My Experience Of Working In Malta by Dermot S. L. Butler
Speech given by Dermot S. L. Butler
at the Malta Alternative for Hedge Funds Seminar, Grosvenor House, London
17th May 2007
Good afternoon Ladies & Gentlemen, I am here to tell you about my experience of working in Malta.
The simple answer to this implied question is that my experience has been excellent and I can honestly say that there is not the slightest element of sycophancy when I make this statement.
For those of you who don't know Custom House, I should explain that we are a Dublin based alternative investment and hedge fund administrator and, indeed, we call ourselves The Specialist Fund Specialist. And, because we are an Irish company, we are regulated by the Irish Financial Regulator (the Irish Financial Services Regulatory Authority IFSRA) and authorised to carry on the business of an administrator of Collective Investment Schemes under Section 10 of the Irish Investment Advisors Act of 1995.
We currently act for over 260 funds or sub-funds, for over 110 clients, by which I mean managers or promoters of funds, with total assets under administration recently reaching $25 billion.
In May 2005, we opened a representative office in Chicago and in January of this year, we opened another representative office in Singapore. This enables us to offer a virtual 24/7 service.
We are a privately owned independent company and, therefore, when we set up in the mid-90's, we were competing with many much larger institutions and the only way to obtain clients was to offer a more personal service and, in my judgment at the time, to target start up managers. In order to attract start up managers, we created a Fund Formation and Set-up Department, which still flourishes.
It doesn't take much imagination to realize that we, therefore, have considerable experience of those onshore and offshore centers, which offer a hedge fund domicile. These include primarily the offshore ones Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Isle of Man, as well as the Channel Islands. Ironically, we have never set up a fund in Ireland, for reasons that I will explain in a few minutes.
So why Malta?
I first went to Malta in early 2005 in order to visit a couple of clients who were investment managers established on the island.
I have to admit that I was very impressed with the enthusiasm of these clients we were working with, who, in turn, introduced me to one of the island's leading attorneys. This was before the magical 5th of May - a significant date in Malta's calendar, being the day it became a full member of the European Union. It was this EU membership that was, I think, the catalyst that first encouraged our clients to look at Malta as a viable hedge fund jurisdiction, in competition with all those I have just mentioned.
The next time I came to Malta, I was introduced to several people from the MFSA and the banking community in Malta and also met Professor Bannister. I was very impressed with their enthusiasm and keenness to attract hedge fund business to Malta, providing, of course, the hedge fund community respected their rules and regulations. Without wishing to sound patronizing, I was somewhat surprised at the sophistication of the regulations already in place, but that was explained when I was told that Malta had undergone some ten years of preparation with regard to the regulatory environment and, in my opinion, they now have a strong, but flexible regulatory regime.
In my experience, the Maltese regulatory authorities have shown that they are determined to ensure that any player in the market complies with the regulations but, at the same time, they have shown a pro-business attitude and flexibility with regard to regulation, which I find very encouraging. By this I mean that, if there is some wrinkle in the law that could affect the management of the hedge fund adversely, but adds no advantage to any third party or increased security for investors, then the authorities would be prepared to consider and, if necessary, to derogate an amendment or even take steps to change the law.
All of this encouraged us to recommend Malta as a jurisdiction to several of our clients and with some success. Of course, there are other factors that have to be considered, but in the balance, several of our clients have concluded that Malta was a wise choice. Those other factors included, inter alia:
i. Costs
a. Establishment
b. Ongoing operational
ii. Attorneys
a. Capability
b. Capacity
iii. Auditors
a. Capability
b. Capacity
iv. The amount of time it takes to get a fund set up
v. Comparative regulatory regime; and of course
vi. The reputation of the jurisdiction
With regard to establishment cost, we have found that Malta is generally on a par with the Caribbean Caymans, Bahamas and BVI, but less expensive than Bermuda and certainly less expensive than the Channel Islands.
I mentioned Dublin earlier and one of the reasons that we do not act for any Dublin companies, apart from the fact that we are not a custodian and do not have a custodian bank within our group, is that the organizational costs of a Dublin fund are horrific, especially for a relatively small start-up fund and the annual operating costs are very high. For example, it is unlikely that you will get two independent directors for much less than 30,000/40,000 and that is before you start thinking of the cost of a custodian, administration (which is unlikely to be less than 75,000 p.a.) and audit, let alone ongoing legal fees, which can mount up to horrendous numbers.
Ongoing operational costs in Malta are, on the whole, probably slightly less than in the Caribbean, but definitely less than Bermuda, Channel Islands and the Isle of Man. And, of course, when compared with the cost of operating a fund in the two main EU competitors Dublin and Luxembourg Malta is far more attractive.
We have found both of the attorneys and the one audit firm that we have used, to be as good or better than in any other jurisdiction we have experience of. In my judgment, Malta, for the foreseeable future, will have a sufficient pool of staff to meet capacity requirements.
