REVIEW OF ALTERNATIVE INVESTMENT FUND DOMICILES AND TRENDS 25 November 2014 Oliver Wyman
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Introduction The following presentation analyses trends in choice of domicile for Alternative Investment Funds, prepared by Oliver Wyman for the Association of the Luxembourg Fund Industry (ALFI) Alternative Investment Funds (AIFs) are defined as investment schemes that apply investment strategies typically not available to traditional mutual funds (e.g. UCITS). AIFs can be grouped into three main asset classes: Hedge Funds Private Equity funds Real Estate funds The report examines only those domiciles attracting largest number of Alternative Investment Funds by number fund registrations and asset under management. These are: The Cayman Islands State of Delaware in the United States of America Key AIF domiciles in the European Union: Luxembourg, Ireland and Malta The Channel Islands comprising Jersey, Isle of Man and Guernsey Other Caribbean Islands: Bermuda and British Virgin Islands (BVI) In order to ensure desired level of accuracy, the report uses publicly available information from local monetary authorities and industry associations (to the extent available), commonly used fund databases (e.g. Preqin, EurekaHedge, Monterey Insight). But since much data is not disclosed, this has been complemented by proprietary data and interviews with industry experts to derive estimates for AIF domicile choices Oliver Wyman 2
The number of Alternative Investment Funds has increased by 10% since 2010 Total number of traditional AIFs 2010-2013 Excluding UCITS compliant AIFs 23,000 10% 9% 14% 39% 28% 2010 23,100 11% 9% 14% 38% 28% 2011 +10% 24,700 11% 8% 12% 42% 27% 2012 Number of UCITS compliant AIFs in EU +17% 25,300 11% 7% 11% 43% 27% 2013 ~ 560 ~580 ~620 ~660 EU (excl. UCITS) Channel Islands Other Caribbean Cayman Islands Delaware Observations There are now over 25,000 AIFs, having increased by 10% since 2010 The distribution of fund domicile has remained relatively stable Stable positioning for Delaware, and growth for Cayman Islands Increase in EU-onshore location (Luxembourg, Ireland, Malta) from 10% in 2010 to 11% in 2013 Decrease in relative positioning of Channel Islands as well as other Caribbean markets In addition the number of UCITScompliant alternative funds has grown steadily to 660 but remains small in comparison Source: Oliver Wyman Analysis of each jurisdiction data and estimates where data is not publicly available Note the EU numbers are for Luxembourg, Ireland and Malta; Other Caribbean is British Virgin Islands and Bermuda; Channel Islands comprise Jersey, Guernsey and Isle of Man. Other domiciles are smaller and not included in the analysis; numbers include sub-funds and Funds of Hedge Funds Oliver Wyman 3
Domiciliation in the EU and the more traditional hubs of Delaware and Cayman Islands show the strongest growth Change in number of AIFs 2010-2013 Observed trends EU (non-ucits) 27% 1 Strong growth in EU, fuelled by AIFMD EU (UCITS) Cayman Islands 17% 22% 2 Demand for Alternative Investment Funds under mutual fund/ucits structures Delaware 8% Channel Islands -12% Other Caribbean -15% 3 Demand for onestop-shop domiciles decreasing appeal of smaller offshore domiciles Source: Oliver Wyman estimates Average growth number of funds = 10% Average AuM growth = 13% Oliver Wyman 4
Traditional offshore domiciles confirm their dominant role within the respective AIF asset classes Top domicile per asset class by AuM, 2010 vs. 2013 comparison Observed trend Hedge Funds Private Equity Real Estate 45% 40% 30% 31% 40% 33% 55% 60% 70% 69% 60% 67% 4 Successful domiciles maintaining or strengthening their dominant role Cayman Islands for HF 2010 2013 2010 2013 2010 2013 Delaware for PE & RE Others Cayman Islands Delaware Source: Oliver Wyman estimates Oliver Wyman 5
In summary therefore, we see four main trends which we now examine in turn 1 Strong growth in EU, fuelled by AIFMD 2 Demand for Alternative Investment Funds under mutual fund/ucits structures 3 Demand for one-stop-shop domiciles decreasing importance of smaller offshore domiciles 4 Successful domiciles maintaining a dominant role Deep-dives on following pages Oliver Wyman 6
