The Irish legal market is undergoing a shake-up as business returns following the financial crisis.

The news in April that a number of law firms were planning an entry into the Irish fund industry came as little surprise to the market.

Increased interest from managers and investors in regulated products means Irish law firms’ funds practices are busy. That in turn has led to interest from outside the market in having a Dublin presence.

UK-headquartered international firm Eversheds made the first move. It hired Stephen Carty from Dillon Eustace to head a funds practice at its Irish branch, Eversheds O’Donnell Sweeney.

Dechert was the next in with the news it had hired William Fry partner Declan O’Sullivan to kick-start its Irish presence. Meanwhile, international law firm Walkers is looking for lawyers as it seeks to follow offshore competitor Maples and Calder into Ireland.

Other firms on and offshore are also rumoured to be sniffing around Dublin with a view to setting up shop. While other departments within law firms are still finding business slow, the funds teams are flourishing.

“I see it as a vote of confidence in Ireland as a domicile. These firms perceive that there must be great potential for the domicile,” says A&L Goodbody investment funds head Brian McDermott.

William Fry funds partner Cormac Commins agrees. “It’s a reflection of the opportunities that there are. Clearly the UK law firms have seen that there’s an opportunity there and want to ensure that they don’t lose out,” he says.

Matheson Ormsby Prentice (MOP) partner Dualta Counihan thinks the move by onshore firms into Ireland is “defensive” adding: “Their goal is to be able to tell their clients ‘we’re in Ireland’.”

The problem new firms face when moving into Dublin, say lawyers already there, is the limited pool of available talent.

“The Irish market is only so big with a limited number of senior parties,” notes Barry McGrath, a financial services partner at Maples and Calder. It can be difficult to break into the market and it took Maples a number of years before it was solidly established as a major player.

Spreading the word
“Our Dublin office now has a significant profile and substantial volumes of work,” says McGrath, adding other Maples offices are marketing the Irish practice well. As part of an international firm that traditionally served the offshore market, Maples has been able to apply successfully the same model in the Irish market and work as a team alongside instructing onshore law firms.

“Ireland has particular characteristics and you have to be committed to it,” McGrath says.

“It’ll be a challenge for any firm coming in because they’re dealing with a relatively mature legal services practice,” adds A&L Goodbody’s McDermott.

Counihan says Dublin has room for firms that want a small, servicing office to drive business back into London. “It won’t be a huge concern to us that these people are looking to come to Ireland. We see it as evidence that they recognise that Cayman isn’t the be-all and end-all,” he says.

While lawyers acknowledge the Cayman Islands will continue to have the lion’s share of the hedge fund pie, they report significant amounts of activity in Ireland in both regulated and non-regulated products.

“It has been a challenging time in the Irish legal industry. But in fund services, because we’re internationally facing, we have been in recovery mode for the last six months now. It’s a good area to be practising in Dublin at the moment,” says MOP partner Tara Doyle.

Indeed some law firms have adjusted their internal practices to react to that trend. At William Fry, partner Paul Murray has moved back into the funds team from the structured finance products practice. The move, says Murray, is partly due to the loss of O’Sullivan to Dechert and partly due to market demand.

The firm believes it will benefit from the skills Murray picked up practising structured products law, as the type of trading strategies used by hedge funds in the current environment centre on such vehicles. Murray thinks lawyers need a convergence of skills to address the needs of fund managers.

All the Irish law firms believe there has been an increase in the number of managers wanting to set up Ucits-compliant hedge funds, although other products remain popular. “We’ve seen a noticeable up-tick in activity in all types of product. What I find encouraging and interesting is that it’s not just as if Ucits is the only game in town,” says McDermott.

Gaining favour
A&L Goodbody was advising hedge fund managers on how to set up a Ucits-compliant fund five years ago. Managers who would not have looked at the vehicle then are now examining it.

