fund administration - Ogier

Focus report:Sponsored byfund administrationThe searchfor shelterDomicilesRisk-averse investors want a saferegulatory framework – pages II-IIISponsored Q&ATrends in fund administration and thefuture of offshoring – pages IV-VGETTy ImAGES

September 5, 2011Focus report: fund administration IIIalamyAIFM rules are‘biggest threatto the industry’The Alternative Investment FundManagers directive, which will regulateinvestment in private equity and hedgefunds, was seen as the most threateningpiece of legislation to the buyout industryby 77% of chief financial officers surveyedby Private Equity News in February.The directive’s key provisions includerules increasing disclosure and forcingfirms to use a depositary – a kind ofcustodian – to manage their funds.Dividend recapitalisations – in whichprivate equity firms take money out ofcompanies they own through a refinancing– will become more difficult in the first twoyears after a buyout.continental Europe are becoming risk averse,politically motivated and worried about theironshore regulators. Some feel that they wouldbe treated better by their political masters andlocal regulators if they invest onshore.”But in some respects, partnerships usingthe local law of offshore domiciles such asGuernsey can be more advantageous to investorsthan onshore partnerships, de Lance-Holmes added.While partnerships in England are governedby 1907 law, in Guernsey and Jersey they arebased on more modern legislation. Under Englishlaw, partnerships do not allow for givinginvestors a say in decision-making, whereasunder Guernsey and Jersey laws investors canhave more say about fund activities.For this reason, many real estate partnershipsare already based offshore, since real estateinvestors tend to have more influence infunds, de Lance-Holmes said. Under Englishlaw, private equity funds also require capitalcontributions to be structured using interestfreeloans, while in Guernsey and Jersey, theycan be established without the need for a loan,A lot of investors incontinental Europe arebecoming risk averse,politically motivatedand worried about theironshore regulatorsJonathan de Lance-Holmes,Linklatersde Lance-Holmes said. Both Guernsey andJersey have similar offerings but Guernseyhas the benefit of a longer history with privateequity, said the industry executives. Often thedecision between the jurisdictions can comedown to prior relationships or investments onone island or the other, said the executives.Given that all fund management decisionsmust be made in the fund’s chosen fund managementdomicile for tax reasons, the decisioncan come down to which island is best servicedby the airports in London, or which Londonairport is most convenient for fund managersto travel from. Getting managers from othermajor mainland European cities such as Parisand Frankfurt to the islands to make managementdecisions is more difficult since there areno direct flights to Guernsey and Jersey.Luxembourg popularMeanwhile, for funds in continental Europe,Luxembourg is one of the more popular domicilesfor private equity, with its establishednetwork of administrators and lawyers, andflexible laws.The majority of funds tracked globally byPreqin were US-based, with 16.3% based innon-Delaware US states. A further 10.8% ofprivate equity funds were based in Delawareand 11.5% were based in the Cayman Islands.The Cayman Islands are an attractivedomicile for US funds since they have “flexiblelaws, and are relatively cheap for US fundstructuring,” said de Lance-Holmes.Dermot Butler, chairman of fund administratorCustom House Group, said that somefund managers were also considering alternativelocations such as Malta and Ireland todomicile funds.He said: “Malta has a very pragmatic andbusiness oriented regulator that will listen toarguments.” He said convincing suggestionswere welcomed by the regulators there andcould result in changes to local law.Butler said Cyprus was another possiblelocation for fund administration, favoured byRussian funds.Further east, Singapore is increasingly becominga popular destination to set up a fund,particularly for funds investing in India, sinceSingapore and India have signed a “double taxtreaty” to avoid the need for investors to paytax twice if they have a fund based in Singaporeinvesting in India.

