| Bank of Ireland’s move up north - the long and the short of it |
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| In July, the Bank of Ireland signaled a major move for Ireland’s funds servicing industry when it announced that it would open a new operation in Northern Ireland, the firm’s first outside of the Republic and its first hedge fund operation. In the recent past, firms have looked to cheaper locations outside of Dublin to expand their funds business, but BOI’s move indicates that they are now committed to moving further afield as capacity in the regions dries up. LIAM MANAHAN talks to FIONA REDDAN about what the move means for Dublin’s funds industry, and why it took so long for BOI to develop a hedge fund capability. |
Bank of Ireland has a strong reputation in the funds servicing business, having administered the first UCITS fund launched in Dublin for AIG back in 1987. Today, its funds servicing operation, Bank of Ireland Securities Services (BOISS), which employs 370 people in New Century House in the IFSC, has total assets of $160-165 billion in primarily long only funds.
It has built a reputation in this area, and is the largest administrator of exchange-traded funds in Europe, as well being very successful in multi-manager and property funds. However, while long-only funds have driven growth at the bank for the past 20 years, it is now getting ready for its next stage of growth, as it looks to both product and geographical expansion.
Gearing up for growth
In 1996, the bank entered into an alliance with State Street, to jointly provide custody and administration services to funds in Dublin. However, following the acquisition by the Boston funds company of Deutsche International, which gave State Street a significant Irish presence, the firm looked to get out of its alliance with BOI. So, in 2003, State Street bought out the bank’s 50 per cent share in the alliance. | | Photographed at the announcement of Bank of Ireland's new funds operation in Northern Ireland on Thursday, July 26th were (l-r): First Minister, Rt Hon Dr Ian Paisley, MP, MLA; Liam Manahan, managing director, BOISS; Deputy First Minister, Martin McGuinness, MP, MLA. |
Up until this point, the bank had focused its growth strategy on the alliance, but following its break-up, BOISS had to reconsider how it would get ready for further growth. ‘After the alliance broke up we had to refocus,’ says Manahan, ‘and realise that this is where we find ourselves today’.
This refocus led the bank to realise the necessity of developing a hedge fund capability, although the provision of this has been a long time in gestation.
‘Should I have acted before now? Absolutely!’ says Manahan when asked why it took BOISS so long to get in on this booming sector, and he admits that some clients were critical of BOISS’s procrastination.
To buy or to build?
In 2003, BOISS made its first foray into hedge funds when it established a small hedge fund administration unit in its Dublin operation, and the firm currently services some $3.5 billion in alternatives. However, to expand this capability, the bank needed to commit to either buying a hedge fund specialist, or building its own expertise.
Unlike many other service providers, including BOISS’s old alliance partner State Street, which acquired hedge fund specialist IFS in 2002, Manahan says that the bank was keen to develop its own capability rather than buy in the expertise through an acquisition.
‘Have all these acquisitions proven to be successful for all the companies involved?’ he asks, before responding with a resounding ‘No’. Moreover, he says that such an acquisition would have been expensive in terms of price/earnings ratios, and that the bank already had the clients, technology, and skills in the long-only sphere, but needed to commit to doing this in the hedge fund arena.
So, once the bank had decided its route into alternatives, the next decision to make was where to locate the operation.
North or south?
While Manahan jokes that his home town of Hospital, Co. Limerick, was his first choice, Belfast soon emerged as the ‘obvious choice’ for the new operation.
As a domestic operation, the bank isn’t eligible for IDA grants, and although BOISS did first consider a second operation within the Republic, Manahan cites the benefits of ‘first mover’ advantage up north as being a key factor, as he doesn’t expect to be the only southern player to make the move across the border. ‘I can absolutely can guarantee that other firms will move up there,’ he says.
Of course, the fact that Invest Northern Ireland, the IDA’s northern equivalent, was willing to support the new operation, and the expansion of Bank of Ireland’s branch network in the North, to the tune of €3 million (?2 million), was also a factor.
