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

Transcript:

Brandon  0:04  
Hello and welcome to today's episode of The Guernsey finance podcast, the show where we bring you interviews with top thinkers from a cloth 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 of Funds and Private Wealth at Guernsey Finance, at the islands 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 island, including almost two decades of company direction and 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. So without further ado, thanks for joining us today, Martin.

Martin  1:18  
Thank you very much. Brandon, and I never thought of my career in terms of decades before. So thank you, that's made me very old!

Brandon  1:26  
Apologies. So just firstly, just you know, can you just tell us a bit about, you know, how and why you set up Core, and why you chose Guernsey to headquarters as well?

Martin  1:36  
Yeah. So why did core Come about? As you aware, and as an opportunity, your listeners are aware, there's been an awful lot of consolidation going on in the fundamental industry, in 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 disrupter in the industry, and I saw this as a great opportunity to be a new entrant and really disrupt the market. What does Core stand for? I think, to me, it's three things that I would say are differentiated. So first of all, it's there's what's the role of a fund administrator? A fund admin is at the very core of a funds operations. So that's what our rule is. Our rule is to be there and coordinate everything, whether it's a client, an investor, 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. What's the client? Every 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 of the line, or whether it's being good people and having a friendly conversation, putting a smile on people's face. It's really important to me taking a modern kind of environment, 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. An average fund, I 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.

Brandon  3:12  
Great. Um, and how has your experience been, sort of operating out of Guernsey, you know, regulatory terms, you know, the general business environment. How does that fare up and weigh up? And weigh up?

Martin  3:22  
I think, first of all, why do we step calling 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 going to a great place to do business. You know, 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 as you know, for me personally, and to call emphasis about the values and engagement with people, I found a 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 the initial feedback, advice as to what what worked for them, what they wanted to see from Core and as a result of us working closely with them, you know, we got regulated in seven half weeks, which I think is a great, a great regulation time for a fund administration business.

Brandon  4:31  
Especially when you sort of, you know, way up against competitive jurisdictions that are slightly more bureaucratic, perhaps.

Martin  4:36  
Yeah. I mean, there are jurisdictions whereby I know if I, if I set up Core, that would take me minimum of a year. That's not even just setting up the company. That's actually the regulatory process itself.

Brandon  4:48  
Definitely, at Core your focus, I think I'm right in saying is primarily on that sort of administrating of closed-ended fund side macro economic trends. Have you identified as having you know the greatest impact on that sort of closed ended market, sort of space, if you like.

Martin  5:04  
Over recent years, the closed-ended space for fundraising has been particularly tough. It all started really probably with COVID, when you think about sourcing that five years ago, as we were talking about earlier on, which is quite surprising. But we had COVID, and that obviously put initially 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 of 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 in all the major economies. So like or not, well, whether you agree with whoever's been elected, wherever we 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 new the first six months will be a bit of suck it and see, and investors will then start to decide if they're going to release the fund and if they 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 mergers going out to market now. We're seeing new mergers come out with new ideas, new asset classes. So I think there's definitely a lot of positive science. So we'll see how they go.

Brandon  6:34  
And we've had several guests on recently who have talked a lot about VC you know, that as a sort of a rising niche or subspace, if you like, in particular, with maybe sort of 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, you know what? What about the island makes it so attractive for those sort of investment flows?

Martin  7:01  
VC interesting. So obviously, as I say, cause a new business. So we actually closed our very first first fund was a venture capital fund. It was an interesting one as well, because it was an existing manager in in real estate who basically wanted to diversify their portfolio, which again ties into the 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 a VC fund in Guernsey. So that's great, and it does tie into the I think was Proskauer. I think who issued the kind of the report identified that, I think was, half of all VC funds in the pew were actually domiciled in Guernsey. So it all fits together. Why? I think one of the major reasons for that is is actually going to be a very flexible place to be. You know, I think if you're if you're a Venture Capital Manager, you're probably looking at smaller funds. You look for greater flexibility. You're looking at more flexible regulation. And actually, I think that's something that we've done. We've we've targeted that. And when I say we've target I mean as an industry, including regulator, and there's, there's been an appreciation that to handle VCs, we need to be more flexible. You know, 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 up to even more. So you give us that we're giving VC managers lots of scope to go and actually fundraise.

Brandon  8:29  
Yeah, and 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 sort of flow their respective sort of capital, both into 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?

Martin  8:54  
I think emerging markets are an interesting thing because there's often higher risk factors, maybe then you get another errors, therefore some more challenges. I think we have, we have, we got a regulation right, I think is key to that, because we do have to mitigate the risks associated with with high risk jurisdictions that emerging markets may have, but I think we do that in a sensible way. And I think for the for the for the actual client, investors, they feel comfortable that we give the current level 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.