IV Focus report: fund administrationSeptember5, 2011Sharing theregulatoryburden: fundadministrationoptions in 2011In a sponsored Q&A session, Jane Pearce,a Jersey-based partner at Ogier FundServices, discusses Madoff, AIFMD andwhat the future holds for offshoringWhat are the biggest challenges facingthe fund administration industry?Legal, regulatory and risk management arekey points of focus and have been challengingdynamics over the past two years. Thenuances of the Alternative Investment FundManagers Directive and Dodd Frank havebeen debated and well-documented. However,once precedents for legal and regulatory issueshave been established, the direct resultwill be the ongoing cost of compliance andwho will pay. The cost of ensuring compliance[with regulation] has been a hot topic and willcontinue to be until we know the full extent ofthe provisions and we have practical experienceof their impact day to day and over thelife of a fund.What stage is Ogier at in preparing and researchingincoming European regulation?Despite the well-argued and documented responsesby the private equity industry to theEU, regulation is here to stay and we will allhave to adapt to a tougher environment. Regulatorychanges will have a significant impact onthe funds that Ogier advises and administers.Being a combined administration and legal offering,Ogier is well-placed to understand thetechnical aspects of new regulation, such asAIFMD and Solvency II, while being able tooffer a practice insight into compliance in theback-office. While Ogier has the resource tobe able to tackle the issue of increased regulatoryburden, this may not be the case for otherservice providers.Are investors and GPs now demandingmore from their fund administrators?Yes, investors and GPs are sending throughmore requests than ever and, more significantly,their requirements are changing. GPsare creating a consistent reporting frameworkacross their funds and seeking standardisationof reporting requirements. Frequency ofreporting has increased, as has the level andgranularity of reported information. There is adrive towards best working practise that deliversreal value for money and keeps costs downfor investors. However, each investor will inevitablyhave their own demands and reportingcriteria and these needs have to be met.The outcome is that customisation can generatea substantial amount of work for both theGP and their administrator.Is outsourcing becoming more popular?Madoff has had an effect on the private equityindustry and investors are questioning inhouseadministrative functions. It is possiblethat outsourcing will become the industry’schoice; however, there is also a higher expectationand sophistication of requirements thanever before. A robust and scalable infrastructure,combined with multi-disciplinary localexpertise are required to deliver the supportto the GP and investors, in every situation,and for the life of the fund.Where will the most popular outsourcingdestination be and why?The Channel Islands, and the administrators

