fee charged by administrators on the island might be around USD20,000, compared with as much as USD50,000 in Dublin. However, he insists that the EIF remains a valuable tool. We ve got a sound product, it s a case of marketing it effectively, Simpson says. EIFs can be used for a number of products, not just hedge funds but private equity and property, where we re also seeing plenty of growth. ISLE OF MAN Hedgeweek Special Report Jul

8 As you might expect, excellence in assurance is not just about numbers.* As well as getting the figures right, our Assurance Services practice in the Isle of Man has experts in everything from statutory audit to process assurance, and accounting advice to corporate governance. It s all about adding value to our clients business. To find out more about what we could do for your company call Mike Simpson on , contact him at Sixty Circular Road, Douglas, Isle of Man or visit PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the Isle of Man firm of PricewaterhouseCoopers LLP (a limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

9 PRICEWATERHOUSECOOPERS Awareness grows among fund gatekeepers By Mike Simpson The Isle of Man s experience in servicing what are today known as alternative funds goes back at least two decades, to the late 1980s, when the island was already carving out a niche including hedge funds and what were then considered non-standard types of investment. Over the years the island s expertise and capacity have grown considerably and today encompass big administrators that are global players and are capable of servicing very large hedge funds, such as HSBC and Fortis. As the level and quality of service offered on the island has increased, it has also seen growth in ancillary services such as law firms and auditors essential to the development of the industry. In addition, the Isle of Man has benefited from the creation nearly seven years ago of the Experienced Investor Fund, a vehicle that has proved particularly well suited to hedge fund structures because of the opportunity to use a prime broker. Strong growth in the number of EIFs being established testifies to the demand in the market for a suitable Isle of Man-domiciled fund vehicle. At the same time, there is also significant growth in the number of overseas funds, mostly incorporated in the Cayman Islands or British Virgin Islands, which are being administered on the island. These funds are carved out of regulation in the Isle of Man, so they are only subject to regulation in a single jurisdiction. This makes it easier for funds that are dissatisfied with the service they are receiving in another jurisdiction to move their administration mandates to the island. The principal attraction of the Isle of Man is the quality of service offered by providers here. It is an attribute particularly appreciated Mike Simpson is a partner responsible for investment management with PricewaterhouseCoopers in the Isle of Man by managers of start-up alternative funds that may struggle to find a comparable level of individual attention at a competitive price elsewhere. Historically this has been an important servicing jurisdiction for start-up funds, because it can deal with smaller funds on a more cost-effective basis than many of its rivals. Whereas the standard level of administration fees may be similar as a proportion of assets, the minimum charges imposed by service providers on the island may be half or less of those required by administrators in a centre such as Dublin. However, the Isle of Man is also attracting larger funds from competitors as well, such as the growing number of closed-ended funds that are seeking listings on London s Alternative Investment Market. This growth in business has not happened by chance. It is due in considerable part to the efforts made by the government and by the Fund Management Association over a number of years to raise the island s profile in the market. As a result of repeated contacts with the big London law firms that advise promoters on the establishment of hedge funds, we have noticed a significant change in attitude and level of awareness over the years. Whereas in 1999 it was necessary to explain to people where the Isle of Man was, and why it should be considered for the domicile and servicing of hedge funds, today many of the lawyers we meet in London are already using the island. There is no doubt about either the level of knowledge among key gatekeepers to the fund industry, nor about the surge in business coming to the island. ISLE OF MAN Hedgeweek Special Report Jul

10 JURISDICTION Isle of Man flexes its competitive muscles By Simon Gray The fund services industry in the Isle of Man has been active for well over a decade but for much of its existence it has been overshadowed by other areas of the financial services industry on the island, while in international terms it has been perceived as a small niche business of limited interest to much of the burgeoning global alternative investment sector. However, that perception is no longer valid. Over the past few years, the government s financial promotion body, Isle of Man Finance, has undertaken a series of initiatives in collaboration with the industry, through the Fund Managers Association, to raise the industry s profile, especially among the key gatekeepers for global funds business among the London law firms. In addition to regular industry roadshows and a presence at international funds conferences, Isle of Man of Man Finance recently established a permanent London office. This is particularly important, according to industry players, because the growth of the global funds industry is not only providing increased opportunities for new business but is placing a strain on the biggest hedge fund administration centre in Europe, Dublin, in a way that turns a spotlight on facets of the fund servicing business in which the Isle of ISLE OF MAN Hedgeweek Special Report Jul

