What is the solution to the fund market's liquidity woes?

Transcript:

Brandon (00:04.952)
Hello and welcome to today's episode of the Guernsey Finance podcast, the show where we bring you interviews with top thinkers from across the global financial services industry. For those of you who are not familiar, we dive into emerging trends and themes from sectors including investment funds, captive insurance and everything in between. My name is Brandon Ashplant. I'm technical manager at funds and private wealth at Guernsey Finance, the island's promotional agency for the financial services sector.

Today I'm talking to Martin Scott, the CEO and founder of Core Fund Services. Core Fund Services is a specialist provider of corporate governance, fund administration and accounting services and is headquartered here in Guernsey. Prior to setting up Core, Martin had over 20 years experience in the fund administration sector here on Ireland, including almost two decades of company direction experience holding both executive and non-executive positions on local independent firms, as well as global corporations.

We'll be discussing the impact of global macro trends, the increasing interest in VC that has persisted for some time now, along with the rise of secondary markets and more recently also deep tech as well. without further ado, thanks for joining us today, Martin.

Thank you very much, Brandon. And I never really thought of my career in terms of decades before, thank you. That's me for very old.

Apologies about that. Firstly, can you just tell us a bit about how and why you set up Core and why you chose Guernsey to headquarter as well?

Martin (01:36.846)
Yeah. So why did Core come about? As you're aware, an option, your listeners are aware, there's been an awful lot of consolidation going on in the fundamental industry and the fiduciary world as well, generally. I think the time is right for a new entrance, if I'm honest. And I've always been a bit of a disruptor in the industry. And I saw this as great opportunity to be a new entrance and really disrupt the market. What does Core stand for?

I think to me it's three things that I say are differentiated. So first of all, what's the rule of a fund administrator? A fund admin is at the very Core of a fund's operations. So that's what our is. Our rule is to be there and coordinate everything, whether it's a client, an investor, a regulator, intermediaries, that's our rule. So we want to be the best at being that. The second rule is our Core values. What do we stand for? And for us, it's about whoever we deal with, whether it's a client,

everyone to the milkman who delivers the milk, can we give them a positive experience in their day? Whether it's helping with getting a deal over the line or whether it's just being good people and having a friendly conversation putting a smile on people's face. It's really important to me, particularly in the modern kind of environment, that that's how we do things. And the third point, and probably the main differentiator in my eyes, is that Core stability. We intend to be here for a long time. You know, an average funnelized say in private world is 10 years.

We want to be here from 10 years time, 15 years time. So our clients and future clients can basically rely on us to be there and support them through the lifetime of their funds.

Right- has your experience been operating out of Guernsey? Regulatory terms, the general business environment, how does that fare up and weigh up?

Martin (03:22.83)
I think first of all, why do we set up Core in Guernsey? As you rightly say, I've been here for decades. But in all seriousness, why Guernsey? I've worked for local independent firms. I've worked for big global firms. My experience of doing those things over the 20 years I've been in the industry has proven to me that actually Guernsey is a great place to do business. I'd rather be here than pretty much every other jurisdiction I know. Various reasons for that. One is the infrastructure. I think we've got a great

quite a great infrastructure. I will throw a positive word in for the regulator. You know, I found them very engaging. As you know, for me personally and the Core emphasis about the values and engagement with people, I found our regulator very engaging. When I was looking to set Core up, I went in to see them in advance. I gave them the chance to engage with me to find out what we wanted to do. They did so. And because of that, you know, they gave me their initial feedback, advice as to what worked for them, what they wanted to see from Core.

And as a result of us working closely with them, we got regulated in seven and half weeks, which I think is a great regulation time for a fund administration business.

especially when you way up against competitive jurisdictions that slightly more bureaucratic perhaps.

Yeah, I mean, there are jurisdictions whereby I know if I set up a call there, would take me a minimum of a year. That's not even just setting up a company, that's actually the regulatory process itself.

Brandon (04:48.398)
At Core, your focus, I think I'm right in saying, is primarily on that sort of administrating of closed-ended funds side. What macroeconomic trends, have you identified as having the greatest impact on that sort closed-ended market sort of space, if you like?

Over recent years, the closed-ended space for fundraising has been particularly tough. It all started really probably with COVID when you think about it. We're still seeing that five years ago as we were talking about earlier on, which is quite surprising. But we had COVID and that obviously initially put a bit of a block on things. Then we've had subsequent issues with Ukraine, Gaza, and all the fallout politically and on a world economic kind of aspect that fall from that.

2024 was very much the mentality that you heard in the industry was survive to 25. I.E, it's going to be another tough year, but we think everything will start to improve in 2025. Whether that will be seen, we don't know, but let's find out. And the reason I think in 2024 was due to the major elections that were going to take place across the world and all the major economies. So like I know, whether you agree with whoever's been elected, wherever.

