Fund administrators in Malta have seen a massive increase in business in 2010 from new start-up hedge funds as well as redomiciliations. Ucits IV and more custodians should increase 2011 prospects.

Malta’s wait to be bounced into the top tier of fund jurisdictions may be over if predictions from Brendan Conlon, business development director at SGGG Fexco Fund Services (Malta), come to pass.

He predicts that at least three fund platforms will be launched in Malta before the end of the first half of 2011. “These are very big names. Two are large North American banks,” he reveals. “This will put Malta in a different league altogether. So far it has not attracted top-tier names but in 2011 that will change,” he adds.

SGGG Fexco Fund Services (Malta) is a venture linking Fexco, a services company headquartered in Ireland, with SGG Fund Services, a Toronto-based fund administrator which also operates in the Cayman Islands with around C$15 billion ($14.76 billion) of assets under administration (AUA) worldwide.

SGGG Fexco Fund Services (Malta), which has been licensed since October 2009, like other fund administrators in Malta experienced a strong increase in new business since January 2010. It is currently working on a number of new fund launches, including Ucits funds, with clients from the UK, North America, Switzerland and the Middle East. The company is also assisting a number of fund managers with the redomiciliation of funds from the Caribbean islands to Malta.

“For some reason earlier this year [2010] someone turned on the tap. This coincided with our entering the market. Although it does not take much to get Malta busy, potentially it is going to be a substantial player. Now it is still relatively small but it’s getting busy and attracting a lot of interest,” notes Conlon.

Overall Conlon is bullish about Malta’s prospects. He believes the cost advantage of Malta compared with Luxembourg and Ireland will continue to work in the jurisdiction’s favour for some time but warns that “if your costs run ahead of yourself, it might nip [development] in the bud”. He says Dublin is trying to match Malta on price but is hitting a brick wall. “Salaries are too high,” says Conlon of Dublin.

He says Malta can offer substantial savings. On a straight plain vanilla fund with €50 million ($65.85 million) of assets under management (AUM), fund administrators on average will quote 10-12 basis points (bp) but Conlon says “we can make a profit on 8-9bp in Malta. We are 3-5bp less than Dublin and 6-8bp less than Luxembourg. Dublin is trying to match Malta but it is not sustainable,” says Conlon.

In Dublin, Conlon says a qualified accountant with three to four years of experience costs €45-50,000 a year whereas in Malta the salary is closer to €30,000. “This all goes into making businesses more costly to operate. Fund managers can see this reflected in the fees being quoted. They are going to Malta for a look and liking it,” continues Conlon. “The regulator is more approachable than in Luxembourg. It is an EU jurisdiction that’s never had a blow-up. If the underlying investors are comfortable with Malta for the domicile of the fund, Malta should pick up a lot of business.”

He says there are some legal firms in Malta working nearly exclusively on redomiciliation. He says his company continues to receive approaches from North America and US fund managers looking to launch a Ucits or other fund out of Malta.

“We’re seeing a number of enquiries coming from North America. They are looking at Malta to launch a Ucits fund to tap into the European market,” confirms Conlon. He also points out that although the jurisdiction continue to attract a lot of start-up funds, “I think that will stay but also Malta will start to get other more established business and from bigger names.”

Conlon also predicts that one or two big legal firms are likely to relocate to Malta. “These guys know how the business moves and if Malta is the flavour of the month for 10 years or more, you want to be in Malta,” concludes Conlon. “It is all very positive stuff. Doing the round in London every five to six weeks with the big prime brokers and banks, it is getting much easier to sell Malta than ever before.”

An equally bullish story comes from two well-known names in the fund administration sector: Apex Fund Services and Custom House Global Fund Services. Both are relative newcomers to Malta.

The first of the two to choose Malta was Apex. “We’re 16-strong now and we’re hiring four more,” says Anthony O’Driscoll, managing director. “2011 has been busy. We are growing in the number of funds and in the quality of assets. The size is one of the biggest changes,” he adds.

“We are starting to capture work from both Cayman and the US. European investors are happier to put money into European Union-based funds. It’s a mind set, a perception, even though there is no real difference in regulation. They are more confident putting money close to home and any change in EU regulations won’t change that. You’ll continue to see an increase,” ­predicts O’Driscoll.

Like SGGG Fexco, Apex is receiving enquiries from US managers looking at the possibility of using a Ucits vehicle to promote funds throughout the EU. Although O’Driscoll like others in the industry is worried about the lack of custodians in the jurisdiction – something the Ucits rules require – he is confident the custody issue will be settled by the end of 2011 or earlier. “We need custodians to go to the next level and to compete as an alternative to Ireland and Luxembourg,” admits O’Driscoll.

Apex is also planning on setting up a fund platform so it can provide managed services for regulated entities. O’Driscoll says Apex has clients lined up for the service and plans to work with another company which will provide due diligence on managers wanting to access the platform. “Our platform will be able to white-label funds for banks. One German bank has already has asked us do that. We are confident of success,” he adds.