1 AIFMD increased the attractiveness of European onshore domiciles Impact of AIFMD Effective since July 2013, AIFMD defines a regulatory framework for Alternative Investment Funds in the European Union Introduces new requirements for managers of AIF, e.g. Appointment independent depositary and independent valuer of assets Ensure effective liquidity and risk management Investor disclosure requirements Introduces EU-wide passport rules previously only available for UCITS funds Allows marketing of authorised funds across Europe Expected to replace the National Private Placement regime in 2018 At the same time increases difficulty to market non-eu funds in the EU Source: Oliver Wyman estimates Total number of funds, 2010 indexed 130 120 110 EU Cayman Islands Delaware 100 90 Channel Islands Other Caribbean 70 2010 2011 2012 2013 AuM, 2010 indexed 125 EU 120 115 Delaware Cayman Islands 110 105 Channel Islands 100 95 Other Caribbean 75 2010 2011 2012 2013 Oliver Wyman 7
1 The three EU AIFs domiciles are all growing strongly, each with differing sweet spots Total number of EU domiciled funds 3,000 2,801 2,606 2,500 2,460 2,213 2,000 1,706 1,602 1,586 1,500 1,537 1,000 526 586 432 500 370 442 478 509 306 0 2010 2011 2012 2013 Source: ALFI, MFSA, Monterey Insight, Oliver Wyman estimates +169 (+11%) Luxembourg Ireland Malta +216 (+58%) +203 (+66%) Observations Luxembourg with strong growth in Real Estate and Private Equity funds Number of RE and PE funds up by more than 35% since 2010 (estimate) Decreasing number of Hedge Funds and Fund of Funds since 2010 Ireland with strong focus on Hedge Funds Large centre for Hedge Fund administration >60% growth in number of Hedge Funds since 2010 Malta attracting niche markets within the hedge fund industry Focus on small funds, with Malta s average fund size below 20m, compared with ~ 80-120m for Luxembourg or Ireland Oliver Wyman 8
1 Each domicile s position confirmed from an Asset under Management perspective AuM of EU domiciled funds In bn 240 220 200 180 160 140 120 100 80 60 40 20 0 186 134 47 5 2010 196 135 55 6 2011 212 141 64 7 2012 229 148 74 6 2013 +14 (+10%) Luxembourg +28 (+60%) Ireland Malta +1 (+25%) Observations Luxembourg with highest Assets under Management of analysed EU domiciles Nearly 50% of AuM in Private Equity or Real Estate funds RE and PE AuM up by more than 30% since 2010 Ireland with 60% AuM growth since 2010 Fuelled by increasing number of Hedge Funds and positive market performance Malta relative small with 6.4bn AuM in AIFs Note: Numbers for Ireland estimated based on average fund size of Irish QIFs Source: ALFI, MFSA, Monterey Insight, Oliver Wyman estimates Oliver Wyman 9
1 Co-domiciliation is an increasingly favoured response for onshoring AIFs evidence from Luxembourg and Ireland Number of funds and sub-funds Luxembourg +89 (+8%) Ireland Observations EU-onshoring not attractive for all AIF managers, especially managers without a sizeable European investor base 523 1,064 2011 Funds +30 (+6%) 528 1,074 2012 553 1,153 2013 Sub-funds +107 (+60%) +47 (+19%) 285 301 254 285 241 178 2011 2012 2013 Co-domiciliation seen as effective and efficient way to ensure compliance with AIFMD without moving the funds away from off-shore location Re-domicilation, i.e. giving up original domicile in favour of a new domicile, is still an expensive undertaking and impacts existing investors Co-domiciliation, through setting up parallel fund or a master/feeder structure allows to keep the original fund domiciled in the offshore jurisdiction and setting up a regulated fund in the EU Note: Data on sub-funds for Malta not published; funds/sub-funds split for Luxembourg estimated based on ratios for total PIF universe Source: Monterey Insight, Oliver Wyman estimates Oliver Wyman 10
