Flight to Gibraltar EIF funds

As more investors look for safe, well-regulated jurisdictions, Gibraltar appears an attractive alternative within the EU. For the accounting and auditing practices based in the territory, the growth in the experienced investor fund vehicle is shifting work away from more traditional domiciles.

Despite an increased interest in Gibraltar’s vehicle of choice for hedge funds, the experienced investor fund (EIF), the majority of audit and accounting work flowing to the locally based accounting and auditing firms is still firmly weighted in favour of the Caribbean jurisdictions and others in Europe. However, that could be changing.

Deloitte has seen a “steady stream” of work from new launches. According to partner Stephen Reyes and senior manager Jon Tricker, this has given the firm more confidence in the future for the jurisdiction. The scale of audits is still firmly weighted towards domiciles outside Gibraltar, but that is slowly changing.

As the general hedge fund industry begins to pick up with more launches planned in 2010, Deloitte expects to receive more Gibraltar-domiciled fund work as managers and investors in Europe shift towards the safety of EU jurisdictions. Both Reyes and Tricker believe Gibraltar will begin to benefit from this shift.

At the same time Reyes expects managers based in Europe to start looking closer to home for new launches and may even look to re-domicile existing Caribbean-domiciled funds. Fear of what the EU’s new rules regarding alternative investment fund managers will finally contain are adding to the uncertainty. Many are opting for what is increasingly being seen as a safe bet: an EU jurisdiction.

Tricker confirms Deloitte in Gibraltar is still working on audits primarily of funds based in the British Virgin Islands and the Cayman Islands but concedes that as more EIFs are launched it is likely they will start to become more numerous. Moves within the jurisdiction to start attracting more Ucits fund work could also bring increased domestic fund work to the accounting community.

Both say the combination of low tax, a well-regulated environment within the EU and the flexibility of the EIF should attract more funds in future.

At PricewaterhouseCoopers  (PwC) senior manager (assurance) Kristian Menez agrees that Gibraltar-domiciled fund work comprises the minority of audit work. Menez estimates PwC has around a fifth of the local market in Gibraltar and confirms a shift towards local fund structures. Like Deloitte, he thinks the financial crisis is encouraging a flight to EU jurisdictions for European-based managers and investment companies. He believes Gibraltar remains cost-effective in relation to Luxembourg and Dublin without loss of quality from service providers.

For 2010 Menez expects to see a growing number of Gibraltar-based funds replacing Caribbean work. “I do expect more work to come from the Caribbean but the increase in the Gibraltar side will be where our growth will come from in future,” predicts Menez. He also expects that once Ucits legislation is in place, Gibraltar may also start to attract more work from that segment of the market.

At KPMG director Michael Harvey is also positive about potential growth in Gibraltar, mainly through the EIF vehicle. The office was re-established in May 2008 with only three staff and is now up to eight and growing.

Harvey believes the jurisdiction should be “very appealing” with its low tax and clear regulation. Like other firms he thinks once Gibraltar updates its Ucits III rules and gears up for Ucits IV, the jurisdiction can expect more business. For Harvey, Gibraltar is a “powerful” story and expects to see more business coming out of the territory.

Michael Harvey, director of the KPMG office in Gibraltar, is equally positive about the prospects for its hedge fund industry. “We’re keen to get on the Ucits bandwagon,” he says, adding Ucits IV should also “open some doors for us”.

“What happens over the next 12–18 months could be important,” he says in reference to legislation expected from Brussels.

David McGarry, managing director, KPMG Audit, based in the Isle of Man but responsible for the Gibraltar office, is equally positive. He believes Gibraltar occupies a unique space. It has the characteristics of a major jurisdiction within the EU but with a cost advantage not matched by Dublin and Luxembourg. He also believes the EIF is an ideal vehicle for funds and expects to see an increase in the numbers of launches using the structure in 2010.

For him the AIFM directive is “good news” and expects Gibraltar to gain a great deal from any tightening of hedge fund rules.

In future McGarry expects Gibraltar to continue to attract quality business. Its small size means it will be limited to some extent but says the territory is far from close to capacity.