Country report: Furthering funds in the BVI

By Jacques Bofferding, Regional Managing Director, Prime Fund Solutions

Fortis began 2006 as the world’s third largest administrator of hedge funds and funds of hedge funds, with US$215bn of assets under administration and hedge fund administration operations sites in seven locations worldwide. During March 2006, with the goals of furthering its global presence and continuing to build its capacity, Fortis acquired Hedge Funds Services (BVI) Ltd (‘HFS’) in the British Virgin Islands. Why did Fortis choose the BVI? How does Fortis expect to lever this 25-person operation to further advance its leading position in the hedge fund administration and banking industry? What does this move tell the market about the alternative fund administration industry?

The BVI is now enjoying widespread popularity in the hedge fund industry. With over 4000 regulated funds, the BVI recently surpassed Bermuda to become the second largest hedge fund jurisdiction in the world – behind the Cayman Islands (with 8000 funds). Hedge fund managers and the underlying investors are attracted to the BVI for a number of reasons. Setting up funds in the BVI is quick, easy and cost efficient, but that’s only half the story.

A central aspect of the jurisdiction’s appeal is that the BVI has demonstrated its commitment to continually developing its regulatory structure. The legislation in the BVI meets the key criteria of protecting investors, ensuring that markets are fair, transparent and efficient, and reducing systemic risk. Efficient and cost-effective structures such as the Segregate Portfolio Company, which offer cross-class protection, are very attractive to alternative investment managers. When compared to other jurisdictions, cost efficiencies are experienced in the BVI both at startup and throughout the fund’s lifetime.

Complementary to all of these positive attributes, the BVI also has an abundance of well-qualified auditors and legal professionals in the territory. Investment managers have a wide choice of service providers on the islands, but importantly they also have the flexibility to choose service providers that are located elsewhere. As previously seen with the development of hedge fund jurisdictions, reasonable flexibility for the investment manager ultimately translates into increased popularity of the jurisdiction. The BVI has done an excellent job at turning this bit of theory into a reality.

Fortis’ acquisition of HFS also lends us an insight into its strategy in the fund administration space. Fortis is taking active steps to develop and acquire capacity, and in doing so is taking care to maintain personalised service and the feel of small business. The Tortola, BVI office and its staff of 25 will continue to provide a high-touch service to its clients and provide Fortis with additional resources to continue efforts to support the full range of hedge funds – well-connected startups and established funds, single manager funds and funds of funds alike.

The Fortis acquisition also corresponds to one of the oldest plans in the financial services playbook – a standard financial service horizontal acquisition formula – namely, the acquisition of a similar business in a different geographic market. Fortis quickly consolidated the BVI business onto its global IT platforms. The Fortis systems gave the BVI clients improved sophistication behind-the-scenes and access to a greater variety of reporting formats. Fortis believes its BVI clients will enjoy a more satisfying administrative experience, benefiting from Fortis’ systems, global reputation and human resources.

HFS was founded in San Francisco in 1996, adding its BVI operation in 1999. For a number of HFS clients – those that started small and grew to be large funds – the timing of the acquisition was particularly fortuitous, in that they inherited a larger fund administration partner at a convenient time in their growth cycle. As funds grow, they generally start to become acceptable investment candidates for funds of funds, family offices and institutional investors. When the funds reach this stage they frequently find it necessary to switch to a top-tier, established administrator, driven by the requirements of the new prospective investors.

Fortis serves both hedge fund and fund of hedge funds (FOF). Its worldwide FOF client base is particularly extensive due to a differentiating ability to simultaneously provide administration, custody and financing (bridge and leverage) services. As a bank, it can be the appointed custodian for the hedge fund assets, while also providing billions of dollars in bridge and leverage facilities to FOF clients using the underlying hedge fund investments as collateral. Additionally, Fortis used its in-house banking offering to provide the BVI client base with more traditional treasury products such as bank accounts and foreign exchange facilities. As the banker, Fortis retains exclusive control over the subscription accounts to guarantee that all financial processes run smoothly. Going forwards, Fortis will be able to attract more substantial FOF clients to the BVI by providing a combined administration service that includes custody and financing. Overall, the added revenue production and improved control attributes of providing in-house banking to the new BVI clients resulted in a win-win situation for Fortis, its clients and their hedge fund investors.

Any successful business strategy must fulfill some sort of need in the market. This is exactly what took place with Fortis and the BVI. As it is generally accepted that most new hedge funds will be using a third party administrator, demand for quality administration services is on the rise. Anyone familiar with the market knows that many fund administrators have been running out of capacity to take on new clients. The number of administration providers who are successfully developing sufficient capacity to meet demand are increasingly few. In addition to organic growth and active global staff recruitment, acquisition is one of the many tools Fortis is using to assure service quality and maintain the capacity to take on new business.

The market for fund administration has experienced its share of growing pains over the years. Entrepreneurial ventures pop up with regularity and some of the more mature independents, such as HFS, are selling their businesses. Large and established players are not insulated from re-thinking their strategy, as evidenced by major market participants considering strategic alternatives and banks agreeing to combine. It may well be difficult for an investment manager to anticipate what might happen to his fund administrator given this environment. A good way to start the process of screening prospective fund administrators is to look for evidence of the provider’s depth of experience, institutional underpinning and long-term commitment to the industry.

References

Fortis is an international provider of banking and insurance services to personal, business and institutional customers. The company delivers a total package of financial products and services through its own high-performance channels and via intermediaries and other partners. The firm has 59,000 employees globally, a market capitalisation of €42 billion and a presence in 50 countries. The main activities of Prime Funds Solutions, the unit of Fortis dedicated to servicing the alternative investment community, include providing fund administration services from eight global operations sites and financing to fund of funds.