Global legislation drives improvements in due diligence
“By allowing managers of non-BVI funds to apply for the Approved Manager license it simply strengthens the BVI product even more,” comments Nicolaas Faure, Executive Director of Drake Fund Advisors, an emerging market specialist. “We are one of the preferred administrators for start-ups so this will add to the arsenal when we talk to new managers and present our services. In addition to the law firms, we are definitely sharing in the optimism of this updated Approved Manager regime. It should have probably been there from day one.”
Naturally, the extension of the Approved Manager regime having only just been introduced in January this year means that it will take time for BVI manager numbers – and potentially BVI fund numbers – to ramp up. But for Drake Fund Advisors, the last 12 months has already been encouraging. More than 20 new funds joined the administrator and Faure is optimistic that that number can double in 2014. Currently, the firm has 55 funds on its books and roughly USD900million in AuA. The hope is that the USD1billion barrier will be broken later this year.
As Faure explains: “By adding licenses around the world, we’ve been able to take on more funds. For example, we have one South African manager for whom we’ve always done all of their international work. Since expanding our operations with an office in Cape Town, we’ve been able to take on the administration of their onshore vehicles as well.”
Faure notes that a number of managed accounts are also starting to become converted into full-blown hedge funds. Two or three such mandates are now being worked on to convert them into BVI funds, adding further to its fund suite. What has also helped Drake Fund Advisors has been the attraction of its incubator fund to start-up managers.
The Incubator Fund PCC is a segregated portfolio company (SPC). This allows each manager to join, buy a cell in the SPC and avoid the need to structure a standalone fund, thus avoiding a lot of the cost expenditure. But as Faure points out, some managers who had initially planned to join the incubator fund “end up actually structuring a fund. The incubator platform is therefore proving a useful way to attract talent regardless of whether they use it or not. It’s a great tool for us and something today’s start-up managers require.”
What is certain among BVI service providers is that those who wish to continue attracting new managers will need to continue investing in their technology systems. With so much regulation dominating the hedge fund industry, it is as much of a challenge for fund administrators to control costs as it is the managers themselves. Whilst managers are having to innovate the way they trade, so the administrators are having to innovate the solution sets available to clients: if not, they will simply get left behind.
“Over the last 24 months we’ve been deploying our technology platform called iCon,” comments Howard Eisen, managing director and head of sales for Conifer Fund Services, one of the BVI’s leading fund administrators. “This is a cloud-based resource. Managers today require more comprehensive reporting of portfolio positions no matter where they are domiciled, no matter how many prime brokers they use. We draw in all that data, resolve trade breaks, reconcile everything and present it all in one place.
“That’s important because investors today are demanding as much operational alpha as they are performance-based alpha. In other words, they want to make sure that nothing can go wrong with respect to operations and that the manager has institutional quality infrastructure irrespective of whether they are a USD10million manager or a USD10billion manager.”
That investors are applying more fee pressure on managers – especially start-ups – and regulation is raising the bar in terms of transparency has, in Eisen’s words, created a “perfect storm” for administrators like Conifer as managers are expected to do more with less operating revenue (the management fee).
“With iCon we can approach start-up managers launching, and by utilising our middle office services, including our iCon product, they have the ability to demonstrate to investors that their books and records are on Advent Geneva, that they are being reconciled every day, that trade breaks are being resolved every day etc. They can demonstrate a high level of transparency from straight P&L through to complex risk metrics in just the same way that much larger managers can.
“It’s the perfect storm of needs and requirements in the market, and we’ve won a lot of new mandates as a result. We brought on more than 30 new clients in 2013,” confirms Eisen.
One solution that managers are increasingly in need of is a FATCA solution, as they work to develop best practices in terms of knowing precisely who their US and non-US investors are in their funds. This is a big development for the industry because failure to identify US taxpayers and comply fully with the tax rules under FATCA will cause managers to be hit with 30 per cent withholding tax.
Last month, the Cayman Islands’ government signed a Model 1 inter-governmental agreement (IGA) with the US government. What this effectively means is that foreign financial institutions (FFIs) will be able to report directly to the tax authorities in Cayman, who will then file directly to the IRS on their behalf, making for a more streamlined process. However, the BVI government has still yet to sign its IGA and, says Michael Laveman, a tax partner at EisnerAmper, “is somewhat behind the curve compared to Cayman”.
