Originally published in the HFM Week, Guernsey Report, June 2008
European connections, a competitive edge and globalisation all mean Guernsey is more than prepared for the challenges ahead, says Joe Truelove of Kleinwort Benson
The turn of the year marked an important anniversary in Kleinwort Benson's Guernsey residence. It has been 45 years since the company established itself on the island; first as a bank and then as a prominent name in fund administration and fund custody.
Through the decades, business has grown from roots dealing primarily with large blue-chip fund managers, such as M&G and Prudential, to overseeing administration for London-listed fund of hedge funds and, increasingly, unlisted hedge funds, private equity funds, property funds and infrastructure funds.
While the products Kleinwort Benson specialises in – fund administration and custody – may be deemed fairly commoditised, the flexible approach it applies to these offerings is far more distinct.
The company is one of the largest fund custodians on the island, and though this in itself is enough to differentiate it from some of the smaller fund administration providers without a custodian licence, it is its capacity and willingness to offer both or either of these services, if required, that truly sets it apart.
"It's part of the secret to our successes," says Joe Truelove of Kleinwort Benson's corporate fiduciary services division. "Our custody team is independent to our fund administration team and the two product lines can be offered together or separately: we have clients who are administered by competitors, where we act as the custodian, and clients where we act as administrator and there is an external custodian.
"Some large fund administrator custodians which are part of banking groups provide services to open-ended funds but don't work as custodians with other smaller administrators. We do, and we've got a large amount of business this way."
As such, Kleinwort Benson can offer Guernsey as a domicile via a number of options: in terms of full service custody and/or fund administration; or while working with existing service providers that the client is happy and familiar with acting as sub-custodian or sub-administrator. Such flexibility of options is hard to find.
Another aspect that differentiates Kleinwort Benson from other similarly sized local providers is its stance on foreign back offices. While other organisations establish them abroad, in Dublin or Luxembourg for example, Kleinwort Benson has chosen, instead, to work directly with outsourced service providers themselves giving flexibility to clients who have relationships off island or who wish to work with particular service providers.
The company has experienced significant growth through the range of asset classes it accommodates, and while Truelove admits this too is integral, he is keen to highlight the role played by Kleinwort Benson's European connections in maintaining success.
In terms of working with partners in other jurisdictions, he first points to Luxembourg where there's often an EU connection to property funds. Its Luxembourg-based partners enable Kleinwort Benson to administer complex fund structures that often involve Guernsey-based parent companies, administered by KB, which have Luxembourg subsidiaries that are administered by a service provider based in Luxembourg. Truelove then mentions the company's partners in Dublin, who can provide a more cost effective service for certain asset classes like debt funds, than would otherwise be available in Guernsey.
Thanks to this congenial business attitude, the organisation is both more agile and more able to accept business opportunities. "If we can't provide all of the services that a client requires then we will find a partner who can," Truelove states. "If, for example, a client asks us to provide lending, and we can't fund it, we'll help them to find an alternative provider. We're not limited by our own systems. Whatever the client needs; whether it's in terms of specialist systems, specialist knowledge or just a more cost effective service, our approach allows us to work with others to provide the best solution."
In terms of the Kleinwort Benson brand, Truelove is adamant that integrity remains a core value. "We believe treating people fairly is an honourable way to do business and conducive to long-term success," he says. "It's simple – if you're honest with clients, and have their best interests at heart, then they are not only more likely to be happy but, ultimately, more likely to stay."
Guernsey remains one of the more attractive destinations in Europe for fund formation. Truelove finds that clients want to use the jurisdiction particularly for listed and private equity entities – taking full advantage of the strong corporate governance culture – and to make use of the large pool of qualified non-executive directors.
Add to this, Guernsey's picturesque surroundings and the short flight times from London (enabling the board of directors to convene their quarterly board meetings with a minimum of fuss and hassle) and the appeal becomes clear. Kleinwort Benson has state of the art offices with panoramic views of all of the other Channel Islands and the coast of France.
Withstanding The Credit Crunch
However, Guernsey's current advantage is its relative insulation from the effects of the credit crunch. It has not remained immune, a number of asset backed debt fund managers have been impacted as their funds have invested in CDOs and mortgage-backed securities before the credit crunch, but the island's reputation for alternative assets has helped it adapt.
Kleinwort Benson has benefited from exponential growth over the last two years and Truelove credits this to an approach that accommodates market volatility and makes full use of Guernsey's alternative funds market.
"Our strategic approach is to always be willing to administer the next asset class," he says. "We recognise that as one asset class declines in popularity, there will always be another that is likely to benefit from increased volatility or bear markets. Traditional hedge funds should perform well in both bear and bull markets."
He clarifies: "And so, in many ways, our strategy remains unaffected by the credit crunch as it accommodates its presence. As one opportunity diminishes, another raises its head. Knowing where to capitalise is the key."
Truelove uses the increasing popularity of mezzanine and distressed debt funds as an example. The company's rise has responded to the decrease in interest in the stream of London listed funds which invested in asset backed securities until the credit crunch of August 2007.
Kleinwort Benson's strategic flexibility, its general ability to adapt, and willingness to consider any of the accumulating variations of asset class, are proving vital at a time when the fund industry itself is evolving at an alarming pace.
In terms of changes, Truelove cites the expansion in the number of asset classes available and the nature of these classes. "Two years ago, nearly all Kleinwort Benson's clients were fund of hedge funds and private equity funds," he says. "Since then, there has been a proliferation of property funds. Single manager funds are using the term hedge funds in the broadest sense by including the likes of debt funds and more exotic asset classes such as timber funds, wine funds and film funds."
It is clear there has been expansion across the board, not only in the proliferation of different asset classes but in the listing regimes as well. "We are familiar with five different listing regimes," Truelove continues. "Historically we've provided company secretarial services to London-listed funds, but in the last couple of years we've seen the emergence of AIM listings, Euronext listings, the Irish Stock Exchange and the CI Stock Exchange."
There has been huge growth in terms of assets under management, with fund capacities increasing dramatically. Truelove is no longer surprised to find London-listed funds trading at $US1bn each, whereas a few years ago expectations would have been around the $US100m mark.
He also mentions the industry's increasingly competitive edge and globalisation. Kleinwort Benson's clients are investing in the Far East, Russia, South America, Asia and Africa. Truelove tips Indian, infrastructure and Sharia compliant funds (or a combination) and funds with uncorrelated returns, such as commodities funds investing in assets like timber, as areas for future growth.
Whatever unexpected turns the road takes, and in these uncertain times nothing is sure, Truelove is adamant that Kleinwort Benson will rise to the challenge. "The future is nothing if not exciting," he says. "We will adapt to support it by doing what we've always done – being entrepreneurial."
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.