2 Demand for regulated AIFs triggered an increase in UCITS compliant replications of alternative investment strategies Number of UCITS compliant AIFs 2010-2013 Comments 562 584 +17% 620 656 Since the introduction of UCITS IV in 2009, number of UCITS compliant AIFs estimated to have nearly doubled After initial high growth years, growth stabilised to a 17% increase during the period 2010-2013 429 117 2010 415 447 454 150 154 182 16 19 19 20 Luxembourg 2011 Ireland Malta 2012 2013 Higher demand for transparency and regulation post-madoff increased the attractiveness of UCITS structures Attractive liquidity terms Increased transparency (e.g. disclosure of investments) Required authorisation from regulator However, UCITS investment constraints (e.g. on leverage, investment concentration or use of derivatives) seen as key drawbacks of these regulated structures Source: Monterey Insights, MFSA, Eurekahedge, Oliver Wyman estimates Oliver Wyman 11
2 Moreover AIFs under regulated mutual fund structures also report significantly higher asset growth in the US through 40 Act funds Growth in AuM 2010-2013 2010 indexed 220 200 180 160 140 120 +107% +63% US ('40 Act) Luxembourg, Ireland, Malta (UCITS) +13% Traditional AIFs Comments Increased demand of regulated AIF seen in Europe (Luxembourg, Ireland, Malta) as well as in the US UCITS complaint AIFs with 63% growth since 2010 In the US, AIFs under the 40 Act mutual fund structure with an increase of around 107% during 2010-2013 In comparison, AuM of traditional AIFs up by 13% during the same period 100 2010 2011 2012 2013 Source: Morningstar, Oliver Wyman analysis and estimates Oliver Wyman 12
3 Domiciles offering one-stop-shop solutions continue to attract funds at expense of domiciles with less well developed fund infrastructure Funds growth rate 2010-2013 of non-eu domiciles Total number of funds, incl. sub-funds, in % Isle of Man -21% British Virgin Islands -15% Jersey -15% Bermuda -12% Guernsey -3% Delaware 8% Observations We observe a trend away from smaller jurisdictions toward traditional, wellestablished domiciles Required depositary liability is seen as key element of the AIFM Directive with most significant impact on the industry Importance of well-established and comprehensive fund infrastructure confirmed by recent developments on the Isle of Man where HSBC withdrew operations triggering a decrease of total number of funds Cayman Islands 22% Source: Oliver Wyman estimates Oliver Wyman 13
4 The dominant position of traditionally successful domiciles seems entrenched Number of funds across regions and asset classes Region distribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 17,700 5% 12% 16% 15% 53% Cayman Islands has traditionally been seen as the global home of Hedge Funds and has strengthened that role over the last four years 1% 5,500 12% 57% 8% 2,100 18% 13% 1% 52% Delaware with dominant position among both Private Equity and Real Estate funds 10% 23% 16% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% HF Asset class distribution PE RE Channel Islands EU excl. UCITS compliant funds Rest of Carribean Delaware Cayman Islands Source: 2013 Oliver Wyman estimates Oliver Wyman 14
Hedge Funds 4 Around 60% of global offshore Hedge Fund assets are domiciled on the Cayman Islands Distribution by number of funds and AuM 17,700 2,100bn 3% 2% 4% 5% 4% 3 3% 6% 3% 3% 14% 12% 2 12% 15% Observations 1 Cayman Island s leading position driven by US investment managers offshore funds - dominant position even clearer from AuM viewpoint 2 Delaware seen as traditional hub for US onshore Hedge Funds, however with limited growth in HF during 2010-2013 Malta Guernsey 53% # of funds Isle of Man Jersey Note: EU numbers for non-ucits compliant funds only Source: 2013 Oliver Wyman estimates 1 Bermuda Luxembourg 60% AuM Ireland BVI Delaware Cayman Islands For analysed European onshore domiciles, approximately half of Hedge Funds domiciled in Luxembourg, with the rest split almost evenly between Ireland and Malta Oliver Wyman 15 3
Private Equity 4 Most Private Equity funds are domiciled in Delaware with Guernsey gaining some ground Distribution by number of funds and AuM 7% 1% 5,500 1,200bn 2 9% 0% 4% 2% 3 7% 4% 0% 57% 1 69% 23% 15% 1% Observations Flexible legal environment and efficient partnership structures seen as key factors for PE domiciles 1 Delaware in the pole position, mainly due to the flexible and clear partnership law and lowcost operational environment 2 Guernsey with focus on PE net asset value of PE funds under management and administration grew 140% during 5 years until 2012 today PE funds constitute ~73% of all Guernsey domiciled funds About 90% of EU domiciled PE funds domiciled in Luxembourg 3 Malta Guernsey # of funds Isle of Man Jersey Note: EU numbers for non-ucits compliant funds only Source: 2013 Oliver Wyman estimates Bermuda Luxembourg AuM Ireland BVI Delaware Cayman Islands Oliver Wyman 16