As for trends in the industry, O’Driscoll says the move to more frequent liquidity, particularly for Ucits funds, will impact the industry. Fund administrators not able to provide daily or weekly reconciliation may miss out on business. To meet the potential demand from hedge funds as well as Ucits fund managers, Apex plans to introduce a middle office solution for customers. It will offer pre- and post-trade settlement as well as daily reconciliation.

Over 2011 O’Driscoll hopes to see the business continue to flow into Malta. “The average assets under administration are moving up as larger clients are setting up funds here. We are moving away from €10 million-€25 million to €50 million now. Cash is still hard to come by. Managers don’t want to spend a lot of money setting up funds. We have a fair pricing system and we want to grow. We don’t mind a low starting point because we are looking for a long-term relationship,” says O’Driscoll.

Custom House, having started from a base of only eight at the end of 2009, now has over 40 people working on fund administration in Malta. “We wanted to develop Malta as a European centre for our administration. It is in the same timezone but it is less costly than Dublin or Luxembourg. Malta is the new kid and has something to prove. It needs to be efficient and keep costs down. It offers tax efficiencies, too. So the idea was to move people gradually from Dublin to Malta and grow the office as an administration centre,” explains Alberet Cilia, executive director at Custom House’s Malta office.

The growth in the Malta operation Cilia attributes to a combination of new business and a significant transfer of operations from Dublin, and in particular work on the Altma sub-funds for the National Bank of Canada Global’s numbers sub-funds, all of which are domiciled in Malta as Sicavs. Cilia confirms that around 80% of the work in Malta is daily in nature. “We start in Singapore and finish in Malta and hand over to Chicago. It gives us a huge advantage,” Cilia says of daily net asset value (NAV) calculations for NBCG.

Cilia is now looking at expanding the office and ensuring new recruits as well as existing staff have training and development opportunities offered to them. “We do a lot of on the job learning and development,” he confirms.

The Malta operation can “give a spectrum of services” says Cilia. One of the biggest initiatives in 2011 was the setting up of the Nascent Fund Sicav, an open-ended umbrella fund platform designed to provide an efficient and cost-effective solution for new managers wanting to start a hedge fund. The platform enables managers to enter the market but at the same time control their own segregated sub-fund. The set-up fee is €8,000 with an annual operating fee of 1.2% (or 20bp) up to a cap of AUM of $40 million.

The platform is the idea of Dermot Butler, chairman of Custom House and the man responsible for moving the company to Malta. He hopes the platform, which is supported by local law firm Ganado & Associates, will encourage even more start-up hedge fund managers to choose Malta.

“The first priority was to put in the foundation and develop the office,” explains Cilia. “Now we will fine-tune the aspects and impose even greater level of standards and quality control. We will continue to grow in stages and over the next year our primary focus will be SAS 70 accreditation for the Malta operation. We want to make sure we are 100% compliant.”

Kenneth Farrugia, general manager at Valetta Fund Services (VFS), is equally positive about prospects for his company as well as the jurisdiction. This should come as no surprise as Farrugia is also chairman of FinanceMalta and has been active in promoting Malta as a hedge fund and alternatives jurisdiction.

“VFS has just $2 billion AUA in 87 funds. Of this, 25 are property funds but the rest are all hedge fund structures. We cover all types of funds: long/short, distressed, high yield, global macro. And we also do private equity. We have a good range of strategies and hedge fund experience,” notes Farrugia.

He points to the positive numbers showing growth of over 30% in the alternatives funds sector for 2010. Farrugia says the decision to allow funds domiciled in Malta to chose a fund administrator outside Malta has worked in the jurisdiction’s favour. The vast majority of Malta-domiciled funds chose Malta fund administrators. “ The majority of our funds are Malta domiciled – over 90%,” confirms Farrugia. “There is still potential in the market. We have seen quite a lot of new funds and redomiciliations and we expect more. Malta’s very welcoming.”

He attributes the success of VFS partly to the banking of the largest domestic bank in Malta, Bank of Valletta. “Our unique selling point is that we are able to leverage Bank of Valletta’s IT infrastructure and expertise to provide delivery of services. We have senior managers here with 10-15 years of experience. They have a depth of technical expertise and have worked with a variety of strategies.”

Farrugia is confident of Malta’s (and VFS’s) ability to grow in future. He points to the growing depth and breadth of the financial services sector and believe that will in turn help further develop the fund administration business on the island.

“Our industry will continue to accelerate. We have real traction,” he says. In future he expects administrators and custodians to work together to increase Malta’s market share in European products and in particular the Ucits market sector. He believes Malta, as an early implementer of Ucits IV which comes into effect in July 2011, will be able to attract more business. However, like others he wants to see a wider range of custodial services offered in Malta.

“Ucits IV is very welcome for sure. With its implementation no longer will fund managers need to have multiple domiciles,” notes Farrugia.

His views on the alternative investment fund managers (AIFM) directive are similar to others. “The directive is welcomed. In my view it will increase co-ordination at the regulatory level, particularly on common issues. It will help regulators understand jurisdictions better.”