It's all been done. So now actually we can see how those economic policies play out and will they actually benefit fundraising. I don't think it's going to happen immediately. I think there'll be a, maybe the first six months will be a bit of suck at and see and investors will then start to decide if they're going to release the fund and if they like the way the markets are going. But more generally, I guess from my perspective, there's definitely more interest from asset managers.

We're seeing existing mangers going out to market now. We're seeing new mangers come out with new ideas, new asset classes. So I think there's definitely a lot of positive signs. So we'll see how they go.

Brandon (06:34.742)
We've had several guests on recently who have talked a lot about VC, that as a rising niche or subspace if you like, in particular with maybe a dried up listing space and that sort of thing, spurred on by those trends. Why do you think VC and private capital managers look to Guernsey so often? What about the island makes it so attractive for those sort of investment flows?

VC is interesting. obviously, as I say, it calls for a new business. So we actually closed our very first fund, was a venture capital fund. It was an interesting one as well because it was an existing manager in real estate who basically wanted to diversify their portfolio, which again ties into how people are diversifying and new ideas come to fruition. Even just this morning, I had a meeting with a potential new manager who's looking to do VC funding in Guernsey.

Um, so that's great. And it does tie into the, I think it was a, Proskauer I think, who, who issued the, the kind of the reports identified that I think was half of all VC funds in the period were actually Domiciled and Guernsey. So it all fits together. Um, why? I think one of the major reasons for that is, um, is actually Guernsey is a very flexible place to be. You know, I think, um,

If you're a venture capital manager, you're probably looking at smaller funds, you're looking for greater flexibility, you're looking at more flexible regulation. And actually I think that's something that we've done. We've targeted that. And when I say we've targeted, I mean as an industry, including the regulator. And there's been an appreciation to handle VCs, we need to be more flexible. I think the PIF regime is very good, our private investment fund scheme.

We can target 50 investors in the fund itself, but you still go out to even more. you're giving us that we're VC managers lots of scope to go and actually fundraise.

Brandon (08:29.774)
Right- most of, or not most, but many of your clients are based in emerging markets. I think I'm right in saying, and with investors looking to flow their respective capital both back into those markets, but also out of them as well. What do you think they typically look for in a fund admin and by extension a domicile as well?

I think emerging markets are an interesting thing because there's often higher risk factors maybe than you get in other areas, therefore there's more challenges. I think we have, we got our regulation right, I think is key to that, because we do have to mitigate the risks associated with high risk jurisdictions that emerging markets may have. But I think we do that in a sensible way. And I think

for the actual client investors, they feel comfortable that we give the current level of regulation. For the managers themselves, they appreciate the fact that there's still sufficient flexibility for them to actually do business in a realistic way and move as quickly as they need to move.

Yeah. And there's no question that the industry has been going through a hard market, if that's the right term to use, maybe not, for fundraising for several years. we talk about a of private capital and the sense of this listing space having dried up in the last 18 months, maybe longer actually, maybe more like three years. What should I say, do you think differentiates Guernsey in being able to free up that fundraising?

I think it's, so I recently did an article for for the drawdown magazine. And my, my big, kind of slightly cheesy kind of equation I did, because I had this idea in my head of Einstein equals MC squared idea. And I said, well, actually, could we do something a bit similar for the Guernsey funds? And it was speed to market minus red tape equals about 400 tons.

Martin (10:30.08)
I think that's what Guernsey does well. That's what Guernsey can offer. We have speed to market. We have effective regulation. But that regulation also gives us fast track programs whereby the regulator can give us a fund regulation in one day in some cases. We then have less red tape. So if you're within the EU, for instance, obviously you have to comply with all aspects of AIFMD. Well, we still have private placement

in Guernsey and so we can use that. We are subject to certain aspects of AIFMD rules, but it's much like the touch. So again, we can target European investors in the market, compensated a full scope EU fund, which is subject to all costs. And it's, I think the study by Corbus, I think it was, which says 3 million, of course, 3 million euros in additional costs of the course of the fund, which is going to affect your terms quite significantly

particularly if you're maybe not a huge manager. But it's not just that to me, it's the ancillary things that people don't necessarily think around. So if you're within scope of EU rules and you're also in scope of things like EMEA for hedge fund rules and such. So again, there's more reporting on all these different areas which just keep mounting up, mounting up. We have great regulation. We're not some kind of, well, there's no regulation there. We have proper regulation, we good regulation, but I think it's practical regulation, it's pragmatic regulation.

And that, as I say, plus the speed to market gives better returns. And that's a story that I think both GPs and LPs want to hear.

Yeah. And something we have heard a lot about as the promotional agency, and I know that this rumbling is in the wider industry and this has been the case for a long time now, and we've touched on it already. Is this sort lack of liquidity in the market? Is this something you're seeing? if so, is it a symptom of a wider trend or is it a blip? What's your take on that situation?