As for speed in setting up, Malta is on a par with most other jurisdictions providing you have all your 'ducks in a row'.
I have been involved with two Maltese law firms and both of them have proved to be excellent. Hedge funds today are much more complex than they were, even five years ago, let alone ten years ago, and I was very impressed with the manner in which the lawyers were able to pick up the strategies and, in the case of one particular fund that we established here, explain a very, and I mean very, complex organization and the steps that needed to be taken to launch the fund. I am pretty sure that the attorney, in particular, had never seen a strategy like this before and there are many in the audience today, I suspect, who could not have picked up that ball and run with it, as he did.
Timing
Providing there are no complications, it should be possible to set up a fund in Malta within two weeks. This is an advantage over many jurisdictions, although, to be fair, you can set up a fund just as quickly in the Cayman Islands and the Channel Islands offer a virtual turn-around solution, but that does not take into account the amount of time needed to draft the relevant documentation before launching the fund. It goes without saying that, if you have a fairly standard long short equity fund, the likelihood is that an existing template for an Offering Memorandum can be used with, perhaps, just some changes reflecting the fees and the actual trading strategy and, of course, details of the other players. Such a document should be able to be introduced to the authorities with an expectation that the fund can be launched within two weeks.
In terms of comparative regulation, I would suggest that Malta is probably closer to Ireland than it is to the Channel Islands or Bermuda and certainly there is a perception that the regulation in the EU is stronger than that of the Caribbean and I think it is a valid perception.
Reputation
This is an interesting one. I say this because when we first decided that Malta was a good jurisdiction, no one, in the hedge fund industry at least, had the slightest idea where Malta was and, therefore, it didn't have a reputation, good or bad. Without wishing to point fingers, some of the other Mediterranean jurisdictions do have a reputation and, by association, those reputations are not first class. Therefore, the effort needed to persuade a conservative institutional investor that Malta was an attractive domicile was different to the one that might be needed to persuade them that they should open up in the Caribbean. But, my experience is that, once they have seriously looked into Malta as an alternative jurisdiction, all our investors, without exception, have agreed that Malta would suit them. One major investor turned Malta down, but that was because they already had a string of funds in Luxembourg and they decided that they would just add to their quiver.
So would I still choose Malta today?
Yes - in what I believe is referred to as, a 'New York Heartbeat'.
It can be quicker to establish a fund in the Cayman Islands and the Cayman Islands now has a very clean reputation and many people still choose it because the hedge fund community is familiar with it. However, certain institutional investors and particularly European banking institutions still have long elephantine memories back to the days 25 years ago and more, when you could pick up a Dollar bill in the Caymans, sniff it and feel better already. I am not suggesting for a moment that that environment still exists there, but it is difficult to change conceptions of conservative bankers, once they have imbibed them.
Another reason for selecting Malta as a financial center, as I have already mentioned, is that they have a large pool of qualified, well-educated staff, including, already, a pool of experienced lawyers, auditors and other service providers. When Dublin first launched the IFSC back in 1988, no one envisaged that they would attract business to such an extent that they would, effectively, price themselves out of the market, because the surplus amount of staff then available to a new IFSC firm has now turned into a deficit. Indeed, companies are now opening satellite offices in other parts of the country - and in our case, other parts of the world - in order to try and attract educated staff at all levels.
I, personally, think the Isle of Man, which is promoting itself as a financial center, will have this problem soon and, over the years, we have seen it occur in the Channel Islands on a fairly regular basis. Therefore, I believe that the prudent move for somebody wishing to get involved in a stable, cost effective jurisdiction, with the EU sobriquet, will be to select Malta, because it has a population of 400,000 people and a substantial and currently refillable pool of educated staff and/or graduates, with the appropriate qualifications.
Whilst on the subject of graduates, potential users of the island should also be encouraged by, what I understand to be, the very positive attitude of the Government with regard to assisting candidates to obtain a third level education.
So that is a brief description of 'My Experience of Working in Malta' and the commercial attractions of doing so. But I feel that I should, as a final remark tell you that, in my experience, it is an extremely nice place to work or even just visit for Board Meetings (and you should do that visit for Board Meetings, as a matter of good corporate governance). I find the island to be charming, the people to be charming and, for the most part, the weather to be charming and the history of the island to be fascinating.
It is the first place that I have visited in several years - and I assure you that I have visited numerous places for various reasons where I have felt comfortable and safe enough to have been tempted to purchase a property and, indeed, I recently sold an investment property in Dublin because I feel the market is too 'hairy'. It is my feeling that buying a quality property in Malta will prove to be a good investment for several years, or until Malta develops the Dublin syndrome and prices itself out of the market. In the meantime, it is a splendid place to set up and domicile a fund.
The only drawback that I can think of and that is probably because I suffer from a standard English education, is the language, which is extraordinary, but then I have a problem understanding what people say from Birmingham or north of the river in Dublin.