Dillon Eustace

Originally published in the April 2012 issue

In 1992, five Dublin-based partners set up a new Irish law firm at a time when Europe was emerging from a recession and Ireland had just implemented the first UCITS Directive. Ask Dillon Eustace how they got to be the leading legal advisers to UCITS-compliant hedge funds and they will tell you that timing played a large part and that, in the early days of the firm, winning some important fund mandates, particularly in Asia, gave the firm the kick start that it needed.

Donnacha O’Connor, a 38-year-old partner who specialises in advising alternative fund managers, stresses that factors beyond knowledge of the law play an important part in any firm’s success. “From a client’s perspective, ‘over and above’ is where they want law firms to differentiate. Experience and market knowledge are held in high value as is the ability to get things done.”

Customers come in all shapes and sizes to the Dublin-based company. Some larger institutions approach Dillon Eustace with a great deal of prior understanding and are just looking for someone to guide them through the fund establishment process. Other smaller firms might want to have their ‘hands held’ a bit more, and again this is something that Dillon Eustacetake on with ease. Some of the time, the law firm will have a role akin to a project manager in helping an institution set up a vehicle, according to O’Connor. This level of service has helped the company take 25% of all new funds started in Ireland – not bad for a business only founded in 1992, outpacing the other larger, more established legal firms based in the Irish capital. An initial focus on the newly established UCITS industry in the 1990s was what helped Dillon Eustace progress to the extent that it has, according to O’Connor.

The company’s growth runs in parallel with the expansion of the Irish financial industry, which only really took off in the early 1990s. A government initiative set up the International Financial Services Centre in Dublin’s decaying docklands, hoping to attract global financial firms with the temptation of a young, educated workforce, but most importantly offering significant tax breaks.

Dillon Eustace focused on financial services from the start, with several of the five founding partners coming from another law firm where they had worked on Ireland’s nascent fund management industry. Dublin itself was an ideal place to set up a business servicing funds – it is English-speaking, close to London and uses common law, the legal system familiar to the English-speaking world.

“We grasped the opportunity,” says O’Connor. “A lot of firms saw what was going on, but a lot of the bigger, more established firms, were driven by their corporate practices and might not have committed the numbers to financial services. At the time the industry was organised, there was no trade association, and the partners were travelling a lot of the time. The story sold itself to some extent – if an institution wanted to market to investors across the EU in a pooled vehicle, a UCITS fund was the natural choice and, for the most part, the choice of domicile was between Ireland and Luxembourg.”

Throughout the firm’s history, the calibre of their employees has always been central to its strategy. In a job where you have such a high level of customer contact, the type of people you employ makes the difference between success and failure. That means the company tends to hire not only talented lawyers, but rounded individuals, capable of helping their clients through frequently challenging processes. “Ultimately the whole job is about dealing with people so the individuals we hire have to be able to get on with people and be pragmatic.”

An important part of any candidate’s CV therefore is what they have done independently of their legal training. The company looks favourably on those who have worked in the industry or who have worked abroad. O’Connor is no exception. He previously worked for a French hedge fund company in Paris and sat the New York bar before becoming an Irish solicitor. He joined Dillon Eustace after dealing with them as a client for many years.

One of the attractions of work in Dublin is that the Irish government has always been at the forefront of trying to grow the fund industry in the country, with one of the lowest corporation tax rates in the European Union at 12.5%, and a zero rating on the income and gains of funds.

While the authorities are still committed to maintaining the country’s attractiveness to managers, some things have changed since the days of the Celtic Tiger. All of Ireland’s major banks needed a recapitalisation following the collapse of the country’s housing market, and those bailouts triggered a sovereign debt crisis. Those domestic concerns, coupled with a toughening of attitudes internationally towards financial services, means that the Irish financial regulator has faced pressure to increase its watchfulness over the industry.

That has led to increased costs, according to O’Connor. Still, given the wider and less professionally-orientated profile of UCITS hedge fund investors, the increased oversight may well work in favour of the managers of these funds.