Brandon  9:34  
Yeah, and there's no question that the industry has been going through, you know, a hard market, if that's the right term to use, maybe, maybe not, for fundraising for several years, obviously, we talk about rise of sort of private capital and and the sense of this listing space having dried up in the last sort of 18 months, maybe longer, actually, maybe more, like three years. Why do you think? What should I say, do you think differentiates Guernsey in being able to sort of free up that fundraising?

Martin  10:04  
I think -So I recently did an article for the 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 a Einstein equals MC squared idea. And I said, Well, actually, could we do something a bit similar for Guernsey funds? And it was speed to market minus red tape equals better fund returns. I think that's what Guernsey does. Well, that's what Guernsey can offer. You know, we have speed to market. You know, we have effective regulation, but that regulation also gives us fast track programs whereby we, the regular regulator, can give us a fund regulation in one day. In some in some cases, we then have less red tape. So what if you're within EU, for instance, or if you have to comply with all aspects of AIFMD, well, we still have private placement in Guernsey. And so we use that we are subject to certain aspects of afmd rules, but it's much like the touch. So again, we can target European investors in that market, compared to, say, a full scope EU Fund, which is subject to all costs. And it's, I think the there's a study by Cobus, I think it was, which says 3 million over the course, 3 million euros an additional cost of the course of the fund, which is affect your terms quite significantly, particularly if you're maybe not, not a huge manager. But it's not just that, to me. It's 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, we're not some kind of, you know, oh well, there's nothing. There's no regulation. There we have, we have proper regulation. We have 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.

Brandon  12:04  
Yeah, and something we have heard a lot about as a, you know, the promotional agency, and I know that there's rumblings in 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 of lack of liquidity in the market? Is this something you're seeing and, and, and if so, is it, is it, you know? Is it a symptom of wider trend, or is it, you know? Is it a blip? What's your take on on that situation?

Martin  12:31  
Again, I think it's fundamentally down to macroeconomics for funds have been in operation for quite some time. So equally, people don't, people don't want to fire sale assets, they where money is already tied up. So how do we free up money? So we've seen a quite significant rise in certainly continuation funds and secondary funds, and there's some major continuations. I'm hearing 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 managers a chance to not have to exit with fire sales and therefore still get, still generate good return investors. But I think in terms of the liquidity, market is still fundamentally driven by the macro economic conditions. But again, as I said before, I 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 yeah, 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's that, to me, is why the fund industry is so good, because the intelligence of the industry and the people involved, we find solutions to things. And again, you know, with Core it resonates with me, because it's disruptive. We don't just accept, oh, we can't about that, actually, no, can we do something about that? Can we be better? Can we, can we find solutions? 

Brandon  13:49  
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 and even private markets as well. But what you know, where does that sit in, sort of being, I guess, the part of the equation to the, if you like, to the answer.

Martin  14:02  
In terms of my equation, I think it is because it gets the better returns. The risk of a fire size is, is horrible if you're, if you manager, and you know, do you want to just sit on a some kind of ghost fund that has to carry on for years and years, not doing anything, and you have the managers on you getting the fees with investors, are just seeing their IRS keep dropping. This is an effective way of realizing and it benefits everyone.

Brandon  14:27  
And as part of this, you know, debt funds have also become incredibly popular. You know, be it direct lending, mezzanine distressed debt, they all seem to be on the rise. And they're all sort of areas that you work in as well. I understand why the rise.

Martin  14:44  
I think there's a need for new means of debt. I've seen asset managers including Guernsey and debt providers in Guernsey setting up and looking to do funds in Guernsey because to provide debt liquidity there isn't currently there, or isn't being offered in the same way that 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 I think it also, again, it depends on liquidity. The harder it becomes for the banks to lend, the more likelihood you're going to see normal these debt providers spring up as well, and some people debt funds.

Brandon  15:24  
And it's clear that isn't, you know, another trend to speak of is, is there's been a rise in interest in deep tech and and, of course, as part of that, AI, and there's a lot of buzz around AI, you know, now, no doubt, whatever your your thoughts are, technology is shaping and reshaping the way, you know, business is conducted across a range of sectors. You know, how has core responded to that?

Martin  15:48  
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, tokenization, 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 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 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 in specific so that kind of AI is not ready in existence yet for us, but I do think there's, there's great scope for it. For instance, the one, the one I keep challenging tech providers to get, for me is, and some is a piece of AI that will take a set of IFRS accounts and convert them into US gap. That's when I do AI will have made it in my world. I'll be I'll be loving that. So I think we do have to be mindful of, you know, getting the right AI tech at the right time, and identifying the good, the good ones when it comes along, rather than just kind of 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 tokenization and crypto like or not they're coming. And I think you we need to be mindful of getting the right tokenization and the right crypto and that means in terms of how we regulate it, to be honest, largely, is amazing. How do we how do we know, how do we know the origins of it? How we know how it works? I think, at the moment, for laymen like myself and laymen in the industry, it's it's probably still too much of an unknown. But I think as an industry, we also need to read and we can dive and understand it.

