Ireland's future once lay in financial services. What now? Christine Senior reports
It is clear that Ireland has been in the doldrums for some time. The country had successfully established itself as a financial centre, but collateral damage from its debt crisis has hit brand name Ireland.
There is another side to the story, however. In an ironic twist, one impact of the crisis has been beneficial. With plummeting commercial rents and shrinking labour costs, Dublin is proving to be more attractive to foreign enterprises. DTZ showed prime rents fell 39% in 2009 and they continue to fall. Labour costs fell in comparison to the EU average, and the European Commission estimates that Irish labour costs will have fallen 6.8% by 2011, compared with 2008.
The jewel in Ireland's crown as a business centre for foreign companies is undoubtedly its cherished 12.5% corporate tax rate. In the negotiations to agree a bailout package the Irish government fought vigorously to defend this, and won. The argument in Dublin is that any attempt to chip away at this tax rate would be catastrophic for Ireland's attempt to dig itself out of its debt pit.
You would expect the local financial services industry to talk up the solidity and success of its business - but it also has figures to prove its case. On the funds side, statistics from the Irish Funds Industry Association show that the proportion of global hedge funds domiciled in Ireland doubled to 7.4% during the first three quarters of 2010, making Ireland home to 63% of the European hedge funds market.
The custody and asset servicing sector is also booming. Figures from Lipper show the value of all mutual funds serviced in Ireland at the end of June this year stood at $1.46trn (€1.1trn), a rise of 7.2% over one year. The second half of the year seems set to be even stronger, as Lipper estimates that Irish-domiciled fund assets alone, serviced in Dublin, rose by 19% between June and October.
On the fund management side, business looks equally buoyant. According to the latest official figures at the end of June, assets under management were up, at close to €350bn. Around three-quarters of that is managed on behalf of non-Irish residents. Another positive is that fund managers are hiring staff again, according to Frank O'Dwyer, chief executive of the Irish Association of Investment Managers.
The funds industry suffered a scare in the autumn. Chile placed Ireland's fund industry on the watch list after Fitch downgraded the country's sovereign credit rating. The action was a consequence of Chile's unusual, if not unique, regulation which specifies the credit rating of the domicile of funds it invests in. The Irish funds industry risked losing $6bn of Chilean pension assets from Irish-domiciled UCITS, and the Irish government and the industry mounted a vigorous campaign to convince the Chileans that the industry strength was unaffected by sovereign debt concerns.
Mark White, head of investment funds at the Dublin law firm McCann Fitzgerald, commented: "Having engaged with the Irish government authorities, agencies and industry, the CCR, the Chilean Risk Classification Commission, has reconfirmed its approval of Irish authorised UCITS and it has also decided to review the criteria it will apply in considering the eligibility of those UCITS."
The buoyancy of the local funds industry owes something to a desire among fund promoters to abandon lightly regulated offshore jurisdictions in favour of better regulated onshore jurisdictions.
"Investors particularly in Europe are saying: ‘we are not sure about staying in Cayman, or BVI, or Bermuda and as a result prefer to be in a UCITS funds or a regulated EU fund'," says White. "Ireland gives them that and the fact there is the expertise particularly on the alternatives side means they choose Ireland over Luxembourg, which is happening recently notwithstanding our domestic financial woes."
This preference for onshore domicile is demonstrated by London-based RWC Partners, which is about to launch its first Irish-domiciled fund in January. The RWC Macro fund is a qualified investment fund. The choice of Dublin as a domicile was a deliberate rejection of lightly regulated offshore centres.
Dan Mannix, head of business development for RWC Partners, says: "For a business like ours, which has the infrastructure to support slightly more regulated environments, we can choose what we believe is the optimum place to domicile as opposed to the one which has lowest costs or a light regulation touch. In our opinion, there is less uncertainty over the future of funds domiciled in Ireland than those domiciled outside the EU. That's principally as a result of the Alternative Investment Fund Managers (AIFM) directive."
