On the face of it, this may not be the best possible time to start a new business offering corporate governance and independent directorship services for the hedge fund industry. Fund numbers in Cayman have been stagnant, and the cost of entry for new funds, especially smaller ones, has risen, at times, to prohibitive levels.
Meanwhile, the number of firms offering directorships has grown, and more and more lawyers and accountants have made the switch to become professional independent directors.
Cayman’s fund governance offering may well be near saturation level, and the profession itself has attracted greater attention from regulators.
Still, Ronan Guilfoyle and Wade Kenny, both formerly with DMS Offshore Investment Services, have taken the plunge and founded Calderwood.
Guilfoyle confirms that friends asked, “why did you not do this a few years ago?” But, he says, there are still new hedge funds launching, and “we have great relationships with many of the service providers in the industry.”
In an industry where new business comes mainly from referrals, being an insider with many years’ experience in financial services, including many years of serving on fund boards, is a distinct advantage.
“Business has started well and I predict we will see more of the same as we expand,” says Kenny.
While it is harder for small hedge funds startups due to higher regulatory costs and greater demands for institutional infrastructure from larger investors, he notes that the number of funds launching is still about the same, even if there are fewer smaller funds starting up these days.
New business for governance service providers is coming mainly from administrators, auditors, prime brokers, offshore and onshore legal counsel and also other directors.
The trend toward split boards, an attempt to create more diversity in fund governance structures with independent directors coming from different firms, means that even referrals from fellow directors, who are technically competitors, are not unusual.
After all, it makes sense to form a board of experienced professionals who know they have a good working relationship because they served together as directors before.
Guilfoyle says, “It’s easy to be complimentary with people who you have worked with before, who have been in the industry for a while, who are experienced.”
“Ultimately, once you become a director of a company we all share a fiduciary duty to that company,” Kenny adds.
Different business models
The independent director profession has seen many debates in recent years about the capacity of directors to serve on multiple boards, while dedicating sufficient time and attention to each appointment.
Depending on their business model, some have called for a cap on the number of board appointments for individual directors. Others maintained that the number itself is not significant, but that the support system of people and infrastructure around the director is what really determines their ability to serve on a large number of boards at the same time.
Guilfoyle believes that the market has room for everybody. “Firms don’t grow unless people believe in their strategy or their model.”
What makes Calderwood unique, says Kenny, is the level of experience coupled with a lower number of relationships. “There are not many directors out there who have the experience that we have, who have worked with the size of clients that we have and who have a very small portfolio.”
He says new managers will recognize this as an opportunity to get a very accessible service that adds value.
Although the firm expects to grow significantly, the principals say they aim to maintain a ratio of fund numbers to directors that ensures personalized service.
Infrastructure does play an important role in increasing the capacity of individual directors, they agree, but it can also increase transparency for investors by allowing directors to demonstrate that they are doing what is expected of them.
“That is something that we view as very important,” Guilfoyle states. “We wanted something that matches client needs and what the industry expects.”
This demand for transparency resulted mainly from the financial crisis, which was a turning point for the role of independent fund directors.
When funds were under stress, Guilfoyle says, managers and investors truly recognized the benefit that independent directors can bring.
“A lot of directors stepped up to the plate at that point, making sure that they did suspend redemptions and whatever was necessary to protect the fund and its interests.”
Subsequently, the attitude toward directors by managers, investors and lawyers changed. Institutional investors wanted to speak to the directors; they demanded more transparency around what directors were doing; and it became a key part of the role of the director to engage with investors.
Institutional investors were also the main driving force for change in fund governance, and few would now invest in an offshore fund that does not have independent directors.
The same is not yet the case for onshore funds or in the private equity space, but Guilfoyle says a trend is emerging.
Many fund structures involve feeder funds that separate U.S. taxable investors onshore from U.S. tax-exempt and non-U.S. investors offshore and channel investments to a master fund.
According to Calderwood, investors are now starting to question why independent oversight exists on the offshore side but is lacking for the onshore fund.
“We are seeing a greater interest and need for our expertise with onshore funds, particularly if the master fund is an onshore limited partnership or limited liability company,” Guilfoyle notes. “Another trend that is emerging is for independent oversight to be utilized in the private equity space.”
While progress is slow, he believes it will eventually happen as onshore funds grow in size.
“After 2008, I thought every single fund would have independent directors on their master fund board, that it would be the standard.
“I saw, if I was an investor I would insist upon this, but it took time, and I think on the onshore side and private equity side it will as well. People are talking about it now and at some point someone will actually say: ‘I am not going to invest until you do this,’” Guilfoyle says.