Cayman Islands: Understanding The AIFMD Distribution Landscape

"I was in Chicago recently. A German pension fund said they had a USD500m allocation in a Chicago-based fund. They wanted to know that they could continue having a relationship with the manager and they said that having the depositary guarantee (under AIFMD) was important to their end investors. They told the manager that they wanted to put their USD500m allocation into an EU-regulated fund. 

"We now have four funds on our AIFM platform that have come as a result of that market sentiment among investors," confirms Derek Delaney  of DMS Offshore Investment Services.

Although still early days, the point made by Delaney suggests that AIFMs could benefit from considerable asset raising in Europe under the Directive. Key to doing this, for many managers, is to join a platform and, depending on the size of the AIF's assets, launch either a bespoke fund or a more generic sub-fund.

"Platforms are good for smaller managers with low AuM who are looking to build a track record and grow their business, and at some stage go independent. The issue with platforms is that you've got contamination risk and you have no choice over which service providers are used. You have to accept the fund directors, lawyers and so on for the sub-fund. So it does diminish the control aspect," comments Peter Northcott of KB Associates.

London-based Lawson Conner, a market leader in compliance solutions for the investment fund industry, not only offers a fund platform for distribution under AIFMD, it also provides specialist advice, particularly to non-EU AIFMs looking to distribute funds in Europe without having to use a European fund vehicle.

"We provide fund marketing and distribution support whereby we advise investment managers regarding the appropriate fund placement strategies across European jurisdictions and compliance environments. We ensure from a regulatory and compliance perspective that funds have got all the relevant tools to go and market into a particular jurisdiction in a fully compliant way.

"Often, when we speak to US and Swiss managers, for example, when we ask them where they intend to distribute their fund it's usually only into the key markets; UK, Switzerland, and possibly the Netherlands. However, managers are missing out on a large number of potential funding sources. We can help market in those often neglected markets because in our view, the funds marketing passport under AIFMD should not be seen as the be-all and end-all," says Gerhard Grueter, founding partner of Sapia Partners LLP (an FCA-approved AIFM) and co-founder of Lawson Conner.

Of course, having a European institution approach a manager and say, 'We love your strategy, we want to invest, but we want a regulated AIF, here's a ticket for EUR500m', is the Holy Grail. No manager is going to refuse that.

But the reality is this rarely happens. Which is why fund platforms, just as in the UCITS world, are seen as an important solution for alternative fund managers who want to piggyback on a third party AIFM's license, launch a sub-fund, and freely avail of the passport.

Daniel Maycock, Director, Investment Management Services with Lawson Conner, notes that the level of independence and governance oversight also offers a clear benefit to investors.

"Compliance and risk management, independent of the fund manager, are key for investor protection. Investor protection can be greatly enhanced by funds operating on an AIFMD platform, which provides risk and compliance oversight over the fund managers' daily trading activities and which is in no way commercially incentivised by the fund performance. This removes or greatly reduces a lot of the risks when investors are looking to identify new managers," comments Maycock.

From a distribution perspective, therefore, platforms can act as the gatekeeper to good governance, which can only strengthen the arm of managers as they bring new products to market. Independent oversight is something that investors welcome, and this makes asset raising a potentially easier task.

ML Capital has been operating its MontLake UCITS platform since 2010. The fact that it is a distribution-led business made it perfect sense to roll out the MontLake QIAIF platform last December for those looking for an AIFMD distribution solution.

"We have 12 people on the ground in Dublin operating our structure. We've good real substance, something that both UCITS and AIFMD really look for in the jurisdiction you operate out of. To put things into perspective, we started 2014 with four employees in Dublin; we ended the year with 12, following a strong year of growth and gearing up for AIFMD," says COO Richard Day.

ML Capital has both an in-house direct sales team and a European client servicing team that looks after the different products on its platform.

"When fund managers join us they get the expertise of highly experienced sales professionals in various European geographies," adds Cyril Delamare, CEO and founder of ML Capital. "That's key to a US manager trying to access the European market. A lot of times, managers might go down the route of becoming regulated themselves but then they realise they have to figure out where the money is. The solution we offer gives managers economies of scale from an operational perspective, and once you get set up you then get access to a sales team which is experienced in the UK, Ireland, and continental Europe."

If a manager chooses to launch a sub-fund, typically this will come with co-branding to reflect the name of the host platform. The other option is to request the platform to build a standalone fund, which many are happy to do. This frees up the manager to choose their own service providers and the fund would launch under their name. By appointing a third party AIFM like ML Management Ltd, the name of the ManCo would appear discretely in the fund's documentation.

"When it comes to marketing and distribution it should be their logo, their company name on marketing materials, their footprint on the fund. We don't grab the investment strategy, the investors; it's the manager's business. We run the fund from a compliance and regulatory perspective only.

"We are finding that the approach works really well. Prop traders come out of large organisations, be they banks or existing hedge funds, and they want to run their own business. The last thing we want to say to them in that situation is, 'Okay, you're about to become part of another large firm again'. It's a hands-on approach from a compliance and regulatory perspective but from an investment strategy and distribution perspective, it's very much hands-off," comments Maycock.