Martin (12:31.584)
Again, I think it's fundamentally down to the macroeconomics. For funds have been in operation for quite some time. So equally people don't want to fire sale assets when money is already tied up. So how do we free up money? So we see a quite significant rise in certainly continuation funds and secondary funds. there's some major continuation funds. mean, a lot of the major law firms are working on an awful lot of continuation funds, which is great because it provides liquidity, but also provides the asset buyers a chance to...

not have to exit with fire sales and therefore still generate good returns to their investors. But I think in terms of the liquidity market, it's still fundamentally driven by the macroeconomic conditions. But again, as I said before, think hopefully in the coming months, we'll start to see that starting to loosen up as hopefully people become comfortable with the new economic policies of the world. But again, I love the fact that continuation funds have come about because it shows as an industry

We have good people who are finding solutions to problems. And that to me is why the financial is so good. Because the intelligence in the industry and the people involved, we find solutions to things. And again, with Core, it resonates with me because it's disruptive. We're not just accept, well, we can't anything about that. Actually, no, can we do something about that? Can we be better? Can we find solutions?

And to what extent do you think that continuation funds are the answer to that? Because obviously we've seen the rise of sort of secondary markets and even private markets as well. where does that sit in sort of being, I guess, part of the equation, if you like, to the answer?

In terms of my equation, I think it is because it gets the better returns. The risk of a fire sale is horrible if you're a Do you want to just sit on some kind of ghost fund that has to carry on for years and you're not doing anything and the managers are only getting their fees, the investors are not just seeing their IRRs keep dropping. This is an effective way of realizing and it benefits everybody.

Brandon (14:28.29)
As part of this, debt funds have also become incredibly popular, be it direct lending, mezzanine, distressed debt. They all seem to be on the rise and they're all areas that you work in as well, I understand. Why the rise?

I think there's a need for new means of debt. I've seen asset managers, including in Guernsey and debt providers in Guernsey setting up and looking to do funds in Guernsey because to provide debt liquidity that isn't currently there or isn't being offered in the same way they used to be by the traditional lenders and banks. So there's definitely a marker for it. I'm not seeing a huge amount yet, but

think it also depends on liquidity. The harder it becomes for the banks to lend, more likely you're going to see more and these debt providers spring up as well and that's a big debt bonus.

And it's clear that another trend to speak of is there's been a rise in interest in deep tech. And of course, as part of that AI, and there's a lot of buzz around AI, no doubt, whatever your thoughts are, technology is shaping and reshaping the way business is conducted across a range of sectors. How has Core responded to that?

Well, first of all, we have a very simple philosophy. One is that we'll have fewer systems, but better systems. So in that respect, AI, tokenisation, crypto, all those kind of things are of interest to us. But I'm also just mindful of not kind of diving headlong into them until I know that they work. And it's really important for me that we do that. So we're keeping a, we've got really good systems as it is, but we're always looking to improve them. But we'll also keep a very close eye on what can be done. I think at the moment, the AI

Martin (16:19.362)
materials and systems available to us are probably not there to the extent I would like them to be. But this is not because they're not very good. It's more the fact that it's the industry that we're in. We operate in a very high standard industry. There's very little that we do that is kind of basic, just kind of getting things through internet, whatever, and providing a generic report. Most of the stuff we do is very specialised and specific. So that kind of AI is not ready in existence yet for us.

But I do think there's great scope for it. For instance, the one I keep challenging tech providers to get for me is a piece of AI that will take a set of IFRS accounts and convert them into US GAAP. That's one idea way I will have made it in my world. I'll be loving that. So I think we do have to be mindful of getting the right AI tech at the right time and identifying the good ones when it comes along, rather than just being sold things are not necessarily going to fit to our actual needs as a business.

But also we need to look at things like tokenisation and crypto. Like or not, they're coming. And I think we need to be mindful of getting the right tokenisation and the right crypto. And that means in terms of how we regulate it, to be honest, largely is the major thing. How do we know the origins of it? How do we know how it works? I think at the moment for laymen like myself and laymen in the industry, it's probably still too much of an unknown.

But think as an industry, you also need to read it and understand it.

And switching gears now slightly and looking ahead, suppose, what do you see as the most significant trend in asset management and how are you preparing to address them or capitalise on them if you see opportunity in the space for Core?

Martin (18:06.478)
I think actually the major trend that I've seen probably the past 10 years for me, for asset management firms, I guess more specifically, has been probably the lack of successful planning in place. Some have done it, some have kind of realized that they were going to have issues if they didn't, but others haven't done that and quite a lot of them. And I think as a result, we've seen more new managers spinning out in recent years. They have the experience, they've also got the black book of network and connections.