At Praxis Fund Services managing director Nick Mahy is equally confident of the future. “We have seen a lot of interest from the Caribbean,” he confirms. “We are getting enquiries along two lines: to service funds from Malta and as more funds set up in Malta, to administer those domiciled here.” Praxis Fund Services (Malta) opened its doors in October 2008.

He confirms his office is “working hard at selling Malta”. This includes the other Praxis offices in Guernsey and Luxembourg, both part of the Praxis Group, an independently owned financial services group based in the Channel Islands.

Mahy is pleased at how the Malta office is developing. He is particularly happy with the low staff turnover: only one in two years. He believes the benefits of Malta as a jurisdiction – things like lower cost and tax breaks for companies – will encourage even more smaller managers to set up shop on the island.

“Things have really begun to pick up,” he says. “There is interest in new business. This jurisdiction is built for small and emerging fund managers and they will find a good home to start a venture here. We’re seeing a lot of funds with less than $20 million that in other jurisdictions are too small to start up. But our total expense ratio is favourable. We’ve had interest from Luxembourg and Switzerland.”

One of the largest fund administrators in Malta, TMF, is also experiencing a growth spurt. According to Els Serracino Inglott, TMF’s administration services to Malta-domiciled funds have doubled over the last 12 months. While the total business has not doubled, it is still a substantial increase.

“Many of our own client base is looking to set up a Ucits fund or convert existing funds. We’re seeing a lot of offshore moving onshore,” she says.

With around 150 staff Serracino Inglott is keen to capitalise on the growing importance of Malta as a funds centre. She agrees Malta is an attractive place for start-up funds to open. “Yes, I think it will continue to be attractive for small start ups. One of the reasons is that the regulator is open and flexible enough for smaller scale funds,” she notes.

Serracino Inglott believes only a lack of custodians and hold-ups at the regulator because of an inability to cope with increased workloads are the only potential breaks on expansion. “Malta has a very good name and approach. Its staff growth [at the regulator] keeps pace with growth that will be prohibitive. It’s very hard work at the MFSA [Malta Financial Services Authority] and there is only so much they can do. It could be a challenge,” she ­concludes.

BVI and Malta join forces to exploit market potential

International Trust, formed in 1995, provides back office and organisational support for financial services funds, fund mangers and credit institutions from Malta, London and Zurich. Although its core business is focused on corporate services, a chance meeting at a conference led to an unusual joint venture.

Around two years ago Kevin Vella, managing director of what is now Folio ITL Fund Services, met a representative from the British Virgin Islands-based Folio Fund Services. At the time neither was looking to establish a joint venture but as the environment for offshore funds began to shift, Folio and ITL started discussing the idea of setting up a parallel fund administration business in Malta.

The worry that European-based fund managers might want to relocate their funds to Europe pushed the idea along. In September 2009 ITL received authority from the Maltese regulator to provide fund administration services from Malta. “This was unique for both of us. It was clear that the BVI and Cayman Islands and all financial jurisdictions in the Caribbean were perceived to be under pressure from the international financial services community to improve on regulation. This pressure also had led for a bit of outward movement,” says Vella.

Over four to five years around 18 funds managed from the UK moved out of the Caribbean. “We expect to get a lot of questions form the Caribbean side regarding the setting up of something in the EU both as a professional investment fund (PIF) and as a Ucits, a strong brand in the European Union,” confirms Vella.

Folio Group is the largest administrator in the BVI with around $3.5 billion in assets under administration (AUA). The company’s focus is on administering BVI-domiciled funds. These account for around 80% of its client base with the remainder comprised of funds registered in the Cayman Islands, the US and Anguilla.

Folio’s clients are mainly smaller hedge funds that fall below the minimum AUA requirements of the big administrators. These funds typically cater to high net worth individuals (HNWIs) and family offices rather than institutional investors.

This segment of the market came under pressure in the aftermath of the financial crisis. Folio saw its AUA decline as a result.

Folio’s expertise is working with emerging managers and helping them navigate the early years in business. “We are entrepreneurs ourselves. We are happy to help managers through the setup and structuring process without charging an arm and a leg,” says Derek King, managing director of Folio Group.

The link with ITC was logical. The joint venture with International Trust, one of the largest trust companies in Malta, created Folio-ITL Fund Services. This organisation will provide fund administration services to funds domiciled in Malta and other European jurisdictions.

The move to Malta was made with an eye on the future, says King. “We can administer European funds and feeders into the BVI as well as Ucits funds from Malta,” says King.

One of the primary reasons to take advantage of the BVI-Malta link was to have a presence in the EU. “Travelling to/from Germany or London is not a problem if you are based in Malta. It doesn’t cause disruption,” says Vella. He believes the joint venture will be better able to exploit the “many business opportunities in the European territory”. “We also see the Malta office as a marketing spring board into Europe,” he adds.

Although the joint venture has not yet started administering any funds, Vella is positive about the company’s future. “We’re not depending on fund administration, so there’s no pressure on the joint venture,” says Vella. “We are still in the initial stages with this business. We have had to set up from scratch, build a unified technology platform and ensure it is well integrated and the same as Folio’s.”

Vella expects the venture will be in a position in 2011 to start to attract clients and to capitalise on any redomiciliations from the Caribbean.