For alternative investment fund (AIF) promoters looking to domicile and market their AIF in Europe, outsourcing core alternative investment fund manager (AIFM) functions to a provider of third-party management company (ManCo) and AIFM services is a quick, cost effective and compliant route to cross-border distribution.
Luxembourg is the location of choice for AIFs wishing to distribute across Europe and has experienced an exponential growth in demand for AIFs in recent years. This is largely owing to its reliable offering in terms of fund structuring and its sophisticated fund services sector.
The AIF market is increasingly competitive and regulatory scrutiny over fund governance has similarly intensified. The implementation of the Alternative Investment Fund Management Directive (AIFMD) in 2013 has driven many investment managers to appoint a third-party ManCo. By doing so, they transfer the bulk of the administrative burden of AIFMD compliance - such as the organisation of a compliant portfolio, risk management and overall oversight setup - to the third-party AIFM. This provides a number of benefits for the promoter of the AIF:
- Optimises capital raising - By accessing the AIFM's marketing passport, the promoter obtains an efficient route to distribution within the entire EU, through a single point of contact. The AIFM makes the application in its home member state and once the local regulator has approved, notifications are sent to its counterparties in the targeted EU countries and distribution may formally commence from that point onwards. There is no further interaction with the local regulators. Note that AIF promoters can no longer pre-market their fund, their investment strategies or investment ideas to get a sense of investor appetite without a notification to relevant regulators. [Find out more about the new AIF pre-marketing rules and how Ocorian can help here.]
- Optimises fund manager time - Setting up the necessary substance for a proprietary ManCo is costly, resource intensive and takes a significant amount of time. Using a third-party AIFM mitigates these issues and enables managers to concentrate on their core activity.
- Minimises operating costs - An increasing number of small and medium-sized fund promoters do not have the scale or resources to deal with the cost and complexity of ever more demanding regulatory requirements. Outsourcing these requirements to an experienced third party is therefore cheaper than running a proprietary ManCo structure.
- Access expertise - AIFMs are staffed by compliance and accounting specialists that are experienced in handling the day-to-day operations of the AIF, in compliance with AIFMD and local requirements. In addition, an AIFM should have sector specialists amongst its team to ensure a smooth alignment on investment processes with the fund initiator, e.g. in the fields of private equity and real estate.
- Speed to market - AIFMs provide an established platform with the requisite legal documentation and service providers in place to enable the efficient set-up and launch of a fund.
- Tax support - Third party AIFMs usually do not replace a tax specialist, but will assist the AIF's tax adviser by providing the necessary information and accounting documents needed so the administrative burden on the client is much reduced.
- Mitigates risk and reduces liability exposure - The AIFM's responsibility for risk management includes a wide range of risk areas, from market risk to operational risks linked to the day-to-day operations of the AIF. The AIFM takes on liability for its role of ensuring that the AIF is managed in accordance with the fund documents and applicable rules and regulations. It has a regulatory capital requirement that is linked to the size of its AuM.
- Fund initiator not subject to AIFMD remuneration rules - The external AIFM is subject to the AIFMD's remuneration rules, not the fund initiator. Thus, they can continue to incentivise their deal teams as they are used to, while the limits apply to the AIFM.
As the alternative assets industry continues to evolve, sophisticated and experienced ManCos are ideally placed to provide the operational efficiencies managers need in order to remain competitive.
As a fully licensed AIFM, we (via our wholly-owned subsidiary Allegro S.à r.l. in Luxembourg) provide a platform for comprehensive third-party ManCo services to institutional investors, international fund promoters and investment managers. We can also be appointed through a marketing agreement to facilitate the pre-marketing of your AIF to LPs and other possible investors in the EU and the UK. Combined with our fund administration and AIF depositary capabilities, we are able to provide a seamless one-stop-shop solution to help fund initiators realise their investment strategies and add true value for their investors.
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.