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, and more recently Ireland, are viewed as the locations of choice for AIFs wishing to distribute across Europe. Both jurisdictions have experienced exponential growth in demand for AIFs in recent years.
The CAGR of AUM with third-party Irish AIFMs increased 45% between 2018 and 2020 (Monterey, PwC) and PwC forecasts this to grow 14.2% on average per annum until 2025. Whilst in Luxembourg the AUM of its funds grew 12.6% in the year to January 2022.
The key drivers for this growth are both jurisdictions' ease of doing business, range of fund structuring offerings, and their sophisticated fund services sector.
Strong growth has made the EU AIF market increasingly competitive and regulatory scrutiny over fund governance has intensified. The implementation of the Alternative Investment Fund Management Directive (AIFMD) in 2013 placed a significant administrative burden on AIFs and many alternative investment managers have appointed third-party ManCos as a result.
ManCos shoulder the bulk of the administrative burden of AIFMD compliance - such as the organisation of a compliant portfolio, risk management and overall oversight setup. 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: many small and medium-sized fund promoters do not have the scale or resources to deal with the cost and complexity of increasingly 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, risk and accounting specialists experienced in handling the day-to-day operations of the AIF, in compliance with AIFMD and local requirements. Additionally, 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 do not replace a tax specialist. However, they 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 investment risk to 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 AIFMs are ideally placed to provide the operational efficiencies managers need to remain competitive.
Our AIFM services simplify the complex
As a fully licensed AIFM in Luxembourg and Ireland, we 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 can provide a seamless one-stop-shop solution to help fund initiators realise their investment strategies and add true value for their investors.
To discuss how we could support your fund ambitions, contact our team below or find out more about our ManCo services here.
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.