It may be hard to believe but the Irish funds industry is not much more than 30 years old. The concept of establishing an international financial services centre in Dublin was first mooted by financier Dermot Desmond back in the mid-1980s and embraced with alacrity by Fianna Fáil in its 1987 general election manifesto.
By 1990, the IFSC effectively comprised a single building on Custom House Quay and not even the most wildly optimistic could have predicted what it would grow into over the next three decades. Total assets under administration in Ireland now stand at €4.9 trillion, of which roughly 60 per cent are domiciled funds and 40 per cent non-domiciled. More than 14,000 funds are administered in Ireland by more than 500 global investment managers and direct employment now stands at 16,000.
"This industry is very large," says Pat Lardner, chief executive of the Irish Funds Industry Association. "Indecon research last year showed the industry supported 33,000 jobs indirectly. Of the 16,000 people directly employed, 4,500 of them are outside of Dublin. There are around 1,350 in Cork, 770 in Kilkenny, 440 in Wexford, and over 400 in Galway. In all, the industry paid direct taxes to the exchequer of €837 million last year."
Ireland's importance in the funds world is even more impressive than the value of funds administered here. "The €4.9 trillion is broken down into a mix of assets and funds domiciled here worth €2.9 trillion with the balance domiciled or located elsewhere but with some support or administration happening in Ireland. Some 16.5 to 17 per cent of European funds and 6 per cent of global funds are administered in Ireland. It's an export services-based industry which is a leader in Europe and globally important.
"Ireland is the European domicile of choice for many of the world's leading investment managers, the largest hedge fund administration centre in the world and a leading European domicile for exchange-traded funds and money market funds," says Tadhg Young, Ireland country head with State Street, which has more than €1 trillion in assets under management – close to 40 per cent of the total of assets in Irish-domiciled investment funds."
Growth particularly strong
Growth in recent years has been particularly strong, according to Feargal O'Reilly, head of asset management business development with KPMG in Ireland. "Since the global financial crisis in 2008, the industry has seen strong year-on-year growth – over this period the number of Irish-domiciled funds has increased by 50 per cent and the total assets have increased nearly 3.5 times."
He attributes that growth to a number of factors. “For me, the key driver is the highly-skilled and educated workforce that delivers a fast, flexible and friendly service in a strong and respected regulatory environment. Also, Ireland is the only English-speaking country with full access to the EU marketplace.”
“Ireland offers the international funds industry a stable political and regulatory environment and a strong pipeline of highly educated employees,” adds Young.
EU membership is also important. “Membership of the EU allows us to utilise the passport system for financial services,” says Lardner. “Firms based here can sell their products across the EU and beyond. We are also located in a good time zone, are a common law jurisdiction, and English-speaking. None of these things are new. The real advantage is the industry has been building and growing for more than 30 years. The breadth and depth of the expertise here and our well-respected regulatory environment are very important. The approach to doing business and strong client service ethic which exists here are other factors.”
There are challenges, of course.
“As a hub for regulated investment funds that are invested globally and that attract international investors, Ireland’s legal and regulatory environment must keep pace with the fast-moving global investment management industry,” says Young. “There needs to be continued open dialogue and continual engagement with local and international policy makers.”
Brexit will also have an impact. “Even though it is temporarily off the front pages, it will be a significant variable in 2020,” Young says. “The global funds business grows best when countries have open trading relationships and, for the time-being at least, the post-Brexit relationship between the UK and EU regarding financial services still needs to be worked through.
“All sectors in the funds industry need to address continuing downward pressure on fees driven by investors buying cheaper index products and firms also need to invest in future technologies,” he continues. “However, there are positives from new client opportunities, emerging technologies and strong underlying fundamentals driving investment flows.”
Legislative environment
Another issue relates to the legislative environment, according to Lardner. "In the current low interest rate and low-yield environment, investors are increasingly looking towards private equity, infrastructure and sustainable investments," he explains. "They primarily make these investments through limited partnership structures. It is very important to have legislation in place to support those structures. That legislation has been going through the Oireachtas and we hope to see that go through post the [GENERAL]election."
Looking to the future, Feargal O’Reilly says the outlook is strong. “Growth will be driven by a number of factors including the continuing need for asset managers to fill the financing gap traditionally provided by the banks for investments into real assets, infrastructure and credit strategies,” he says. “In addition, the global demographics of an aging population with more disposable income means individuals need to invest and save more for old age.”
He envisages some key trends coming to the fore. “ESG [environmental, social and governance] is firmly on the agenda of all asset managers and service providers as they develop new strategies and services – green and sustainable investments are the future. We also see a shift in investor appetite to passive and alternative assets. Demand for passive and exchange-traded fund strategies is growing and the need for higher yields is increasing investments into alternatives.”
Young agrees. “We’ll continue to see strong demand in growth products like ETFs [exchange-traded funds] to meet investor demand,” he says. “2020 will also bring a strong focus on sustainability with further progress towards impact investing strategies, including ESG, as products are reshaped for increasingly socially-aware investors. Finally, technology solutions on offer to investment managers will continue to become increasingly sophisticated.”
But there is no cause for complacency, according to O'Reilly's KPMG colleague James Casey. "We live in a competitive world where the asset management industry is constantly evolving to deliver new and better products for investors – the local industry needs to continue working with the regulator and legislator to ensure we remain nimble and at the forefront of these new developments."
“We can take nothing for granted,” Lardner concludes. “The fact that we have grown to become a large industry means that it requires more and not less attention.”