Real Estate 4 Delaware also remains an important domicile for Real Estate funds with other Real Estate focused domiciles under pressure Distribution by number of funds and AuM 5,500 1,200bn 1% 6% 7% 4% 2 2% 3% 7% 6% 6% 3 12% 1% 1% 52% 1 67% Observations 1 As is the case with PE investments, Delaware the domicile of choice for the majority of Real Estate funds 2 Diminishing role of other smaller domiciles, e.g. Isle of Man, historically focused on Real Estate funds, but a challenging period around 2010 put asset values under pressure, triggering a negative trend in asset and funds growth 16% # of funds Note: EU numbers for non-ucits compliant funds only Source: 2013 Oliver Wyman estimates 9% AuM Malta Isle of Man Bermuda Ireland Delaware Guernsey Jersey Luxembourg BVI Cayman Islands Luxembourg with highest share of Real Estate funds among analysed European locations with an estimated 15% of local AIF fund assets in Real Estate and rising Oliver Wyman 17 3
4 Summary of key success factors Key success factors Description Attractive tax system Low tax rates Double-taxation treaties Suitable legal environment Quality of local service providers Consideration of investor requirements Responsive authorities Flexible limited partnership regimes and fund structures Established and effective co-operations with international supervisory authorities Adherence and alignment with international standards Legal environment adhering to investor protection rights High number of locally present custodians with global footprint Skilled and available labour Easy process for re-domiciliation Quick registration period Low registration fees Flexible, open and approachable Following no-nonsense approach Oliver Wyman 18
We expect the AIFMD to continue to drive growth in EU domiciles Luxembourg well positioned to benefit form that trend Domiciles of AIF funds UCITS compliant vs. UCITS non-complaint Perspective 31% 69% UCITS compliant Others 93% 7% UCITS non-compliant Luxembourg We expect the increasing scrutiny from international regulators and global trends towards transparent and regulated investments to continue During the first months since implementation, the AIFMD already attracted significant attention In Luxembourg, already more than 229 AIFM applications received with 148 approved authorisations (as of September 2) In Ireland 57 AIFMs authorised as of beginning of September On global scale Luxembourg has continued potential to increase current positions among AIF domiciles Already dominant role in UCITS compliant AIFs (~69% of analysed UCITS compliant AIF domiciled in Luxembourg) Broad experience in European wide distribution of mutual funds Source: Oliver Wyman estimates Oliver Wyman 19
Overall, we expect the demand for regulated AIFs to continue and the boundary between traditional AIFs and mutual funds to diminish yet further We expect investors appetite for Alternative Investments to remain strong However, we expect most investors to continue focusing on regulated vehicles Pre-AIFMD, UCITS-compliant structures attracted significant investor attention Today, the AIFMD introduces a regulated vehicle that allows participants to structure alternative strategies without the investment constraints associated with mutual funds The traditional demarcation between regulated mutual funds and non- or less-regulated AIF are diminishing therefore We expect the AIFMD to benefit the AIF industry in general AIFMD authorisation is not only about legal affairs or compliance, but in the end defines how fund manager runs its business on a day-to-day basis Compliance with the directive signals good corporate governance and higher investor protection (e.g. asset custody) and increased transparency (e.g. reporting) AIMFD-compliant vehicles are expected to become preferred investment structure for investors that look for a combination of both a regulated vehicle on one hand and full blown alternative investment strategies on the other hand Oliver Wyman 20
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