11 JURISDICTION Man has an appreciable competitive advantage. Competition for alternative fund administration business has become intense as it has grown from a small and relatively specialised activity into a mainstream field into which many of the world s leading banking groups have now moved to offer administration and custody services to the estimated USD1.2trn in global hedge fund assets. As well as the Isle of Man, other jurisdictions that are now seeking to challenge the dominance of the established centres of Dublin and the Cayman Islands include Jersey, Guernsey and Luxembourg, with Gibraltar also looking to establish itself in the market. The Channel Islands, which have both recently revamped their fund regulation structures, are particularly keen competitors, as in other areas of the offshore financial services industry. There s always been competition between the islands in different areas, and there always will be, especially as they have to respond to international initiatives such as the OECD harmful tax campaign and the European Union s Savings Tax Directive, says PricewaterhouseCoopers investment management partner Mike Simpson. Recently other jurisdictions have seen an opportunity to take business away from Cayman, and all the islands want a piece of that market. According to Isle of Man Finance business development manager Brian Donegan, the island has an important story to tell about the cost benefits it enjoys over rival administration centres, as well as a much greater ability to scale up quickly in response to increasing levels of business. He says: If you re looking to build a scalable business, as many of our prospects do, they look at the island in terms of its capacity to grow as well as its cost base, and the other factors involved in bringing people in here. For a start, there is a simple work permit system we had 10,000 work permit applications last year, including 5,000 in the financial services sector, and fewer than one percent were turned down. A detached house here costs about 300,000, compared with our estimates of about 600,000 for the Channel Islands, 750,000 to 800,000 in Dublin and 1.2m in Cayman. Meanwhile, the average Cayman salary for a fund accountant is around 55,000, and in the Channel Islands and Dublin about 40,000, whereas here it s about 30,000. Yet at the same time we estimate that the staff turnover rate in the Channel Islands is around 30 per cent, and Dublin is suffering from a rate of 50 per cent, but in the Isle of Man we estimate the rate to be between seven and 10 per cent. It s a huge difference when you consider how important it is in the fund industry to attract the right people and retain them. Andrew Ashworth, managing director of Abacus Financial Services, the island s thirdranking administrator after HSBC and Fortis, attributes the strength of new business flowing into the jurisdiction to a new perception of the Isle of Man among its key intermediaries, London-based fund lawyers. He says: The island is thriving, with the establishment of new administrators and strong asset growth stemming from fund performance, inflows of new money, the launch of new funds and the transfer of existing ones. ISLE OF MAN Hedgeweek Special Report Jul

12 JURISDICTION In the past five to 10 years, he believes, the jurisdiction has been accepted for the first time as a serious option for administration by the global funds industry. It s partly down to the way the island has been marketed, but also the sheer fact that it s got critical mass, he says. Isle of Man Finance has its own London office, and all three Isle of Man law firms that specialise in funds have operations there too. All these efforts are starting to pay dividends with a recognition that wasn t there in the past. Both industry and government expect dividends to flow from a reform of the island s tax structure formalised in April. This will give most businesses a zero rate of corporate tax (something already enjoyed by the funds sector since 2003), apart from the banks, which will pay a 10 per cent rate, while wealthy individuals who are taxpayers in the Isle of Man will in future benefit from a tax cap of 100,000 on their worldwide income. This latter measure in particular should bolster efforts to encourage fund managers to move themselves and their operations to the island. Says Simpson: There is quite a high level of interest in this, and there have been talks with managers as well as administrators about moving operations to or setting up to the island. We re an hour away from City Airport, which is quicker to reach than from many parts of London. Says Ashworth: We re never going to be Mayfair, where there are people who are wealthy in their own right, and given a choice will stay in London. However, there are already a handful of managers, some of them well known like Charlemagne Capital and Laxey Partners. I don t think we will ever be looking to attract many hedge fund startups and their trading teams instead it is more suited to middle and back office operations. However, there will always be a certain style of manager who doesn t want the hassle of commuting and who appreciates the freedom and security that the island offers. Caledonian Fund Services managing director Gordon Wilson expects the tax changes, along with the increasing flow of business, to attract more administrators to the Isle of Man. He says: A further increase in the number of administrators would add to the island s credibility. A lot of people have looked at the idea and thought they couldn t build a large enough business to make it work. But I believe that as capacity issues grow in other jurisdictions such as the Channel Islands, where it s more difficult to bring people in, get them settled and accommodate their families, the Isle of Man will emerge as an alternative. Richard Vanderplank of leading law firm Cains believes that another impending legislative change will also boost the island s position. We have new companies legislation about to hit the books as well, which provides for a corporate vehicle that is extremely flexible and has a lot of the characteristics of the International Business Company familiar in the warm water jurisdictions. We hope it will prove useful as a structure for funds. The legislation is designed to be extremely flexible from an administrative perspective while also meeting international obligations. It s been vetted by a lot of different people on and off the island and received a clean bill of health in that respect, as well as from a legal perspective. ISLE OF MAN Hedgeweek Special Report Jul