Dublin's securities services infrastructure is showing continued growth in niche areas such as alternatives, as Heather McKenzie finds
The Irish funds industry continued its strong growth during the past year, with total assets estimated at more than $1.7trn (€1.1trn) by the end of 2007. Alternative investment funds proved a particularly strong growth area, and estimates from the Irish Financial Services Regulatory Authority valued the total market as of January 2007 at €700bn.
This growth has attracted a wealth of suppliers in the market - the Irish Funds Industry Association (IFIA) says there are more than 45 administration companies and 23 custodian banks operating in Dublin.
Harley Murphy, head of offshore management at BNY Mellon Asset Servicing in Dublin, says the global credit crunch had affected the industry towards the end of the year, but not enough to wipe out the strong growth recorded earlier in the year. "BNY Mellon saw a 40% increase in assets under administration during 2007, which followed up on the 35% growth we recorded the year before."
Gavin Nangle, head of business development at State Street in Dublin, says UCITS III has enabled traditional players in the Irish market, such as asset managers, to add alternative investment products to their fund ranges. IFIA estimates there are more than 4,720 alternative investment funds in Ireland, up from 2,113 in March 2003.
Promoters and asset managers are becoming much more comfortable in terms of the Ucits III funds they set up, Murphy says. "We have seen an increase in complexity, with derivatives being used as a primary element, rather than as a hedge against positions."
This complexity can be supported by the securities services industry in Ireland, which "is seen as a centre of excellence in fund administration and the processing of alternative investments", says Murphy.
Paul Daly, managing director, BNP Paribas Securities Services in Dublin, agrees about the importance of Ireland's securities services infrastructure. "The administration capability and infrastructure for servicing hedge funds is in Dublin and that is why we are seeing such growth in alternative funds compared with other centres such as the Cayman Islands and Bermuda," he says.
Hedge fund expertise may not be solely restricted to Dublin in the future, however. In July, Bank of Ireland Group announced plans to establish a specialist hedge fund servicing business in Northern Ireland, which will create 149 new jobs over the next five years. The Belfast business will form part of Bank of Ireland Securities Services (BOISS), the custody and fund administration arm of the group.
Brian Goggin, group chief executive, Bank of Ireland, said at the announcement that the group was "creating a sizeable presence in Belfast servicing the international offshore hedge fund industry". BOISS in Dublin services $160bn of assets of which more than $3.5bn is in hedge funds.
One of the strongest areas of growth during the past year was money market funds, says Murphy. IFIA says the total net asset value of Irish-registered money market funds was €319.4bn at September 2007, up 15.7% on the year.
Murphy attributes much of this growth to concern among investors (even before the sub-prime mortgage problems hit the market) about risk, with investors across the board moving out of perceived risky assets and into money market funds, which seek to limit exposure to losses due to credit, market and liquidity risks. "People were concerned about falls in the global markets and that has been reinforced by the credit crunch," he says.
asel II has also helped to drive growth in money market funds, Murphy adds. "Europe has been behind the US in terms of using money market funds, but there is a greater recognition here now among corporates that these funds can be used as vehicles for liquidity shortfalls and surpluses."
State Street services more than $90bn in money market funds, says Nangle, and such funds represent a significant part of the Irish market book of business, particularly compared with Luxembourg, which because an asset tax is applied has a limited profile in the money market business. The Irish Government's Qualifying Investor Fund structure has also helped fuel growth for securities services providers in Ireland.
In February 2007, the financial regulator agreed that a collective investment scheme, which markets solely to qualifying investors (QIF), could be authorised on receipt and without a detailed review of the application for authorisation, "provided that the parties involved meet the necessary authorisation criteria, are approved in advance of the application and confirmation is received regarding compliance with the authorisation criteria".
The ability to quickly authorise funds enables Dublin to compete with non-regulated jurisdictions, adds Daly.
"Domestic investors and promoters demand products get to the market quickly and the QIF and Super QIF enable this to happen."
Overall, Daly says there has been a "huge surge of growth" in activity throughout the year. "The appetite for and growth rate of funds of hedge funds, for example, has been dramatic across the business."
Given how crowded the Irish market is, there is pressure on custodians and fund administrators to differentiate themselves. Daly says BNP Paribas feels its strength lies in its close links with its investment bank. "We can provide liquidity financing for our clients which is invisible to them - they are dealing only with one entity. For our clients, that is very attractive because at times it is very difficult to find liquidity in the market."
Performance reporting is also another area where Daly feels service providers can differentiate. "There is much more demand from boards of directors of fund companies for more detailed information, particularly as investors are now much more sophisticated in their approaches. In providing reports, we have to go into a lot more detail and provide that information much faster."
Murphy agrees that clients are more demanding in the information they require. "This is a challenge, because of the complexity of the instruments and how they are combined in a variety of ways. Investors are aware of this complexity and want to keep on top of it, so they expect much more in the reports and in compliance tools we provide, along with risk measurement and analysis tools."
Murphy says there is always "huge competition" among administrators for the significant mandates that come from promoters, with the top five administrator/custodians garnering around 60% of the market. He says the BNY Mellon merger has worked in favour of both institutions.
"The merger has enabled us to combine the very strong client focus that Mellon had with BNY's strong processing capabilities and systems infrastructure. We can now be more customised in our approach to clients and they like the fact that we don't have a one-size-fits-all solution. To have the ability to do that you need scale and a huge investment in front-office systems."
It is a similar story at State Street, which acquired Investors Financial Services last year. "We have had little, if any, negative comment from our clients about the acquisition," says Nangle. "There are synergies between the two businesses that will enable us to bring a greater range of services to our clients."
The Lipper Ireland Fund Encyclopaedia says that as of June 2007, there were 342 promoters of Irish-registered collective schemes, compared with 321 a year earlier. Daly says he expects growth in the Irish market to continue into 2008. "There are still a lot of new entrants coming into the market and therefore a lot of mandates will be going to RFP. We haven't seen any sign of a slowdown at all."