One sub-fund that has recently launched on MontLake QIAIF is managed by New York-based Centurion Investment Management; the Centurion Short Term Trading Fund.

The QIAIF launched with north of USD50m seeded by Old Mutual Global Investors.

"The strategy didn't easily fit into UCITS because it has an underlying commodity component so we structured it as a QIAIF. The only concern of the investor was that the product was registered for sale in the UK and was eligible for UK fund reporting status, something that is catered for under AIFMD.

"The investor had to sign off on the platform of choice. They were happy to appoint us as they'd already worked with us previously on the Montlake UCITS platform. The overall TER of our platform is also compelling," explains Delamare.

Timothe Fuchs is the CEO of Luxembourg-based Fuchs Asset Management. The firm has a strong heritage in wealth management but Fuchs is very clear to point out that they will not help managers seed their fund(s).

"We are independent. From one activity to another there is no conflict of interest. It could be at a later stage that a fund run by one of our ManCo clients gets introduced to one of our wealth management clients but we will not push this. This is something we are very clear on," says Fuchs.

"However, what we can propose on a case-by-case basis is to help clients find investors, depending on the strategy. We have been developing our network of counterparties that can help us with distribution and widen our exposure in Europe. We know a few seeders. We are happy to make the contact between manager and seeder/investor, but it's then up to the manager to raise the assets," adds Pierre-Yves Augsburger, Director of Fuchs Asset Management SA.

Fund administrator Maitland Group received its AIFM and platform license last May in Luxembourg. According to Kavitha Ramachandran, Senior Manager, Business Development and Client Management, Maitland Luxembourg, the firm is looking at around 50 opportunities on a regular basis.

"The areas of demand we see include managers based in South Africa, Latin America, the US, the UK and Asia. One group of sub-funds, for example, was launched for a manager in Hong Kong and this has led to a number of enquiries from Asia Pacific, in particular China and Hong Kong.

"We've also been approached by some Swiss managers as well as Nordic managers and it's a combination of interests; some want to launch their own SIFs because they have a wide investor base or product range that they want to cater for. In this instance they use us purely as the third party AIFM. Others want the quick and easy solution by launching a sub-fund on our platform," confirms Ramachandran.

Since the beginning of January, Lawson Conner has added six new clients with at least 12 more to start up in Q1 and the message they are putting out to the market is that Europe is very much open for business. Managers just need to be a bit more selective about how and where they market and use their resources wisely. A non-core function such as compliance is more cost efficiently run on an AIMFD platform.

"We've basically doubled our number of managers on the platform over the last 12 months and we continue to see strong demand for our expertise in fund management, regulations & compliance. A number of large US funds have just started working with us, for example, for regulatory and distribution support across Europe," notes Grueter.

For large managers who decide to take on the responsibility of the AIFM in-house, there are still options to work with regulatory reporting and compliance specialists. Indeed, the Annex IV reporting burden can be substantial depending on the number of markets a fund is distributed into under national private placement rules.

ConceptONE LLC has developed a comprehensive reporting solution, RegERM, specifically to help managers who find themselves having to comply with myriad reports including Form-PF, CPO-PQR and EMIR, in addition to Annex IV.

"We provide all the limit exception reporting, the risk reporting but the AIFM still needs to have a designated risk manager in place. Once managers have made their first filing that's just the start line not the end line. This isn't a case of, 'Okay, I've filed Annex IV, that's AIFMD taken care of'. This is a case of, you've submitted a large transparency report that will be scrutinised 1) by the regulators and 2) compared, at some point, to other transparency reporting, namely the investor reporting. Now is the time where everything a manager reports to current and prospective investors will be compared and looked at in the context of Annex IV," explains Dan Connell, President at New York-based ConceptONE.

Another important aspect that AIFMs need to be mindful of is that they conform to the correct frequency period when reporting Annex IV. Quarterly filings apply to AIFs with EUR1bn of notional assets or a single AIF with EUR500m in assets.

"The manager – be they EU or non-EU – needs to calculate the AuM of all the funds they manage, not just the ones they market into the EU," stresses Connell.

"Say you are a US manager with EUR3bn of AuM, and marketing a EUR10m AIF into the EU; in that situation, you're a quarterly filer. The bulk of the information that US manager would have to file would only be for the AIFs that are marketed (i.e. the EUR10m fund) but the frequency is determined by the total AuM of all AIFs being managed."

In terms of distribution opportunities in Europe, AIFMD hasn't had a significant impact yet because the passport is only available to EU-based AIFMs running EU-based AIFs. There aren't that many that fall into that category at the moment. The vast majority of hedge fund managers are still managing offshore AIFs.

"The key issue that everyone is waiting to hear about is the extension of the passport to non-EU AIFMs and AIFs, which is currently being considered by ESMA with a recommendation due later this year. That will dramatically change the landscape. Meanwhile, EU AIFMs running an EU AIF should currently be enjoying strong asset raising conditions, but that is not yet obvious – although it is still early days," concludes Northcott.

Originally published in Hedgeweek on Feb 19, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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