AIFM: driving structural change
By Michael Hornsby*, Ernst & Young Luxembourg
Funds Europe
August 2010
The proposed Alternative Investment Fund Managers (AIFM) Directive will have a profound impact on the fund industry, both in Europe and internationally. While the main focus of the AIFM Directive is on managers of funds, the Directive will impact not only EU and non-EU AIFM, but also EU and non-EU domiciled AIFs, service providers to these funds and their investors.
The Directive covers the alternative sectors such as hedge funds, real estate and private equity, but also traditional sectors where the funds are not registered as UCITS. It applies to funds, corporate collective investment vehicles (such as REITs and Luxembourg SICARs) and, in many cases, joint ventures; it may also apply to leveraged managed accounts. Such products are generally for professional investors, but may also be sold to retail investors.
The key provisions of the AIFM Directive
In return for more regulation of AIFM, their service providers and funds, the proposed Directive provides for the introduction of passports enabling AIFMs to offer their management services and market their Alternative Investment Funds (AIFs) throughout the EU.
The impact of the Directive is about far more than compliance – it will drive structural change in the industry.
Asset management perspective
Groups, including promoters and managers should consider a strategic rethink of their fund ranges and a review of their operating models.
Fund range review
This will focus on:
• Investor base: meeting the needs of European and international, professional and retail investors
• Marketing: benefiting (where possible) from the European passport for AIFs, private placement possibilities, etc.
• Products styles (regulated/unregulated vehicles, open/closed-ended, single fund/fund of fund, etc.)
• Investment strategies (target sectors and geographic areas, use of leverage, etc)
Groups may consider for example, re-domiciliation of existing funds, mergers and liquidations, creation of new funds onshore in Europe, establishment of master-feeder and fund of fund structures.
Optimization of organizational model
Groups will need to determine the optimal platform to service to their fund range, and benefiting from the passport for AIFMs and any relevant exemptions available. The options open relate to:
• Configuration: the optimal combination of own and third-party or joint venture service providers.
• Delegation: the functions which will remain in-house, and those which may be outsourced by AIFM, such as administration, valuation and marketing. The custodian must be independent of the AIFM.
• Domicile: the choice of domicile or location of the AIFMs and service providers. The AIFM passport enables an AIFM in one EU Member State to manage AIFs in another directly or via the establishment of a branch. AIFMs may also delegate functions to service providers cross-border.
The strategic choices to be made will be heavily dependent on factors such as reputational impacts (in particular with regard to distribution channels and investors), regulatory requirements (such as accessibility of the regulator), direct and indirect tax, operational factors (expertise of local service providers, qualifications of the workforce), location (proximity to investors, key markets, etc.) and internal factors such as risk management and compliance.
The next phase will be executing the business reorganization foreseen under the strategic review. Group’s optimization of their organizational model creates new opportunities and threats; we anticipate a significant level of mergers, acquisitions, spin-offs, liquidations, relocations and outsourcing.
Once reorganized, AIFMs will need complete a more detailed compliance exercise to ensure that all of the requirements of the Directive are met. Going forward, they should also implement a compliance process to ensure that they continue to meet the requirements of the Directive.
Service provider perspective
Service providers, such as depositaries and administrators, will need to carry out their own strategic review of their service offering and operating models.
The key challenge for service providers will be meeting the scope, quality and quantity of service requirements at a competitive price. Service providers will therefore need to attain critical size and implement robust and efficient processes and procedures.
If the provisions on the depositary are implemented, there will be a significant restructuring in the depositary space in particular to achieve the scale needed, and to cover emerging and exotic markets.
Investor perspective
Investors will need to carry out their own strategic reviews in view of the new requirements and opportunities. As some markets and products will no longer be accessible to them, institutional and professionals investors will need to review the investment options open to them post implementation.
* By Michael Hornsby, Real Estate Leader, Ernst & Young, Luxembourg
Posted on 14 September 2010
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