Q&A: Ireland’s Fund Industry Embraces Change

Pat Lardner, Chief Executive of Irish Funds, which represents the Funds and Asset Management Industry in Ireland, recently took time to talk to Ross McCann, Head of Funds Services Ireland, about some of the key issues, challenges and opportunities the industry is seeing today. Despite the shockwaves of last year, there is much to look forward to and a positive mood is in the air.

Looking back on last year’s unprecedented upheaval, how well do you think the industry responded to the challenges faced and were lessons learned?

2020 saw tragedy and disruption, but it is important to acknowledge that our industry has been less impacted than many others. We faced three simultaneous disruptions: operational; market volatility; and volumes of activity. Yet we adapted and performed in a way that has been truly excellent. We have shown real resilience, not just at industry level, but as individuals, teams and organisations. But we also saw many examples of people and companies reaching out to support others, those severely impacted or less fortunate.

It demonstrated the role we have as members of the community, as part of the broader society. As for lessons learned, well, we have shown ourselves to be amazingly adaptive and innovative. Such a broad-based health and economic shock has highlighted the deeply interconnected nature of the financial markets, how banks and market intermediaries behaved, how official actors intervened and offered support. I think the industry, regulators, and policymakers performed incredibly well in such stark circumstances.

The service ethic and quality of the people across the industry really shone through. The support and cooperation in terms of badly needed information, intelligence and insight that was provided to regulators and policymakers was very important, driving everybody to communicate and interact in lots of different ways.

You touched on interconnectedness, what are the key roles you see for Irish Funds both as an industry body and as we look ahead to 2021?

Our common, consistent and central role is to be the voice of the industry. However, we need to re-evaluate who we must engage with and how we explain our role and the value we bring. We are constantly seeking ways to create real collaboration around both opportunities and challenges. In 2021 our advocacy work is going to be at the forefront, both in Ireland and in the EU. Whether that is ESG, capital markets union, sustainability or Covid recovery and our role in funding that. We will also be looking at areas where we need to ensure that the direction of travel on policy and regulation does not actually stifle competition or investor choice.

I think there are two key roles for us in the coming years. Firstly, how do we bring an increasingly diverse pool of expertise and knowledge within the industry together for the benefit of the collective membership? And in the longer term, we must focus on providing strong leadership in identifying opportunities and risks.  What capabilities do we need to have, what competencies are critical for the operational environment?

“Ultimately, it is about being competitive, compelling and highly trusted in terms of the range of solutions we offer. There is plenty to be getting on with in 2021 as we seek to find new and innovative ways to engage and collaborate with people.” - Pat Lardner

Ireland is home to many different fund types, particularly open-ended funds. But in recent years it has positioned itself as an attractive jurisdiction for closed-ended private funds. What is the rationale behind that?

We want Ireland to be recognised as the premier location to support global investing. And we are already delivering on that vision. But we did have a gap in our offering for private market strategies – private equity, infrastructure, real estate, renewables. That gap, alongside a continuous low interest rate environment, has seen investors with no immediate need for liquidity, seek many different return premiums, including those less correlated to their other asset allocations. The EU’s Green Deal, supporting economies and enterprises as they emerge post-Covid, adds extra impetus. In terms of rationale, it is about the completeness of our offering and being fully aligned with both the low interest environment and some of the big policy initiatives at national and EU level.

What sort of trends are you seeing in the private funds sector globally? What feedback from managers and service providers are you hearing?

For diversified investors, market valuations suffered significant turbulence last year. But having now rebounded, strategic asset allocations have the space and capacity to invest in private assets. There is still room for growth. We can see that those investors are also participating in financing the economy. With a question mark hanging over the ability of banks to support enterprises and economies moving into recovery, there is definitely an opportunity for fund-based investors to step in. There is no doubt that we have seen continually good volumes of fund raising in the private equity space, running about €90 billion a year in each of the last five years. Whether it in terms of debt or other areas, investment opportunities will arise in new and emerging industries as a consequence of the pandemic.