Murray believes many hedge fund managers will need some sort of Ucits product within their range. His colleague, partner Tara O’Reilly, adds: “I think it’s interesting that we’re not just seeing this from bigger hedge fund managers. We’re also seeing it from the smaller players. It will fill a gap for them. I think it will have a place in various asset allocation strategies.”

The William Fry partners think the Irish legacy of working with hedge fund managers on a range of products, including exchange traded funds (ETFs), derivative products and 130/30 funds, will serve them well if interest in Ucits continues.

“We now have a new range of potential clients,” says O’Reilly.

William Fry’s Patricia Taylor says lawyers can also help in a manager’s education process when setting up a Ucits fund by guiding them through the regulation required.

The Irish qualifying investor fund (QIF) also remains popular as a viable regulated alternative to Ucits. McGrath thinks Maples is advising on more new launches than it was a year ago, but there is not a “deluge” of QIFs being set up.

“It’s generally the case that if someone can’t fit their product into a Ucits they will go straight for the QIF,” adds Taylor. She points out that some strategies will not fit into a Ucits wrapper due to regulatory restrictions. Like a Ucits, the QIF is recognised by investors as a reputable regulated product.

New launches are keeping lawyers busy at present in a sharp reversal from the past two or three years. During that time the firms were fighting fires for clients, advising on issues such as redemptions, gating and side-pocketing. The turnaround began in 2009. According to Counihan the market improved markedly throughout the year.

He says MOP has seen a “huge growth” in instructions from new jurisdictions. “Ireland’s traditional client base has been European, focused on the UK,” he explains. Counihan says enquiries have started to come in from places such as Canada, South America and
the Middle East, although managers based in Asia still have a tendency to choose Cayman-domiciled
products.

Enquiries are also beginning to flow in following the enactment of the 2009 Companies Act which provides a more streamlined route to redomiciling an investment fund to Ireland. At present few real instructions have been gained from the legislation but lawyers report a steady stream of questions about it.

“It’s really the same community of people who are considering the need for regulated products and they’re looking at it not just in the context of new products but also products that they already have,” says McDermott.

The level of business means funds practices are among law firms’ busiest departments at the moment. Unlike other areas of law, teams are recruiting at all levels of legal qualification.

Counihan points out that MOP’s funds team has grown every year for a decade, while retaining a core group of partners who trained together at the firm. Doyle adds that “it’s a very difficult market to be recruiting in,” contrary to the trend in the wider legal market.

Falling fees
Like other service areas, fees in the legal sector have been driven down following the financial crisis. While lawyers say Irish fees were never as high as those in London, they acknowledge that clients are now getting a more competitive deal than they would have done up until 2008.

From the summer of 2008 when things were slow for six months, many associates and partners were without much work and clients were getting good value. Fees have risen slightly over the past year and remain far more competitive than pre-crisis.

Commins says: “If there’s a silver lining in the domestic cloud it’s been the recalibration of the cost structure. That’s happened across the board. We’re hopefully well positioned to continue to serve the industry and a reduction in cost is a good thing in that respect.”

Lawyers are pleased the Irish Financial Regulator is working well with the industry and think the country’s funds legislation has also proved it works. “They have tried to be sensible, practical and pragmatic. If you go to them with a proposal that’s generally in the industry’s interests, they have always been happy to help,” notes Counihan.

Murray adds: “I find it quite striking just how organised the fund industry is in contrast to other parts of the financial services world.”

The regulator is also praised for keeping the approval turnaround times fast. “The proof of the
pudding has been very much that we can point to the fact that there haven’t been delays,” says
McDermott.

Law firms in Dublin are viewing business confidently and hope opportunities provided by regulation and a renewed investor
demand for hedge funds will keep them active for the foreseeable future.

Lukewarm welcome to EU directive

Despite a year’s worth of negotiations and lobbying in the EU, the final outcome of the controversial alternative investment fund managers (AIFM) directive remains uncertain.

