AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Onshore and offshore administration

Philip Bolton, Director

Bedell Fund Services

Q2 2012

Q2 edition

 


The current trend is for firms to provide both an offshore and onshore administrative solution for funds. Why is this happening, what does it mean for the asset managers and the relationship with administrators?

The landscape in fund administration has continued to evolve with offshore players extending their service offering to onshore jurisdictions and, to a lesser extent, onshore administrators extending their offering offshore. This has been in part a reaction to the changes that have occurred (as well as anticipated changes) in the fund legal and regulatory environment, both onshore and offshore; in part in reaction to the introduction of new regulated fund structures at a jurisdiction level; and in part individual administrators implementing a growth strategy beyond their traditional geographical market.

 

LEGAL & REGULATORY CHANGES

In recent years, individual jurisdictions have sought to introduce new legal and regulatory structures in response to the needs and demands of the fund promoters and/or underlying investors. However, whilst onshore jurisdictions have historically built their fund business in focused fund segments (for example, Luxembourg in retail type/UCITS funds, and Dublin in hedge funds), the trend for offshore jurisdictions to introduce less regulated expert/qualified/sophisticated investor type funds has also seen onshore jurisdictions being fast followers of this offshore jurisdiction “innovation”. Although there has been little competition from offshore jurisdictions in the high volume highly regulated retail fund space, there is a degree of commonality amongst the various sophisticated investor fund schemes across jurisdictions, both onshore (Luxembourg's Specialised Investor Fund (SIF) and Ireland's Qualified Investor Fund (QIF) and offshore (Jersey's Expert Investor Fund and Guernsey's Qualified Investor Fund), with limited arbitrage opportunities for individual jurisdictions to explore as a result.

On the basis of this reasonably homogenous environment across onshore and offshore jurisdictions, administrators see opportunities to do more of the same in a different jurisdiction as they can provide the same core administration services adapted to the regulatory differences between jurisdictions.

 

CHANGING REGULATION

With the pending introduction of the Alternative Investment Fund Managers Directive (AIFMD or the "Directive"), offshore administrators are positioning themselves onshore in anticipation of potential changes from and/or the impact of the introduction of AIFMD. As the detailed regulatory requirements are still being finalised at the time of writing, the impact on the offshore “euro-focused” fund offering remains uncertain. Although it is anticipated that offshore funds will still be able to be marketed in Europe post AIFMD implementation, either through the existing private placement route or through the development of AIFMD compliant fund structures, offshore administrators are expanding onshore with a view to demonstrating their flexibility of continuing to provide administration services to their clients irrespective of the outcome/impact of the Directive. In addition, there may also be some opportunities to expand the administrator’s service offering to provide such additional complementary services that are required by alternative funds and their respective managers in order to comply with the Directive, for example depositary services.

 

OPERATIONAL EFFICIENCIES

An increasing trend within the fund administration industry is the continuous pressure from promoters and managers to provide "more for less" with a consequential significant downward pressure on fees. In order to improve operational efficiencies, introducing system developed workflows to improve the overall control environment (with a view to obtaining a SAS70 or equivalent certification) and at the same time addressing an increasing regulatory requirement to improve transparency in fund reporting, the need to invest in appropriate and specialist IT systems developed for specific fund types is becoming increasingly prevalent. The choice of IT system is a key decision for all administrators as there are few, if any, IT platforms available today that provide efficient solutions for and/or are adaptable to all types of funds (open ended and closed ended) and all asset classes (long only equity, private equity, hedge funds etc). As the choice of IT system is normally accompanied by a significant capital investment in terms of both the initial purchase cost and the cost of implementation of the chosen solution, whilst at the same time provides a very scalable operational platform, there is a need as well as an opportunity for the administrator to develop its client and ultimately fee base.

 

BUSINESS DEVELOPMENT

IMPROVING THE TOP LINE...

As noted above, the increasing requirements for greater regulatory oversight together with a related requirement to develop a more efficient systems-based platform will potentially eliminate the smaller fund administration houses. Alternatively, we are likely to see increasing mergers and acquisitions activity as smaller houses join forces (or are bought by bigger players) to create the necessary critical mass to cover the increasing capital investment requirement and ongoing operational costs. In order to increase the client base and ultimately top line growth, the marketing/business development teams are being challenged to and are seeking to expand businesses across jurisdictions.

 

...WHILST CONTROLLING COSTS

Most offshore jurisdictions due to their size and geographical location suffer from the similar resource constraints (limited availability and consequential higher comparable cost). As a result, expansion to onshore jurisdictions with greater resource availability and ultimately cheaper and well-qualified labour markets is seen as a cost efficient solution. Administration models with the client relationship activity being maintained offshore with a supporting back office operational engine onshore (for example in Ireland or the UK) are becoming increasingly common.

 

 

INSOURCING POSSIBILITIES

Expanding their administrative services across jurisdictions will also enable the administrator to provide services to onshore holding entities/SPVs of offshore structures.

 

IMPACT FOR ASSET MANAGERS

The trends and developments in fund administration should have a positive impact for fund managers. As administrators increase their presence across jurisdictions, they increase their ability to provide a “one stop shop” solution for onshore and offshore offerings. The ability to appoint a single administrator for the whole fund structure will eliminate potential cross administrator inefficiencies and risks that exist when more than one administrator is involved.

Secondly, the fund manager should benefit from the resulting operational efficiencies as a result of one compliance oversight, one client due diligence exercise, one take on procedure, centralised client and structure knowledge/experience, individual contact point, etc. These operational efficiencies should in turn result in reduced costs.

 

CONCLUSION

In a continuously changing environment with increasing compliance pressures from new regulations and ongoing commercial pressures from fund promoters, managers and investors, the ability to develop a scalable business model, whilst remaining adaptable with a flexible approach, is a key success factor to survival and ongoing success for administrators. This development in the fund administration industry will result in more efficient business practices and ultimately more cost effective administration solutions for fund managers.

 

philip.bolton@bedellgroup.com

www.bedellgroup.com

 


 

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