“From the service provider side, we have seen a greater trend for outsourcing from managers, particularly from US managers who have tended to lag behind European managers. It seems clear that as sustainability and ESG get fully embedded in the investment environment they will be important drivers for outsourcing.” - Ross McCann

The Central Bank of Ireland, and more generally ESMA, have recently focused on local substance requirements for managers.  How do you see managers facing these challenges and the role of service providers in supporting them?

The debate about effective governance and oversight is long-standing with Brexit bringing greater impetus to it. We have seen many organisations either establishing or expanding their regulatory presence here. What is notable is the number, size and strength of those names coming here.  Ireland’s central bank has been clear that it is not solely about substance, it is three things linked together.

Firstly, there needs to be effective supervision of entities whose regulatory anchor is very much in Ireland. This is about how a business, as an authorised Irish entity, is supervised and run from here. In particular, those firms who do not undertake all of their activities here. Such organisations must be clear about how activities undertaken elsewhere are supervised and overseen. There are challenges and questions to be asked and the bank is encouraging managers to speak to the supervisory bodies. What is clear that those firms that have gone through the Brexit authorisation process understand very clearly the expectations around substance.

This is not specifically an Irish problem but is part of a much broader European debate and focus. From an AIFMD review point of view it addresses how services and solutions are provided to EU investors; is that done in a way that satisfies the need for oversight and supervision? It is all linked together.

I think that due to the breadth of the ecosystem here, there is an enormous amount of insight, intelligence and experience among the service provider community. The vast majority of our member firms are working with a range of different end clients with different models and approaches. This has helped develop significant skills both through direct and indirect experience.

The membership of Irish Funds has shifted somewhat from traditional service providers, but it has also given a greater voice to local managers setting up in Ireland. What is the impact on Irish Funds and what adjustments are you making?

The industry and the association have seen significant change in the past five years. There is now coverage of the complete value chain, from the origination of an investment opportunity right through to how it is delivered to the end investor and everything in between. This completeness and diversity bring real strength to our collective power particularly when talking to regulators, politicians, policymakers. We have been adapting and growing for some time, growing in relevance. In 2016 we were adding working groups focused on products, distribution, middle and front office. We introduced our first group on management company effectiveness that year. Our evolution does reflect our broader, more diverse membership. Activity in relation to MIFID, or money market funds, AML or financial reporting, has a direct impact on some of our members and I see our development as complementary to their growing needs. The links between front, middle and back office activities are much closer than before. We are running sessions on subjects such as liquidity frameworks or performance fees demonstrating that we must move both with and ahead of where we think the industry is going.

“There is power in embracing change and at Alter Domus we are committed to driving positive change, leveraging technology and harnessing the opportunities change, or disruption can bring. We seek to develop real value for our clients, not just in cost-savings but in tangible efficiencies.” - Ross McCann

We spent a lot of time in early 2020 talking to our members, engaging and hearing what was important to them. We are trying to bring what we learned into a strategic framework launching early this year. We are listening and adapting and will continue to do so. Our job is to bring together our collective expertise and insight, to harness that energy to produce positive outcomes.

Alter Domus, like all our member firms, has professionals doing detailed, intricate and important work every day. Our job is to ensure that we are bringing all that expertise together in order to impact and explain how we bring value. Ultimately, we are enabling savings. I believe we are more broadly a force for positive change and aim to try and bring others along on the journey.

We have seen real encouragement and support for our economic impact assessment and for the changes around Investment Limited Partnerships and the specialised depository. With the legislation complete as of the end of 2020, we welcome the Central Bank’s timeliness with regards their consultation regarding the associated regulatory changes needed. The ability to provide a specialised depository service is a really compelling component for the 1,000 or so managers who are here and want to do business here. It gives us a really strong start to 2021. Perfectly timed in terms of Covid recovery and a really positive step in keeping momentum going in 2021. 2021 is also Irish Funds’ 30th birthday – another positive milestone to look forward to. It is our job to keep making these important milestones and driving positive sentiment.

“I don’t think the industry has ever been closer to each other in learning to interact, communicate and collaborate in different ways. We have a whole range of new tools and skills which, when you add them to the traditional ones, have the makings for a very potent combination.” - Pat Lardner

This article was originally published in Sensus Magazine. Download the latest issue below.