|International location - Dublin, cloudy with occasional bright spells|
|Friday, 24 April 2009 11:27|
In Dublin’s Fair City - Dublin, cloudy with occasional bright spells
Custom House was established to set up and market a range of esoteric funds, each managed by a specific manager, with specific skills, in a specific sector. It was a model that worked well with the McDonnell “McD” range of funds that I had helped establish in Bermuda in the early 1980s. I am told that McDonnell and Co. was the first fund management company to totally outsource the investment management of its funds. It was a unique approach at that time, until Gilbert de Botton set up the GAM funds. I would love to say that he followed our lead, but it was just a total coincidence.
I left McDonnell in 1998, following the 1987 crash, out of which McDonnell came smelling of roses, with an average of 20.5% gain across all seven of its funds. Nevertheless our “credibility” shareholder took fright and I left following what was described in the press as a “philosophical difference of opinion” – a perfect example of a “euphemism”. It was an unfortunate time to try and replicate the McD model in Dublin, which was my intention, because the 1990 Gulf War crash was much more severe than the 1987 event and I couldn’t sell any esoteric investment when you could get 17% in the bank. Remember the days when we all trusted banks?
Feeding the family
Suddenly I had to find another way to feed my wife, children and dogs and, having done some corporate work in Dublin, I decided to concentrate on helping emerging hedge fund managers to both set up and administer their new “hedge” funds. This was in 1993 as Ireland was just building up its administration expertise. The IFSC had originally developed as an international treasury centre, but, alongside that, the custody and administration business started to take off with an influx of the huge global institutions, such as Citibank, State Street, Deutsche Bank, et al, which were all primarily traditional service providers to the large long only equity and bond funds. They were, however subsequently joined by several hedge fund administrators and, over the next 15 years or so, Dublin grew to become the pre-eminent hedge fund service centre in the world. That contention may severely increase the corporate blood pressure in Luxembourg. Nevertheless, it is generally accepted that 30% of global hedge fund assets are administered in Dublin.
So how did this come about?
In 1987, the concept of the International Financial Services Centre became the reality and the “IFSC” was born. The concept was to establish a financial services centre, where qualifying companies – i.e. companies that offered financial services to foreign rather than Irish domestic clients - would only pay a very attractive 10% corporation tax.
However that attraction was multiplied several times when the Irish double taxation treaty network was taken into account. It doesn’t take a rocket scientist to recognise why so many major corporations set up treasury operations in the IFSC – notwithstanding that so many rocket scientists had started running hedge funds.
It should be remembered that, in the mid-90s, hedge funds were a dubious mystery to most traditional banks. Indeed, I recall approaching one of Ireland’s two major banks at that time, with a client who needed a local custodian bank for a proposed Euro denominated fund that was going to invest in US Dollar denominated listed securities. The fund wanted to appoint a specialist currency sub-advisor, to dynamically manage the currency exposure. Our intrepid banker turned down the account because, as he said “We don’t handle hedge funds”. Is it any wonder that so many banks had no concept of the risk or value inherent in their exotic OTC portfolios 10 years later?
Dublin was able to adjust to the growth of the international hedge fund market faster than their competitor financial centre in Europe. Another major boost was the ability to list funds on the Irish Stock Exchange, which I feel should put up a statue of Maire O’Connor, who almost single-handedly put the Irish Stock Exchange on the global hedge fund map, certainly in the early days.
Counting the cost
Another factor was that, when the IFSC was launched, costs in Ireland were very low, and labour was plentiful and skilled. There were more banking, finance, accounting and IT graduates in Ireland per capita than anywhere else in the world at that time and communications were good. Apart from the fact it’s a very pleasant place to live that was why I chose Ireland in the first place.
To a great extent, that has now changed. Dublin is one of the most expensive cities in the world. As a very high cost centre it has competition from several places that did not exist in 1989. Thus, although Ireland is still an excellent centre for a large hedge fund but I think it is expensive, both to establish and operate any fund below $100m NAV.
This is not to say that Ireland’s future is entirely gloomy. Market disruptions such as we have seen can have a very beneficial effect if targets and attitudes can change and a re-vitalised, competitive product is offered. There are some very positive aspects, which, in my opinion, include the continual attacks co-ordinated at the recent G20 Summit by Mr. Brown, Mrs. Merkel, Mr. Sarkozy and Mr. Obama against offshore centres and “tax havens”. Of course many of the offshore centres are not tax havens per se, but “Give a dog a bad name……..”. I believe that it is likely that a prudent US investor who had previously been happy to invest in a Cayman Island fund, will now be nervous that his name could be plastered across the newspapers because he is an innocent investor in a targeted fund.
Therefore we may see a lot of pressure by both institutional and high net worth individuals to invest in what is perceived as a more conservative and better-regulated jurisdiction, providing they are not financially disadvantaged. This, I think, bodes well for European centres, except for, perhaps, Luxembourg, which many politicians seem to confuse with Lichtenstein. Both of those get associated with Switzerland, which has had its reputation destroyed by the UBS tax scandal. One should also remember that French and Germans (and the Belgians, for that matter) hate Luxembourg, because all of their very rich dentists deposit their money in Luxembourg banks, or Luxembourg market funds.
So, this leaves Malta and Dublin, both of which I think will benefit. Dublin will benefit, because it is now well established, as demonstrated by the substantial financial services presence and the fact that the fund industry is very well regulated. However, Dublin does have a cloud hanging over it, because of the perception of total regulatory failure with regard to the banking industry and, of course, Irish funds have to use an Irish resident bank. That could cause some discomfort to the nervous investor, so I think a lot has got to change now if Dublin is to keep its pre-eminent position. On the other hand, I am a long-term bull of the hedge fund market, so even if Ireland loses market share, it will still, I believe, be a major player in a major market and I would not write it off – yet.
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