Although both the EU parliament’s committee for economic and monetary affairs and the EU council of finance ministers have agreed their separate versions of the text, the legislation is yet to go through a full meeting of the parliament. Both parliament and council have to agree on the text before it can be enacted. A further lengthy period of discussion and fine-tuning would then take place before the directive could be implemented in EU member states.

The Irish Funds Industry Association has engaged in intense lobbying over the directive in order to ensure as practical a result as possible for the country. That included briefing the Irish government before it began negotiations in order to ensure the government knew what the issues were.

Some of the issues of most concern to the Irish industry include the question of a passport for funds allowing marketing across the EU, fund valuation and the domicile of third-party service providers such as custodians.

While more regulation of the fund industry within the EU should theoretically be a good thing for a member state like Ireland with a strong background in the sector, in practice market participants are cautious in welcoming the directive.

“The one thing we all know about the AIFM directive is we have absolutely no idea how it’s going to end up,” says Dermot Butler, chair of Custom House Group.

Peter O’Dwyer, director of Trinity Fund Administration, says the directive is a “fascinating animal”. He and others note that it is potentially a two-edged sword for the jurisdiction.

On the one hand the directive could encourage managers to domicile their hedge funds in Ireland. That would particularly be the case if the directive ends up imposing strict equivalency criteria on non-EU jurisdictions and hedge fund managers wanted continued access to European money.

But it could also drive away the business derived from administering offshore funds. This forms a significant part of the Irish funds servicing industry. Managers may decide they are happy foregoing capital from EU investors and to stay in offshore jurisdictions like the Cayman Islands or the British Virgin Islands, and move their management companies outside the EU to such places as Switzerland, Dubai or Singapore.

That would impact on investors too, as many large EU-based pension funds or insurance companies could find their access to a wider pool of hedge fund investments limited.

Depositaries would also be affected as the directive currently proposes imposing strict liability on companies offering this service. If a fund suffered a loss of financial instruments, the depositary would have to prove it was through an unforeseen event and not through any action by the bank.

“I certainly don’t want to give the impression that ‘Ireland Inc’ views the directive as a universally good thing,” says Northern Trust’s Ian Headon, senior vice-president for product management. “Protectionism is never a long-term positive outcome. We listen to our clients and they tell us that there are aspects of AIFM as it’s currently drafted that’s not good for them. By definition that’s not good for us.”

Headon believes the directive could have a few positives, including encouraging greater cooperation between regulators and investor bodies.

Many market participants think the possibility of a European passport for hedge funds could be a bonus for Ireland, although those involved in servicing offshore funds need the EU to agree on equivalence criteria for non-EU countries. While jurisdictions like the Cayman Islands believe they would meet such criteria, these have not yet been finalised.

If hedge funds do find themselves having to move onshore in greater numbers due to the directive, Ireland’s service providers think it is better placed than its main European rival, Luxembourg, to take advantage.

Matheson Ormsby Prentice partner Dualta Counihan says Ireland’s Financial Regulator has invested in specialist staff able to advise on areas such as derivatives and is also able to move more quickly than Luxembourg’s Commission de Surveillance du Secteur Financier.

Ireland, says Counihan, also benefits from a history of working with hedge funds and has an Anglo-Saxon culture that attracts fund managers.

“Luxembourg can up their technical game and their skills but it’s very hard for them to change their culture,” says Counihan.

Jurisdictions such as Malta and Gibraltar would also be jockeying for position in a post-AIFM world, but Ireland is confident it would still have an edge over these up-and-coming fund domiciles and servicing centres.

As the industry waits for the European parliament and EU council to reach an agreement on the final form of the directive, Ireland is watching what happens.

“We’re monitoring it very closely and hope that we come out on the right side and that there are opportunities for us here as a funds service domicile,” says William Fry partner Cormac Commins.

His colleague Tara O’Reilly adds: “I think for a while managers were holding back on doing anything. I think what we’re seeing now is managers just deciding to do something. What we’re seeing is products moving again.”

But the Irish hedge fund industry is likely to remain in something of a holding pattern until the AIFM directive is finalised, and that could take many months yet.