September 5, 2011Focus report: fund administration Vwho operate in them, will continue to be apopular choice. Outsourcing will become moreprecise with services becoming more specialistand focusing on the needs of that GP. We haveseen some high-profile managers establishing aphysical presence in Jersey and Guernsey andwhile they have their own offices, they alsoseek services from local service providers. Itmay also be expected that a Cayman fund with aThose offshore locationsthat want to survive andthrive will need to adapt…it remains to be seenwhich jurisdictions willbe able to achieve thenecessary standards,both in the shorter termand to keep up the paceover the next 10 yearsJane PearceJersey/Guernsey GP will become a more commonstructure given compelling tax, regulatoryas well as AIFMD considerations before 2018.Establishing an investment vehicle offshore– is this something we are likely tosee more of?There are many reasons why you mightchoose to establish your investment vehicleoffshore. The significant factors are location ofyour investors and the manager, as well as thegeographical and sector focus of the vehicle.There are still compelling reason to use offshorejurisdictions and to have confidence inthose jurisdictions. Favourable reports on Jerseyand Guernsey by supra-national standardsetters such as the OECD and the IMF shouldprovide investors with confidence over the administrationand management of their assetsin these jurisdictions.Will the AIFMD create an uneven playingfield between onshore and offshore managedfunds?The process of administration is materially thesame onshore or offshore. Around 20% of whatthe administrator does will be determined bylocal regulatory and legal requirements. Irrespectiveof location, all administrators shouldunderstand why their funds have been structuredin the way they have and to ensure thatthey have systems in place to cope with regulatoryand operational compliance throughoutthe life of the fund.The real distinction between offshore andonshore administration is the speed, complexityand volume of regulatory developments.Uncertainty over scope, timing and the detailof new regulation make it difficult to anticipatethe required adjustment to your systems andoperational controls.The implementation of the AIFMD into lawfrom 2013 means that it is generally anticipatedthat EU managers will need to be authorisedfrom that date. Non-EU managers [ChannelIslands, Cayman and Delaware GPs]willnot be required to be authorised while theyrely on the private placement regime, whichwill continue until 2018. Non-authorised managerswill be subject to fewer restrictions andrequirements than authorised managers.Which offshore locations are likely tochange most within the next five years?The difficulty is not necessarily the volume ofchange but the speed with which you have tochange to ensure compliance and to meet theexpectations of your clients. Those offshorelocations that want to survive and thrive willneed to adapt to this tougher environment. Itremains to be seen which jurisdictions will beable to achieve the necessary standards, bothin the shorter term and to keep up the paceover the next 10 years.To what extent is the chief information officerbecoming an important role withinprivate equity companies?Senior executives in private equity funds dohave new roles and responsibilities. In additionto the CEO, COO and CFO we now also havethe CRO (chief revenue officer responsible forsales and marketing) but also the CIO [chiefinformation officer]. Twenty years ago it wasthe responsibility of the CEO to ensure efficiencywithin his company.This responsibility would have extended tosystems, re-engineering and processes as wellas running a lean and mean operation. Todaythe complexities of global operations requirespecialist skills for each of those disciplines.Disclosure and transparency are key and wecan expect the role of the CIO in the developmentof core infrastructure and systems tocontinue to grow.How difficult will 2012 be for privateequity?In today’s environment we are seeing someencouraging activity in the mid-market andan increased role for the secondaries market.This has given improved liquidity options forthe investors and allowed investors to buildsome new GP relationships. The challengeswill continue to be the availability of capitalto be invested in new funds and the managementof costs that ultimately will drive downprofitability.On a more optimistic note, we believe thatprivate equity will remain an attractive assetclass and face increased regulation [as otherindustries have done in the past] and showthat it can adapt and flourish.

Alternative Investment FundsWelcome to OgierOgier is one of the world’s leading providers of offshore legaland fiduciary services. We advise on BVI, Cayman, Guernseyand Jersey Law and associated fiduciary services through ournetwork of offices across the globe.We have over 800 professional and support staff, including 200lawyers and 300 professional administrators with the strength indepth to deliver service excellence to our clients.We offer a proactive and flexible approach and have theexpertise to handle the most complex offshore fund structuresacross all time zones.‘Offshore Law Firm of the Year 2010’Chambers Europe Awards for Excellence‘Channel Islands Law Firm of the Year 2010’PLC Which Lawyer?‘Domestic Employment Law Firm of the Yearin the Channel Islands’Corporate International Magazine Global‘Offshore Law Firm of the Year, 2008 and 2009’British Legal Awards‘European Legal Services Provider, 2009’ICFA‘Top Offshore Law Firm, 2009’Alpha AwardsContact us:‘IFC Legal Team of the Year, 2009’STEP Private Client AwardsJerseyMichael Lombardi+44 1534 504280michael.lombardi@ogier.comJane Pearce+44 1534 753806jane.pearce@ogier.comGuernseyCaroline Chan+44 1481 752215caroline.chan@ogier.comBob Banfield+44 1481 752327bob.banfield@ogier.comLondon (practising BVI and Cayman law)Simon Dinning+44 20 7160 5070simon.dinning@ogier.comOliver Godwin+44 20 7160 5049oliver.godwin@ogier.com‘Overall Private Funds Law Firm of the Year, 2009’ACQ Global Awards‘International Law Firm of the Year, 2009’Citywealth Magic Circle Awards‘Best Offshore Law Firm, 2009’HFMWeek European Service Provider AwardsInformation on the Ogier Group and details of its regulators can be accessed via our websitewww.ogier.comBahrain • British Virgin Islands • Cayman Islands • GuernseyHong Kong • Ireland • Jersey • London • Shanghai • Tokyo