Ratings agency Moody’s last week downgraded Ireland’s long term credit rating from a high quality Aa2 to a below average Baa1, citing uncertainties over the economy as a key reason for doing so. The action comes days after a downgrade by Fitch from AA+ to BBB+ and a November downgrade by S&P from AA- to A.
Ratings agency Moody’s last week downgraded Ireland’s long term credit rating from a high quality Aa2 to a below average Baa1, citing uncertainties over the economy as a key reason for doing so. The action comes days after a downgrade by Fitch from AA+ to BBB+ and a November downgrade by S&P from AA- to A.
The hole in government finances and the domestic bank failures following their exposure to the property market post-Lehman collapse are other reasons why Ireland’s credit rating has slipped by up to five notches in the last few weeks.
It has also become clear that a EUR85 billion European Union rescue deal, agreed before Moody’s latest rating action, has done little to calm the uncertainty.
Amidst the chaos, however, one aspect of Ireland that has continued to keep its head above water and show continued growth is the country’s fund’s industry. The industry was a major factor leading to the christening of Ireland as the Celtic Tiger in 1995 and today appears to be the only part of the economy that has not lost its bite. Recent statistics show a clear separation between the Dublin-headquartered international funds industry and Ireland’s domestic economic issues.
According to the International Financial Services Centre (IFSC) Ireland assets under administration have reached a record high of EUR1.8 trillion, up from EUR1.35 trillion a year ago. Ireland administers the funds of 852 promoters from 52 countries. Over the last year, 70 new promoters from 14 countries have launched funds in Ireland with total assets in those funds of over USD21 billion. More than 40 per cent of global hedge fund assets are administered in Ireland.
The country has also had 747 new fund and sub-fund launches from October 2009 to September 2010.
While Dublin enjoys record growth in its funds industry, the financial crisis appears to have had little threat to its status as a domicile that has attracted scores of investment funds and administrators from various OECD countries in the last 15 years.
“The sector is aligned principally to the global fund industry and therefore the global economy,” says Ken Somerville, head of business development at local fund administrator Quintillion. “I don’t see this changing.”
What might have possibly threatened the industry as a result of the financial crisis is that non-Irish fund managers will have avoided Irish custodian banks for their funds. But this has had little impact since numerous other foreign banks that offer custodial services out of Ireland can and are fulfilling that function.
The increase in the corporate tax rate from 12.5 per cent as a condition of the EU bailout could have also had a disastrous impact since foreign owned companies that were established in Ireland were established primarily because of the tax advantages. This attraction is what spurred the growth of the IFSC. “The loyalty of such companies is measured in percentage points and, if the tax rate was increased and those companies could get a better tax rate elsewhere, then you wouldn’t see them for dust,” says Dermot Butler, chairman of Custom House Administration and Corporate Services. “However, that threat seems to have passed for the moment, and so we can discount it.” Even after the increase of the corporate tax rate, Ireland still has one of the lowest headline corporate tax rates in the OECD.
The Alternative Investment Fund Management (AIFM) directive, which was approved by the European Parliament in November, has already spurred fund managers to set up Undertakings for Collective Investment in Transferable Securities (UCITS) in Ireland and subsequently generated a lot of work for fund service providers. The directive was originally aimed at hedge fund managers as a result of concerns raised over perceived excessive financial risk-taking and the inadequacy of the regulation of those managers. The draft directive will apply to fund managers of hedge funds, private equity funds, commodity funds, real estate funds and infrastructure funds that are not regulated under the UCITS directive. UCITS are sometimes referred to as ‘newcits’ and are an alternative to hedge funds that offer greater transparency, simpler trading and better regulatory oversight.
Some managers have also set up Professional Investor of Qualifying Investor Funds, which are understood to have a cheaper cost of operation than the UCITS.
The one thing that may drive service providers out of Ireland is the costs of operation associated with some funds. Jurisdictions such as Malta, for example, are said to offer cheaper operational costs. However, says Butler, Ireland has taken several steps to enhance their business, as a result of the crisis, including reducing the minimum investment level of the QIF, and making it possible for an offshore fund to re-domicile into Ireland.
