Originally published in HFM Week, Guernsey Special Report, May 2012
Paul Everitt, Managing Director of Fund Corporation, explores the advantages of collaborative solutions available to investment managers from their fund administration providers.
The offshore investment fund industry has a long heritage and over several decades has
seen significant growth. In Guernsey it has been one of the major success stories of the island's economy and has evolved from a predominantly retail, mainstream equity and cash fund-based sector to now incorporate significant expertise in structuring, managing and administering alternative, niche and increasingly esoteric asset class funds, particularly private equity and real estate structures.
However, in recent years and in the wake of the global financial crisis, the industry continues to face challenges arising from market uncertainty and volatility, regulatory demands, pressures on fees where income is often based on a proportion of assets under management, and rising service level expectations.
At the same time many prospective start-up investment managers have been frustrated in their searches for seed capital and have been unable or reluctant to commit too much resource to building a sizeable team without the guarantee of the associated fund launch.
Furthermore, when all of these factors come together, many fund managers have been looking at their fund administration relationships and seeking service providers who do more than simply 'sell a product'.
A collaborative solution
At Fund Corporation, we see many positive opportunities arising from these market conditions and increasingly are finding that the solution for both parties is to be creative and enter into collaborative, partnered arrangements. I am not referring to the soft, 'management speak' sort of partnership, but one where both sides recognise the need to be open, transparent and flexible on time invested and fee and incentive structures. Essentially, experienced professionals working with experienced professionals.
To put it another way, where a prospective investment manager recognises they do not have the required breadth of experience within their team, nor the financial resources at launch to procure those resources, it may pay them to engage with a service provider who is willing to commit director time to engaging at a deeper level to collaborate on structure, administration processes, fund-raising options and many more aspects of launching a fund. The engaged administrator can provide experience from a range of previous engagements, replacing some of the need for the investment manager to recruit dedicated staff. This can reduce the financial burden, shortcut decision-making, enhance returns and make the whole project more likely to launch.
Obviously, this approach means both parties need to be flexible with fee arrangements. The administrator invests time and effort to assist the investment manager in exchange for longer term benefit.
We have worked with a few clients recently where we have developed this very same sort of solution. The results so far have been very satisfactory for everyone. For example, we were approached by a financial consultant specialising in real estate financing who, over the last couple of years, had developed an innovative financing model for real estate investing.
Having perfected the concept and begun discussions with various counterparties for the establishment of an investment structure, he approached Fund Corporation with a view to us providing administration services. We spent time talking through the steps from concept to launch and it became clear that there were significant obstacles to be overcome. Our client did not possess all the relevant experience nor available assets to easily bring in the resources needed to get the concept 'over the line'. He also could not commit to a standard time-spent launch fee arrangement with us.
We had a strong sense that the investment rationale, and therefore opportunity, was a_ractive. We were willing to be entrepreneurial and quickly came to an agreement on how we would help in the development and launch of the structure in exchange for longer term partnership arrangements.
Taking the long view
With another client, the credit crunch came at just the wrong time, meaning launch plans were delayed and their overall business plan needed significant re-appraisal. As a result, our original relationship needed reassessment.
Over several months we discussed the changing market opportunities and difficulties of funding during such uncertain times. Instead of imposing the strict terms of our contracts we agreed to wait and see what might develop. As it turns out, our client now has significant market opportunities and we have agreed a long-term joint venture that both sides are happy with because of the honest, robust relationship built through those initially difficult times.
As well as easing first time or young fund managers and/ or promoters through the critical corporate governance, regulatory, risk management and administrative processes, in a personable, strategic and bespoke manner, while crucially maintaining investor needs firmly at the core, a key component of the partnered solution is offering the ability, if required, to assist with fund promotion, distribution and capital raising. An extensive and global network of professional intermediary and client contacts including investment advisers, private banks, family offices, accountants, lawyers, trustees, financial advisers and investment clubs is crucial to this activity and a key differentiator amongst many fund administrators.
At Fund Corporation, we are finding that this value-added service is increasingly attractive to prospective and existing clients and helps to establish, and enhance an efficient, involved and robust fund administration relationship.
There has been a shift in the dynamic between all stakeholders in the investment fund industry: promoters like to deal with counterparties who can effect introductions to sources of capital or solutions for difficult portfolio investments; promoters have to work closer with fund administrators to make sure they adhere to new regulatory demands; and even investors can require additional measures from fund administrators to provide security and risk analysis about their investment decisions.
Given these shifts, managers have started to look at the services provided by fund administration firms with increasing scrutiny. To cope with ongoing volatile global markets and fluctuating investor confidence, first and foremost a fund administrator needs to have the industry knowledge and technical capability to deliver services that are both sophisticated and flexible and which provide security to stakeholders involved. Nevertheless, much also rests on the fund administrator drawing together a bespoke solution, rather than relying on a generic, 'one size fits all' approach.
Fund administrators can add value and provide the necessary 'glue' to network parties, establishing the most effective solutions. Gone are the days where effective fund administration meant just 'getting the work done' and being as unobtrusive as possible. The best administrators are becoming more agile and pragmatic when it comes to meeting the needs of fund stakeholders. Effective relationships are the cornerstone of success.
However, these in-depth, partnered solutions are not for everyone. Larger investment managers may have strong enough in-house teams so that all they need is a pure outsourced service provider. The range of services required may be limited. Other fund administrators may not have the experience, or inclination, to put in the investment that the partnered solution requires. However for those of us who can, it provides significant attraction in terms of the quality of long-term client relationships and financial reward; but importantly given today's market, it gives a boost to the chances of new investment managers successfully launching. Fund Corporation's experience is that a collaborative, partnered-solution approach is certainly helping to yield positive results in today's challenging times.
Paul Everittis a co-founder and the managing director of Fund Corporation of the Channel Islands Limited. He has 22 years' experience in the finance industry and since moving to Guernsey in 1998 has specialised in fund administration services.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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