“We have been sitting down with our clients – including BVI clients – over the last six months to put together FATCA action plans: what are the compliance demands? Who will be the appointed FATCA Responsible Officer?” says Laveman, who goes on to summarise what is required by managers who are looking to begin the FATCA registration process:
“When registering with the IRS:
- Managers must first answer 15 questions;
- Next, the IRS creates a FATCA account for the FFI and gives them their allotted GIIN number;
- The first deadline to be aware of is 25th April – managers will need to complete their registration by that time in order to appear on the first IRS list, which will be published 2nd June 2014.”
“It is definitely beneficial to be on that first list,” continues Laveman. “The problem that BVI managers have, however, is that because the IGA has yet to be established between the BVI and the US there is a lack of clarification over whether they can register. Our advice would be for BVI managers to begin the process of registering but they should refrain from hitting the ‘finalise’ button until the IGA is in place. I suspect that this will happen within the next few months.”
Bill Bailey, regional tax lead at Ernst & Young, encourages BVI managers not to wait until the IGA is confirmed before commencing with due diligence work to comply with FATCA.
“To start off with investment managers can perform their legal entity analysis by checking all the entities within the legal structure to determine which ones will qualify as FFIs. They can also look at the onboarding process with respect to new investors and start to review their pre-existing fund accounts to determine the status of their investors (US or Non-US). ahead of the 1 July deadline. This is part of the ongoing due diligence process that managers need to be engaging in right now,” stresses Bailey.
Bailey says that investment managers should also engage in discussions with their fund administrator to determine how well positioned they are to support the FATCA filing with respect to gathering data. “We often hear managers say, ‘We don’t need to worry about FATCA, our administrator is taking care of that’. That may be a bit of a misnomer.”
Laveman says that managers should reach out to all of their service providers – not just their administrators – to ensure that everyone is kept in the loop.
“The best prepared managers have clearly defined the roles and responsibilities of all parties – for the CCO, the COO, the fund administrator and the accounting firm. Communicating with investors in the fund is also important. We advise clients to send out a letter to their investors explaining exactly how their funds will become FATCA-compliant. Explaining what the fund will do and what investors themselves need to do, is a very beneficial exercise,” adds Laveman.
Bailey says that EY has been engaged with fund administrators to help implement their FATCA programmes and make sure they are collecting the right data.
“The same applies to the law firms. We’re all in this together and the more information we can share amongst one another the better,” says Bailey.
Doug Lang is president and managing director at Conifer Fund Services. He confirms that Conifer has enlisted the services of KPMG both in the BVI and Cayman to help review their internal procedures and communicate their FATCA-ready status to clients and their investors.
“They have developed a tool that will help us with our investor onboarding process. We’re in the middle of reviewing our offshore funds, looking at what data we have and what is missing – if at all – and then working with KPMG to communicate that accordingly. Well before 1 July 2014 we hope to be able to update our clients as needed.
“A majority of our clients are US funds, so the task for doing this is perhaps not as onerous as other administrators who have clients with lots of offshore funds with US investors,” says Lang.
Drake’s Faure says that its systems are already well positioned to handle FATCA because the software used has US tax capabilities built in to it.
“There will be a little bit of additional bolting on to the system in terms of how and in what form the information needs to be presented but our systems are definitely not going to have any trouble supporting clients under FATCA,” confirms Faure.
Indeed, with AIFMD also pre-occupying service providers in addition to FATCA, one might be forgiven for thinking that the likes of Drake Fund Advisors and Conifer would be fed up with the on-going operational demands. Quite the opposite, though, in Faure’s opinion who positively welcomes the additional requirements because “administrators who look to apply the least amount of effort for the maximum amount of revenue and profitability will be sifted out quite quickly.
“You need to invest in systems, in reporting tools. The choice facing administrators is whether to make these improvements and charge additional fees to managers of AIFs, or to pass altogether on AIFMD-compliant funds. Either way we expect to benefit substantially from increased legislation,” confirms Faure.
One aspect of the AIFMD that won’t be supported by Drake Fund Advisors is the ability to provide management company services; this is something that some administrators are looking to take advantage of by effectively becoming the licensed AIFM on behalf of their non-EU managers. Conifer are also biding their time with respect to the AIFMD, principally because most of their clients are US-based managers who currently show little or no sign of marketing their funds in Europe.
Those that do choose to market BVI funds would need to avail of a ‘depositary lite’ solution. This arrangement would allow managers to retain their existing prime broker and administrator relationships to handle cash management and asset safekeeping, in addition to an oversight function. It is referred to as depositary lite because the manager would not need to appoint an independent depositary to safeguard, and be on the hook, for the fund’s assets.
“I’ve not spoken to one single manager over the last few months saying ‘I can’t wait to begin marketing my fund in Europe under AIFMD’. No one wants to be the pioneer,” says Eisen.
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