Carne Global Financial Services

Consulting should pay for itself

Originally published in the April 2007 issue

John Donohoe is a quiet spoken Irishman who now advises some of the biggest names in the hedge fund management industry. He is a man who believes that the consulting industry, at least in the fund management space, needs to demonstrate its added value on a practical and quantifiable level. He seems to be on the right track.

Amongst those on his client list are Barclays Global Investors, Europe's biggest single hedge fund manager, as well as Banco Santander, GLG MMI, HSBC, Citibank, and Allianz, large institutional names active across a range of product and function areas within the hedge fund sphere. As the CEO and Principal of Carne Global Financial Services, Donohoe has been quietly expanding his firm across three jurisdictions in the last three years, and has positioned it as a highly competitive specialist within the cross-border asset management industry.

Donohoe's credentials include KPMG and a stint with Morgan Grenfell Asset Management in the early 1990s, eventually becoming a Grade 1 Management Director within Deutsche Asset Management (Morgan Grenfell was eventually re-branded after its acquisition by Deutsche in 1988). Following a reorganisation, he joined the global transaction services part of the bank, to focus on asset servicing for mutual funds and hedge funds in Europe, Asia, and the offshore jurisdictions. This was a big operation, with over 2000 personnel, including the WM Company in Edinburgh (acquired from Bankers Trust), the Deutsche trustee company, and operations in various European countries, including Germany, Italy, and Austria.

When Deutsche decided to sell its securities services business to State Street, Donohoe decided the scope was there within the fund management industry to establish an independent consultancy, providing other fund managers with the benefits of his practical experience. "Over the years I've seen a lot of consultants who claim they can help with various things, but what I wanted to do was bring a different proposition for these clients," he says.

Coming from an institutional background, and having been tasked with managing a multi-million pound business, Donohoe reckoned he had something different to offer. He wanted to put together a team of professionals with strong backgrounds in accountancy and legal services. He was looking for people with at least 10-15 years of industry experience, who could justify their role in his new firm on the back of the real practical experience they could offer. "I was looking for people who had risen through the ranks, who could understand the nuts and bolts of what was happening as well as the big picture," says Donohoe. "They had to be able to assist potential clients with the various challenges they were facing, help to develop various products, and generally make their life a lot easier. That was the concept behind it."

A snapshot of the professionals which Carne puts forward to sit on fund boards bears this out. Paul Larche has over twenty years experience at Deutsche Bank, Ann-Marie Galvin, formerly Head of Transfer Agency at State Street, and a specialist in corporate governance and product structuring, looks back on 18 years. Paul Guillaume, who runs Carne's Luxembourg office, and was Head of Sales and Marketing for State Street Bank SA in Luxembourg before he joined Carne, has over 20 years' experience. The list goes on, but it proves Donohoe's point. Clients paying for Carne services are paying for the advice of seasoned professionals who have pretty much seen it all in their lengthy careers in fund servicing.

Bridging the gap between hedge funds and traditional firms

The other challenge Donohoe took on when Carne opened its doors was to target bigger managers as part of his client base. He wanted to build something that would be different, and that could sit at the forefront of fund management consulting. This meant leading edge clients. "I wanted to go after those players that bridge across both the long-only and hedge fund industries, that have significant assets both in traditional and in hedge funds," he says. "We have a lot of managers that are renowned long-only managers, but have massive amounts in hedge funds as well. A lot of the issues we deal with are current to both." As an example, he cites the EU Savings Directive, which energised fund managers a few years ago. Carne at the time was advising a firm with hedge funds in Bermuda, as well as its range of EU-based long-only funds, and was able to discern that Bermuda had no bilateral arrangements covering this directive. "We raised the flag with them and their lawyers, and it turned out to be right," says Donohoe.

Another example is UCITS 3, an obvious opportunity for hedge funds given the emphasis on 13030. "Hedge managers are very familiar with that, and traditional managers are very familiar with UCITS, but for both of them it presents an opportunity," says Donohoe. "It is an opportunity for hedge managers as it represents a new pool of institutional assets. [Institutions] will not be allocating [to these strategies] from their hedge allocation, they will be allocating from the actively managed, traditional money. [Hedge fund managers] understand long/short funds, what they don't understand necessarily is the complexity around the directive, and how you have to manage the assets, the systems, and the compliance requirements. They also have to understand how they are going to be benchmarked and assessed by these clients. Traditional managers may not necessarily understand the implications of the short position or the unlimited downside, and what sort of concentration levels you might need on the downside to avoid successive divergence away from potential benchmarks that might be set."

Carne is well-placed to advise many of the firms currently considering launching UCITS III-compliant funds. Donohoe knows of many hedge fund firms in the process of designing funds, and he anticipates that we will see a large number of 13030 launches, from both small and large houses, and points to the US experience, where over $50 billion has been raised in the last two years as an example of what can be achieved.

Multi-jurisdictional ambitions

Carne kicked off its operations in Dublin in February 2004, before opening its doors in London. Last August it was granted permission to start a consulting business in Luxembourg. Carne now employs over 40 people across all three locations. Its most senior management team can all boast over 20 years in the industry, giving it massive depth in terms of real industry experience. It has also been keen to recruit individuals with the language skills necessary to deal with continental clients. The Luxembourg office is a strong statement of the firm's intention to make a splash in Europe.

Carne's presence in the key hedge fund jurisdictions has also enabled it to cater to clients working across all three jurisdictions: a business win in London might lead to a future contract in Luxembourg, and vice versa. In addition, it leaves the consultancy well-positioned to tackle cross-jurisdictional briefs, especially the gnarly subject of cross-border funds marketing.

