Ireland is capitalising on its alternative and retail funds expertise to position itself as the global leader in green asset management, explains Mike Hayes, head of KPMG’s Energy and Natural Resources team.
Green asset investment takes on many different forms. Renewable energy projects are still, by far, the most popular for investors – particularly wind and solar projects at a near operational stage. Green funds are also investing in carbon trading projects, and cleantech opportunities such as, electric cars and micro-energy generation.
There are a number of macro developments that help explain why Ireland is ideally placed to avail of this opportunity. Firstly, investors, including large pension funds, institutional, and other classes, are participating in funds that invest in green assets particularly in the renewable energy space. Such investments are attractive to investors for the following reasons:
- They produce stable cashflows over a 20 to 25 year term, and therefore, are particularly attractive for pension investors
- A significant part of the renewable type investment is supported by Government incentive measures such as ROCs in the UK and by Tariff regimes in other parts of the EU
- Investors are seeking new asset classes to invest in which present low risk stable returns in excess of deposit rates
- Power Purchase agreements are typically entered into with highly rated utilities thereby reducing counterparty risk.
Secondly, these investors will usually require a collective vehicle to hold their assets in an appropriate jurisdiction. Such investors face a choice between unregulated jurisdictions such as Cayman and Delaware, or regulated jurisdictions such as Ireland.
What is very clear in the global marketplace is that funds selling to European institutional investors are increasingly required to offer regulated structures for two reasons; firstly, to meet internal governance rules which require investment only into regulated structures and/or listed products and, secondly, because of the Alternative Investment Fund Managers’ Directive (AIFMD) which will likely precipitate a move to regulated structures.
Because of these developments, we are likely to see much greater use of European regulated structures – in particular the various Irish fund models that are currently available.
This presents considerable challenge for promoters and asset managers in that US and Asian investors are comfortable with the unregulated offering while European institutional investors – taxable and non-taxable – will generally prefer a regulated platform. Ireland has a number of key competitive advantages, highlighted in this article, which will help to attract many of these funds to this country.
Certain asset managers are setting up dual structures – one for the non-EU and one for the regulated European investors, thereby offering greater flexibility but greater complexity.
Ireland has already emerged as a leader in green asset management as evidenced by recent announcements from some global asset managers. For example, Blackrock has established its renewable power investment front office capability in Ireland and many others, particularly funds, have domiciled their cleantech and green funds in Ireland.
Another example is Kleinwort Benson Investors which has opted for Ireland as the location for front office green asset management.
Steve Falci, Head of Strategy Development in Sustainable Investments with Kleinwort Benson Investors explained: “We are very pleased to have established a specialist environmental equities team in Ireland. Ireland already has a world- leading funds industry and offers us access to the talent we need to grow our business. We are incredibly optimistic about this sector and see the potential for Ireland to be the global leader in green funds – and in a relatively short space of time.”
Other companies that set up asset management operations in Ireland and have a strong green fund presence include Mediolanum and Marshall Wace Asset Management. The fact that these companies are headquartered in locations across the globe from the US, Italy and the UK, demonstrates Ireland’s attractiveness to managers across the globe.
However, what is perhaps more revealing is the rapid growth in this sector. In the past year and a half, green assets managed from Ireland have doubled and in the past four years have tripled. When green funds managed, domiciled and serviced in Ireland are considered in totality, then Ireland is responsible for at least $10 billion of the global green funds under management.
So, why are these funds coming to Ireland – and at a rapidly increasing rate? Ireland has a well-established, world-class funds industry that includes the globe’s leading custodians and administrators, an open and robust regulatory regime and clarity on the tax treatment of funds – and these are key differentiating factors from other competing jurisdictions. More than 850 fund promoters from over 50 countries have chosen Ireland as their international hub. Irish fund administrators service assets from almost 170 countries.
Another critical reason why Ireland is moving centre stage is due to the success of a number of Irish companies that are active worldwide in the renewable and green enterprise areas and are able to bring their experience and credibility to bear on the management of green assets. These include global leaders such as Mainstream Renewable Power, NTR Plc, various semi-state organisations and some of Ireland’s foremost industrial companies that are leading R&D efforts in developing energy efficient solutions.
Persons working for these organisations have developed projects all over the world from Ireland to China and Chile, and this expertise is invaluable to green funds. This access to talent is the key difference between Ireland and other competing fund locations, where there is no track record of developing green assets either at a local or international level. This pool of talent will be supported in the years to come as a result of Ireland’s concerted effort in the creation of educational programmes to develop new talent in this area.
There are other obvious reasons why managers and promoters chose Ireland – its optimum time zone which means it can do business with Asia in the morning and the US in the evening providing a 24 hour service; an open and transparent environment (Ireland was the only international funds centre to appear on the original OECD white list of countries that are in compliance with internationally agreed tax standards); and with a continuously expanding tax treaty network of some 60 countries, Ireland has one of the most developed and favourable tax treaty networks in the world. Add to this the fact that Ireland is the only native English-speaking country in the eurozone.
Bridging the Gap
There are a number of different ways in which green asset managers can use the Irish Fund infrastructure including the following:
- Managers can establish the fund structure in Ireland in multiple different types of fund structures to meet different requirements
- Ireland can provide the holding structure which holds the various green investments on behalf of the green funds
- The fund manager can locate some or all of the investment management function in Ireland; as such expertise is present and flourishing in the country
- Other support can be provided from Ireland such as administration and custodial services.
The Green IFSC initiative was set up in Ireland to capitalise on Ireland’s increasing attractiveness to green asset managers and international financial services generally.
This Government-supported initiative is a public-private partnership to position Ireland as the global centre of excellence for green finance and green asset management.
This initiative is supported by all key participants such as the global banks which nearly all have existing operations in Ireland, by fund managers and by the principal operators in the green enterprise sector.
In addition to green asset management, other areas of focus of the green IFSC project include:
- Project bonds issued out of Ireland
- Securitisation of green assets
- Insurance services to the green sector to build upon its already world-class offering
- Playing a leading role in various aspects of the carbon markets
Reaching the Peak
The vision is that Ireland will become the global hub for green renewable industry finance with a very strong funds management sector managing green assets globally.
This is an example of Ireland, not withstanding its domestic financial woes, looking to new markets to continue its impressive growth in international financial services.
It is worth noting that the last time Ireland faced considerable domestic economic challenges, the notion of an International Financial Services Centre (IFSC) was born.
2012 is the 25th anniversary of the IFSC and today it is the world’s number one alternative funds centre servicing more than 40% of the globe’s hedge fund assets.
Ireland is also the fastest growing retail domicile in Europe. In 2011, Ireland attracted twice as much new monies as all other European domiciles put together and is the fastest growing UCITS domicile up 500% in the past 11 years.
Ireland’s fund industry from a standing start, has grown to close to €2 trillion. In this context, seeing Ireland as the global leader in green finance and green asset management is nothing more than a natural progression. Ireland is leading the challenge to become the global centre of excellence for green assets. We have already grown an international financial centre before from nothing. This time we have 25 years of experience, expertise and innovation to build upon.
Mike Hayes is a Partner with KPMG.