“The only drawback that Ireland has, which is one that it had before the 2007/2009 debacle, is that the cost of operation in Dublin is still very high, although some of those costs are being squeezed,” he says. The Irish funds industry should continue to grow, he adds, providing it can contain costs.
While funds’ operational costs remain high, the cost of doing business in the fund servicing industry has come down. This is a welcome outcome of the downturn, says William Slattery, executive vice president and head of Ireland at State Street. The cost of doing business has dramatically improved and it is likely to result in a significant expansion in the numbers employed in the sector over the next 10 years, he continues.
Christina McCarthy, senior vice president, Maples Fund Services in Dublin agrees that the fund servicing sector has enjoyed a strong recovery in the course of the last two years as a result of reduced business costs and the positive effect being witnessed in the industry’s record growth. “The statistics are proof that the economic crisis has had no impact on Ireland as a fund domicile,” she says.
The trend towards launching Irish authorised funds in record numbers in the last 12 months is set to continue. Recent figures from the Central Bank of Ireland reported that the value of Irish domiciled investment funds had reached EUR899 billion at the end of August 2010. This represents a 20 per cent increase in the value of Irish domiciled investment funds since the beginning of 2010 and an increase of 27 per cent from the same time last year. EUR899 billion is a new high for the total value of Irish domiciled funds, which now well exceeds the previously reported high of EUR850 billion in October 2007. “The Irish government remains firmly committed to the competitiveness and further development of the funds industry in Ireland,” says McCarthy.
Despite the growth in the Irish fund’s industry, its participants are not complacent. In fact, the domestic crisis, and the negative perception of the country as a result, has made the industry conscious of the need to maintain market share. As Sommerville says: “It is incumbent on each commercial participant in the space to counter this in an effective, transparent and compelling way with their existing and prospective customers.”
Clara Dunne, CACEIS senior country officer in Ireland, says the government recognises that the international financial services industry is a key driver of growth and a developer of employment opportunities in the country. “They also have put in place legislation to allow offshore funds to be redomiciled to Ireland,” she adds. “Competition in the Irish funds industry is now at an all time high but, given the local economic climate, there is still capacity to grow.”
Despite the growth in the Irish funds industry, it continues to work with government authorities to make sure that the message that Ireland is open for international business is communicated to an international client base.
It also recognises that there is always room for improvement and steps have to be taken to ensure the business does not go elsewhere. “In the current environment there is a lot of focus internationally on regulation and transparency,” says McCarthy. “The industry coupled with a proactive Central Bank is constantly developing the legal and regulatory environment necessary to provide product solutions and opportunities in order to ensure the continued sustainability of the industry in Ireland.”
What would also help maintain Ireland’s status in the international funds industry, says Sommerville, would be if the country were to devise a Cayman style fund structure. Here funds may be formed as companies, partnerships or unit trusts according to investor requirements, which are often tax related in their home jurisdiction. For example, funds in which US taxable investors will invest directly tend to be formed as limited partnerships, funds that target European and South American investors tend to be formed as corporate funds and funds that target Japanese investors tend to be formed as unit trusts.
There are many structures utilised in Cayman, including stand-alone, side-by-side, master/feeder, multi-class or series, umbrella and fund of funds.
There are no capital gains, income, profit, corporation or withholding taxes or any legal restrictions on the investment policies and strategies of funds in Cayman.
Despite the work that needs to be done to maintain Ireland’s status, the market remains confident about the future. “We are fortunate that the fundamental drivers of our business - including demographics in our key markets and the need to provide pension funding - remain strong,” says Slattery. “I am confident that the funds industry in Ireland will continue to prosper for many years to come.”
McCarthy concludes: “A continued focus on competitiveness and by staying abreast of regulatory developments will enable the industry to develop and enhance product offerings necessary to meet the demands of an international industry.”