I think we'll see more of that, I'm honest. think, again, hopefully it will all tie into the macroeconomic problems we've had, starting to ease and the funds and the credit starting to come out. And again, the new ideas as well that come along with that. So that to me is probably the major challenge for managers themselves is how do they incentivize to make sure they don't lose their next generation of people. But on the flip side to that, if they do lose them and they end up going and setting up themselves,

There's opportunities for our industry and Core and our peers to go and capitalise by being service providers to these people.

And we obviously touched earlier on the VC side as to what I suppose those managers or those even investors, I suppose, look for when it comes to a domicile. In a similar vein, what's the trend around the private capital manager side? What do they look for and why they, why Guernsey effectively?

Why going to the private capital? That has been, that's been a major selling point for me personally for a number of years. Cause I think, I think going to great for private capital. And what I sell it to is, you know, again, going to the new managers, emerging emerging managers, or even established managers. I think our private capital market is a great strategic opportunity. particularly for a new manager who wants to set up a fund, but hasn't got a track record. It's a way they could maybe do.

Martin (20:04.514)
go and do a club deal, get a few people together, say, we've got this great resource, great investment, get some investment and we'll bring you together, we'll run this one investment for you. And then we'll start establishing a track record and they can do it with various SBBs. And then obviously, obviously you do that two, three times, all of a you've got an investment track record, imagine three investments for however, 30 investors or whatever. It's great. The other option that as well is you can have say an existing major manager

who is trying to build a strategic relationship with a major LP. The LP says that, okay, your sector is new to us, but we're going to back you to manage a portfolio for us because you don't really fancy going into a blind pool fund yet. So, and I've seen established real estate and P.E. managers do that, whereby they've been given a significant portfolio or significant war chest, if you like, to go and buy a portfolio manager and basically prove that manager that they can do it, prove the LP they can do well, and deliver on that.

Hopefully off the back of that, they're gonna say, yeah, we'll come into your next funds then. So I think it's a really good product. It's good because it's simple. It's, again, I love the rules and guns, it's so simplistic. It is, know, if you've got spread of investors and spread of risk, it's a fund. If you haven't got spread of investors, but have spread of risk, it's not a fund. If you've got spread of investors, but no spread of risk, not a fund. I think that's great. We can take it to market so simply. And one of my favorite stories actually about a client I had is...

Well, think about five years ago, they came to me and said, oh, Martin, we'd like to set up a fund in Guernsey. Oh, brilliant. Yeah, I love that. The problem is we need to set this fund up in six weeks time. Okay. With the greatest will in the world. For us all to really smash out the park, get the investors in, get regulators in six weeks, that's not going to happen. Yeah, it has to happen, We've signed it on a deal. closes in six weeks. So, okay, right. Don't worry. All is not lost. Here's what we're going to do.

And we basically did a club deal with them to warehouse that investment. And it was quite a big deal. had to get quite a lot of investors into it. About a month later, they were very happy, you know, how, how well it worked. About a month later, they came back and said, we've got another deal. Can we do another one of those club deals? Okay. I think five years later, they're still talking about launching a fund, but never got around to it because this is just working for them and they're big deals as well. They're not even just small, you know, one or two million transactions. These are multi, multi hundreds.

Martin (22:30.286)
So, yeah, I think it's a great story, particularly for new managers.

Excellent. And just to find a question to finish, what are you looking forward to in 2025 and what's on the horizon for the year ahead at Core Fund Services?

I think what we all hope for in 2025 is the macro picture improves and liquidity and fundraising improves. I everybody wants that. For Core, I'm just loving the journey to be honest. I want to see where this journey takes us. There's a lot of interest in our story because we are different, because we're unique.

the personal touch and the long-term kind of plan that we have is what so many people want to hear. And I'm loving where that's taken us. I think as a final point, and you know this, I'm asking Guernsey Finance to make me the new Einstein with my own special equation of the speed to markets. Can't even remember now. Speed to market minus red tape equals better fund returns. That to me is Guernsey.

That's how we should be positioning ourselves for 2035.

Brandon (23:47.758)
Excellent. Well, thank you very much for joining us on the podcast today. If you would like to find out more about what Guernsey has to offer, visit our website at guernsiefinance.com. If you want to learn more about Guernsey's success in sustainable finance, tune into our sister podcast, the Sustainable Finance Guernsey podcast. If you'd like to hear about Martin and more from Core Fund Services, you can check out their website. We have more in our description in the show notes. Thanks also to you for listening. If you enjoyed the discussion,

Thanks for having me.

Brandon (24:16.808)
We have a backlog of interviews on the Guernsey Finance podcast channel. You can check them out by searching Guernsey Finance on your preferred podcast platform. We look forward to welcoming you back to the podcast soon. Until then, it's goodbye from Guernsey.