Moreover, in terms of the accountancy skill sets required, he felt that the north offered better potential, with 750,000 people living in the greater Belfast area. ‘Once we started to examine it, it became apparent very quickly that it’s an untapped market,’ he says.
In addition, 10 per cent of BOISS’s staff are from the north, and while the bank will have to recruit in hedge fund specialists to run the business, he would expect a certain proportion of these staff members to look for a transfer. In addition, BOISS already has strong links with northern universities through its co-op programme, in which students spend part of their term-time working in Dublin for BOISS.
Costs were another factor in the bank’s decision. Despite the booming residential market north of the border, Manahan asserts that the cost of commercial property in Belfast is less than half what it would be in Dublin. And staffing costs are expected to be 25-30 per cent cheaper in Belfast. The bank has committed to employing 149 people over the next five years, and will have 10 staff working there by Christmas, but Manahan suspects that the growth rate will be more rapid than that.
Belfast
The new Belfast operation will focus exclusively on hedge funds, and Manahan says that he expects the operation to have generated some $8-10 billion in new business by Christmas 2008.
‘There is no shortage of opportunity in the hedge fund space,’ he says, adding that the bank has already been approached by some of its long-only clients to take on their hedge fund business also. Moreover, the firm expects to double its hedge fund business shortly, having just been appointed by a major new client to service its 21 offshore funds worth around $2.5-3 billion.
In 2005, BOI bought US specialist manager, Guggenheim Alternative Asset Management, and Manahan he says that although they haven’t approached the firm yet, this is another potential client of BOISS’s hedge fund servicing operation.
BOISS will now operate a ‘hub and spoke’ type structure on the island of Ireland, whereby the heart and mind of the company will remain in Dublin, with the Belfast office providing additional capacity. The Belfast office will focus on servicing non-Irish hedge funds, which can be administered anywhere, while Irish registered business will be done in Dublin, which he expects will continue to grow.
Regulatory issues
Of course there are various tax and regulatory issues associated with an expansion across the border. However, these are not as onerous as one might imagine.
From a funds servicing perspective, there will be no issue with taxation, but the bank can expect to pay a higher rate of tax on its profits, as companies in the north have to pay corporation tax at 30 per cent, as opposed to 12.5 per cent in the south. However, Manahan asserts that this won’t make an awful lot of difference to them, and anyway, ‘the bank is constantly looking to grow its income outside of the Republic’.
From a regulatory perspective, firms operating in Northern Ireland will have to comply with the Financial Services Authority (FSA), but as Bank of Ireland already operates in the UK, and is therefore regulated by the FSA, this won’t be an issue. Moreover, the FSA doesn’t regulate fund administration, but Manahan says that this won’t lead to a slide in standards for its new Northern Irish operation – instead it will apply the same measures as it does in Dublin.
With regards to needing a derogation from the Financial Regulator’s minimum activities rulings, Manahan says that this won’t be necessary as the new operation will focus on servicing non-Irish hedge funds, and therefore the rulings don’t apply to such business. BOISS has, in any case, sat down with the Regulator to discuss its business plan with them, and Manahan says that it has been very understanding of its plans.
On the overall issue of funds firms moving certain activities outside of Ireland, Manahan says that he thinks it is more appropriate that individual companies make their own case to the Regulator, rather than changing the current minimum activities ruling and instituting new across the board rules.
Peace in our time
Having traveled to Belfast for the launch of the new operation, Manahan was impressed by his meeting with both the First Minister, Ian Paisley, and Deputy First Minister, Martin McGuinness.
‘It was extraordinary to see the great interaction between them,’ he says, adding that, ‘for them it’s now about the economy, they have a unity of purpose’.
The bank’s decision to expand in the north has a lot to do with improved relations between the two communities and he admits that three years ago the environment wouldn’t have been favourable. ‘Peace has made a lot of difference to our decision,’ he says, ‘Belfast has a real sense of vibrancy and opportunity’. |
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