As a fund domicile, Ireland offers many advantages: from a favourable regulatory environment to local expertise, from experienced service providers and a tax structure, which enables funds to pay out income or gains free of local tax.
Risks to funds domiciled in Ireland come more from counterparties such as custodians and administrators than from Ireland's sovereign status. But inevitably that might not be immediately obvious to potential clients whose view of Ireland is coloured by the relentless bad news on the debt and banking front.
The fact that many Dublin-based custodians and administrators are global names with sound reputations is reassuring. BNY Mellon, State Street Corporation, JPMorgan, Citi Global Transaction Services, BNP Paribas Security Services and SEI Investment Manager Services are world-class service providers.
State Street is a prime example of how custody business can flourish in the current climate. Business volumes have grown strongly over the past year, which is a source of great satisfaction to Willie Slattery, State Street Corporation's country head in Ireland. He says the regulatory environment is a particular strength for the funds industry: "It is a regulatory environment that understands international fund products and is hugely respected by our client base," he says.
Clients have expressed concerns about the ongoing crisis, says Slattery: "We have been able to reassure clients that because our business is ring-fenced from issues relating to the Irish state, with bank accounts held by State Street and by assets completely segregated and held on behalf of the clients that there are no implications for the clients, or for our business, arising from counterparty risk issues surrounding the Irish state."
That does not mean that everything is perfect with the framework for financial services companies doing business in Ireland. Joe Duffy, BNY Mellon's Ireland country executive, would welcome some further practical measures from the authorities: "We are looking for clarity on how EU regulations will be transposed into Irish law and for the local regulatory environment to enter a period of stability so that we know what we need to comply with."
Another area of Irish business that looks immune to the crisis is the provision of pensions pooling vehicles for multinationals. The Irish Common Contractual Fund (CCF) is competing with Belgium's OFP and Luxembourg's FCP. The Irish vehicle currently loses out to the Belgian OFP through its stricter funding requirements for DB pensions.
"In terms of establishing a pan-European pension scheme as an entity as opposed to just financing vehicles, the Belgian OFP has probably become one of the most attractive for DB arrangements because of the reasonable flexibility in the funding requirements," says Philip Shier, senior actuary at Aon Hewitt in Dublin.
But Ireland might regain some competitiveness if the funding requirements were relaxed, a possibility contained in the National Pensions Framework unveiled in March last year.
For DC pensions, though, the Irish structure benefits from Dublin's evident strength in the realm of investment funds. "Certainly for DC, Ireland obviously has fund management capabilities, and a strong tradition of pension administration and advice," adds Shier.
Two big uncertainties over the past year in the Irish asset management industry have been over the ownership of two of its leading asset management firms. Earlier this year, KBC Asset Management was acquired by RHJ International for €23.7m and rebranded Kleinwort Benson, the private bank bought by RHJ as part of its plan to restructure as a financial services company.
Kleinwort Benson Investors in Dublin will continue its previous strategy under the new ownership, says chief executive Sean Hawkshaw. "The beauty of this business is that is it immensely scaleable and we have a fully fledged operating platform which is structured to deal with the most demanding institutional investors from anywhere in the world."
The firm runs three core strategies - environmental equities, high-dividend equities and multi-asset strategies. It has around €4bn in assets under management, and approximately 50% of its client base is internationally based.
Hawkshaw admits that the uncertainty up to and during the sale process in 2009 and early 2010 limited its ability to attract new business. "Now that the dust has settled on the deal we're back in action and we've started gaining new clients again, which is terrific."
Frank O'Dwyer, said the deal attracted widespread approval: "KBC was a very outward looking business which had considerable success at winning mandates overseas."
The sale of Bank of Ireland Asset Management to State Street Global Advisors for the knockdown price of €57m completed early this January (see box on previous page).BIAM had been under pressure for some years with poor performance and shrinking assets, although, its sale was a condition imposed by the EU for the government bail-out of Bank of Ireland. By acquiring BIAM's active management capability, State Street wants to fulfil its ambition to expand outside its traditional passive management specialisation.