“The general approach has changed across the board as a result of the financial crisis,” O’Connor says. “There is a greater emphasis now on enforcement and generally speaking, this is no bad thing, as long as the enforcement is effective and measured.”

UCITS-regulated hedge funds face other concerns. The concept of managing certain hedge fund strategies in a UCITS environment has traditionally been an issue for many managers and the UCITS is at the end of the day a retail product. The attraction of UCITS for these managers has always been accessing more investors compared to traditional hedge funds. Some managers entered the market through UCITS platforms rather than setting up their own UCITS and many have seen disappointing sales figures. All of these factors may have created a bad impression of the UCITS hedge fund market generally, according to O’Connor.

One of the major issues for the hedge fund industry as a whole is the prospect of Europe’s Alternative Investment Fund Managers Directive (AIFMD) which Dillon Eustace feels has positive aspects for managers on the distribution side. The system will probably have very little portfolio regulation and therefore may help those managers who want to sell into Europe and who are finding UCITS too limiting.

But there are other aspects that threaten Europe’s funds business. Proposed requirements regarding depositories will probably increase costs. For those non-EU managers looking at Europe as an investor market, establishing in traditional offshore jurisdictions and privately placing into Europe will likely seem more attractive, especially considering this route is open to fund managers until at least 2018.

“The main reason a fund manager won’t want to be subject to the full rigours of the AIFMD is that, in order to comply with the directive, their funds are going to have to meet requirements that will probably result in a higher total expense ratio than a fund operating outside of the directive,” O’Connor says. “However, managers also need to be conscious that private placement rules are not harmonised in Europe and there may be a tax disincentive for certain investors to invest in a fund domiciled outside the EU or OECD”.

Dillon Eustace is trying to anticipate changes in the hedge fund industry through expanding the services it offers and the locations where it operates. The company is also trying to anticipate where the next generation of fund managers will emanate from, with the wealth built up in Asia over the past decade making it the most likely source.

The firm opened an office in Hong Kong last year and has already placed one partner there to court fund managers in the region to set up in Dublin.

“China is an interesting market for us,” O’Connor says. “Chinese asset managers may well shortly decide on one preferred European jurisdiction as a location for their fund operations and we want it to be Ireland.”

Andrew Bates
Partner and Head of Financial Services

Bates has been advising on the establishment of investment funds for over 18 years, working primarily on UCITS structures, hedge funds, private equity funds and real estate structures for many leading UK, continental European, US and South African financial services groups. He has been closely involved in negotiating positive changes in Irish fund regulation with the Central Bank over the years, including the development of side pockets, master-feeder funds with unregulated masters and changes to the custody rules for real estate funds. Most recently he has spent a lot of time working on Madoff-related matters for affected fund clients. Bates is a former Council Member of the Irish Funds Industry Association (IFIA), is a member of Committee I of the International Bar Association, and is a regular speaker at domestic and international fora on investment funds.

David Lawless
Lawless joined Dillon Eustace in 2004 to establish the firm’s taxation department having spent the previous 17 years in Pricewaterhouse-Coopers where he became a tax partner in 1996. He has advised on all taxation aspects of financial services including structured finance transactions, investment management, capital markets, real estate, private equity, banking, treasury and reinsurance. He has written and spoken extensively on such topics and has participated in many public/private tax committees in Ireland to make Ireland an attractive tax location. He is a member of the tax committees of the Irish Funds Industry Association, the Alternative Investment Management Association, the Irish Securitisation Forum and the Law Society of Ireland.

Donnacha O’Connor

O’Connor has advised in the investment fund area for 14 years, having been in-house counsel to an institutional hedge fund for four years before joining Dillon Eustace in 2001. His practice spans regulated and unregulated hedge funds and traditional investment funds, advising managers, prime brokers, dealers and other service providers operating in the industry. He also has a significant practice in establishing regulated investment services firms in Ireland such as hedge fund managers, broker dealers and market makers who are using Ireland as a base for their cross border activities in Europe.