Brandon  17:50  
And switching gears now slightly and looking ahead, I suppose, what do you see as the most significant trends 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  18:05  
I think actually the major trend that I've seen probably the past 10 years for me, for asset management, asset management, asset management firms, I guess more specifically, has been probably the lack of succession planning in place. Some have done done it. Some have kind of realised that they had, we're 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 recent years. They have the experience. They've also got the black book of networking connections. I think we'll see more that from my listen. I think the again, hopefully it will all tie to the macro economic problems we've had starting to ease, and the funds liquidity start come out. And again, the new ideas as well that come along with that. So that, to me, is probably the major challenge for managing managers themselves is, how do they incentivize to make sure they don't lose their next generation people? But on the flip side to that, if they do lose them and then go in and set up themselves, there's opportunities for for our industry and core and our peers to go and capitalize by being service providers to these people. Sure,

Brandon  19:13  
and we obviously touched earlier on the VC side as to what, I suppose you know those managers, or those even investors, I suppose, look for when it comes, when it comes to sort of a domicile, you know, in a similar vein, what's the trend around the private capital manager side? You know, what do they look for? And why do they, you know, why Guernsey, effectively?

Martin  19:36  
Why Guernsey for private capital? That has been, that's been a major selling point for me personally, for a number of years, because I think, I think I think good is great for private capital, and what I sell it to is, you know, again, going to new managers, emerging, emerging managers, or even established managers. For another I think our private capital market is a great strategic opportunity, particularly for a new manager who wants to set up a fund for. Uh, but has no track record. It's a way they could maybe do, go and do a club deal, get a few people together, say, we've got this great resource, this great investment, get some investment, and we'll, we'll, we'll bring you together. We'll run this one investment for you, and then we'll start establishing track record. And they can do it for various svbs. And then, obviously, obviously, you do that two, three times, all sudden, you've got an investment track record. Investment track record. Imagine three investments for however, 30 investors or whatever. It's great. The The other option that is, 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 your sector is new to us, but we're going to back you to manager portfolio first, because you'll be fancy going into a blind pool fund yet. So, and I've seen established real estate and PE managers do that whereby they've been given a significant portfolio of significant war chest, if you'd like to go and buy a portfolio manager and basically prove that manager, that they can do it, proof the LP they can do wrong, and deliver on that, and then hopefully, off the back of that, they then say, well, yeah, we'll come into next Wednesday. So I think it's a really good product. It's good because it's simple. It's, again, I love the rules and goods are so simplistic. It is. You know, if you've got spread investors and spread of risk, it's a fund. If you haven't got spread investors, but have spread risk. It's not a fund, if you have spread 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 about five years ago, they came to me and said, Oh, Martin, we like to set up a new fund in Guernsey. Oh, brilliant. Yeah. Love that. Problem is we need to set this fund up in six weeks time. Okay, with the greatest will in the world for us all really smashed at the park, get the investors and get regulators in six weeks. That's not going to happen. Yeah, it has to happen. We've, we've signed on a deal. It closed in six weeks. So, okay, right. Don't worry. All is not lost. Here's the here's what we'll do. And we basically did a club deal with them to warehouse that investment. And it was quite a big deal, how to get quite a lot of investors into it. About a month later, they were very happy. How well worked. About a month later, they came back, 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 2 million transactions, either multi, multi hundreds transactions. So, yeah, it's, it's, I think it's a great story for even new managers.

Brandon  22:37  
Excellent. And just a final question to finish, what are you looking forward to in 2025 and what's on the horizon for the year ahead? 

Martin  22:48  
At core fund services, I think what we all hope for in 2025 is the picture improves, and your liquidity and fundraising improves. I think everyone, everybody wants that for for core. I'm just loving the journey, to be honest. I want to see where this journey takes us. There's there's there's a there's a lot of there's a lot of interest in our story, because we are different, because we're unique. The the personal touch and the long term kind of plan that we have is what 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 market - can't even remember it 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 2025.

Brandon  23:46  
Excellent. Well, thank you very much for joining us on the podcast today. 

Martin  23:50  
Thank you very much for having me.

Brandon  23:51  
If you would like to find out more about what Guernsey has to offer, visit our website at Guernseyfinance.com. If you want to learn more about Guernsey success in sustainable finance, tune in to 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, 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.