"What you actually find, country-by-country, is the sheer diversity in types of investors," Donohoe says of the European experience. "When a manager decides he wants to tackle the German market, he has to understand the breakdown of the client base. You can go after the wrong client base altogether, and get absolutely nowhere. In some cases you need a local tie-up to make it a lot easier, but you need to understand that these are still very fragmented countries."

Carne carries out a lot of consulting work for firms planning pan-European launches of investment products, and encourages clients to sign up with different distributors for each country. The one-size-fits-all approach is still some way off. Yet of all the UCITS funds sold in 2006, two-thirds were sold cross-border. This is a good indication of the ongoing popularity of funds domiciled in Dublin and Luxembourg. The Carne model is well-suited to this growth, with the London-based team supporting managers with product design and development, but at the same time helping firms in the locations where their funds are domiciled.

Cayman, because of its popularity, is under consideration for a potential future Carne operation, being the domicile of choice for hedge funds. Carne supplies funds with offshore directors, and has 12 people qualified to do so, split between Dublin and Luxembourg. Donohoe feels a Cayman office will be an essential component for Carne, and will help it to target the US market. Switzerland is also considered important, due to the sheer size of assets booked there, and again, Donohoe is looking to set up a Carne office in one of the Swiss financial centres in the near future.

Dramatic changes in the authorisation process for hedge funds in both Dublin and Luxembourg have removed the pre-authorisation restriction, making service providers liable for approving the documents of new funds, and for ensuring that they adhere to regulatory principles. Donohoe sees this as a powerful jurisdictional offering going forwards, and has levelled the playing field somewhat between the big European jurisdictions and the Cayman Islands.

With more institutional investors looking at hedge funds than ever before, hedge fund firms are becoming more conscious of the attractions to large scale clients of funds domiciled in solid EU jurisdictions, especially where European pension funds are concerned. In particular, fund managers who run both traditional and hedge products may be inclined touse Luxembourg or Dublin as the future launch-pads for hedge fund products targeted at their existing clientele, rather than going down the Cayman route.

Tackling operational risk

As institutional clients play a larger role in the hedge funds universe, Carne is finding itself working more closely with large funds of funds in carrying out due diligence on underlying funds. A big area for external consultants is independent operational scrutiny of funds, for instance, their administration set-up or governance. Carne's employees are also sitting on the boards of some funds of funds, and this actively involves the firm in assessing the criteria that has been laid down. "[Funds of funds] are one of the most active due diligence players, for obvious reasons," says Donohoe. "We'd typically be looking at both those areas."

Carne also carries out operational risk reviews for single manager hedge funds, assessing underlying providers and benchmarking them against industry standards. This can include the types of reports and volume of data provided to the manager, as well as controls in place already, and compares this with existing practice in the market. Managers find such independent assessment invaluable, particularly as this ties in well with upcoming MiFID issues.

And what of MiFID itself? Donohoe's experience is that there is a varied level of preparedness in the industry, including some substantial managers that are currently not MiFID-compliant, but which will need to address this issue before November. Yes, much is being written about MiFID, including in the pages of this august journal, but is enough being done? Donohoe says COOs need to be aware that the FSA may well be carrying out checks to ensure compliance going forwards, and that its requirements may go beyond basic MiFID demands.

"There's certainly more guidance being given by the FSA as to what they would expect to be minimum standards," says Donohoe. "It's not rocket science, by any means. It just requires time for managers to sit down and structure themselves in an organised way. If they do it, they will get other benefits from it. Half the problem with these things is that people focus in on the regulatory requirement, and they do it grudgingly, because they have to do it."

Instead, Donohoe argues, MiFID represents an opportunity for fund managers to organise themselves in a more disciplined way, bring their service providers to heel, and get to grips with operational procedures to an extent that they will experience far fewer problems and less risk going forwards. "If you do it that way, and get the business benefits out of it, you'll reap the regulatory requirements," he says.

Donohoe is keen to convince fund managers of the very practical nature of the advice Carne can offer. Carne comes to the table with a very deep knowledge base in terms of the service provider community. Its advice is of a more practical nature than simply benchmarking service providers and helping with the selection process. Donohoe's team can work alongside managers throughout the product design and establishment process.

"Doing RFPs gives us an insight. We find out what people actually need, and who the best people are in terms of skills and systems. Sitting on boards, we see on an ongoing basis how well service providers are doing, and their relative capabilities. Our independent oversight, looking at the actual running of the funds, the service and the compliance, allows us to continuously evaluate service providers as well. We have people in the firm who come from service provider, investment banking, and hedge fund backgrounds, people who have worked closely with service providers and know how things work in practice."

This certainly leaves Carne in a good position to advise on changes of service providers, and Donohoe reckons his firm has helped to transition over $100 billion in terms of assets to date. "We bring it all together as regards the whole package of information," he says.

This level of expertise also comes into its own when it comes to recommending independent directors. Carne can put forward its directors based on which areas of expertise a fund manager feels he currently lacks. Should he feel that it would be useful to have a compliance specialist, for example, Carne can supply someone who can contribute on a real value-added level.

Donohoe stresses that his team pays for itself at the end of the day: they work a full week within hedge fund consulting, and can provide added value to the manager other than simply fulfilling legal requirements. It is all part and parcel of his mantra of practicality: specialist consulting should pay for itself, and should bring a real and quantifiable benefit to the firm paying for it.