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Luxembourg’s service providers focus on AIFM solutions

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One of the biggest challenges of AIFMD is that it directly impinges on investment activities at the manager level, as opposed to the fund level under the UCITS IV framework. This has required a shift in mindset, not just for managers, but also fund authorities in well-established fund jurisdictions such as Luxembourg. 

For Luxembourg to take full advantage of AIFMD, it needs to build on its success as a UCITS hub by also becoming a manager hub. One where global investment managers use the Grand Duchy to establish management company operations, or appoint a third party AIFM, and run their global fund distribution strategy from a single, consolidated location. 

That is one reason why ALFI spends a lot of time travelling the world to explain the basic concepts of AIFMD, and the benefits of doing cross-border fund activities out of Luxembourg, to non-EU fund managers. 

"AIFMD is a challenge for hedge fund managers. One point we emphasise, however, is that there are plenty of solutions offered by third party AIFMs for those managers who don't necessarily want to come to Europe to set up their own management company, which can be costly for smaller managers," explains ALFI Chairperson, Denise Voss (pictured). 

It is perhaps, therefore, no surprise that many of Luxembourg's service providers – administrators, universal banks – some of which have long been operating UCITS management companies, are now actively creating AIFM solutions to attract global alternative fund managers. 

After all, the last thing Luxembourg, or indeed Europe's institutional investor community wants, is for non-EU managers to turn their backs on Europe. 

MultiConcept Fund Management S.A. ("MultiConcept") is a fully integrated AIFM and UCITS IV fund Management Company within Credit Suisse Group. As CEO Cindyrella Amistadi points out, managers today are far more fixated on cost savings and are thinking far more carefully about their distribution strategy from the get-go. 

"We can help them think about where to register their funds. Ten years ago, managers took a wider approach to registering their funds in lots of markets. Now, it is a lot more targeted. It's more to do with identifying the right potential investors and keeping control of costs. 

"We can have an open dialogue with clients to help guide them with this," says Amistadi. Until now, UCITS represented the largest percentage of assets on MultiConcept but going forward, under AIFMD, Amistadi believes that MultiConcept's growth trajectory will be in the private equity and real estate space. 

"We had a discussion just recently with a large manager regarding the possible establishment of a real estate fund, and we are focussing all of our energy in this area right now. Credit Suisse has a large, dedicated team to support PERE funds. We have the internal knowledge and expertise to develop this area of the business. 

"With MultiConcept, Credit Suisse now has a full product range. We can support clients throughout their lifecycle. Some banks still do not offer third party management company services under AIFMD. For us, it is a big point of differentiation," says Amistadi.

Deciding on when to opt for a UCITS fund versus an AIF under AIFMD will depend on many factors. Under the AIFMD regime, less liquid portfolios tend to be used whereas in the alternative UCITS space in Europe, the majority of strategies are those operating at the more liquid end of the spectrum. 

More important than the investment strategy, though, is the marketing strategy. What is the manager looking to achieve? Are they hoping to raise assets across multiple EU countries or just one or two? Who will those investors be? What is their experience in allocating to alternative fund strategies? 

Asking these questions is vital for fund managers to move forward and potentially establish an AIF in Luxembourg. 

If you have a broad requirement to raise capital in the EU and you are looking at multiple jurisdictions it does make life a lot easier to avail of the marketing passport. However, if you are focusing on one or two markets it is best to use the private placement regime. The only problem with this is that the costs of placing in multiple jurisdictions can become costly.

"If you are a non-EU manager with a non-EU AIF raising capital in the EU, a more permanent solution would be to establish an EU AIF managed by an EU AIFM and mirror the strategy in Europe to avail of the marketing passport. You could have your own structure/s or adopt a partnership approach," explains Kavitha Ramachandran, Director of MS Management Services, a Luxembourg-based subsidiary of the Maitland group.   

Taking the partnership approach would allow a non-EU manager to avail of an AIFM platform, such as Maitland's MS SICAV SIF, to initially establish a sub-fund, test investor sentiment, and maybe wait a couple of years before opting to have a standalone EU regulated fund running pari passu to the offshore fund.

"Something else we are seeing and implementing is passporting our AIFM to be able to manage AIFs in other jurisdictions. Maitland recently acquired Phoenix Fund Services – a UK-based fund administrator with its own Authorised Corporate Director (ACD) and AIFM license – so we are able to passport their UCITS administration and management capabilities for managing Luxembourg structures. We are now in a position to be able to manage both AIFs and UCITS in multiple locations," confirms Ramachandran. 

Should a manager opt to establish an AIF in Luxembourg, it makes a lot of sense to also locate the AIFM in Luxembourg so as to ensure that all of the supervisory functions such as risk management are easy to put in place. Rather than spend time and money building substance on the ground by hiring operations staff, building infrastructure etc., the beauty of the outsourced AIFM model is that investment managers needn't worry about putting all the processes in place to remain compliant.

"We have people on the ground, many of who have previously worked for the CSSF, fund administrators, and have experience across the value chain," says Alan Picone, global head of risk consulting services at Duff & Phelps' Kinetic Partners division and managing director of the firm's Luxembourg Management Company. 

One could then argue that if the AIF is not located in Luxembourg, why on earth appoint a local AIFM?

This is where the concept of substance – experienced personnel, systems, processes, etc – comes in to play. If the manager is based in London, and wants to outsource the AIFM role, there aren't many companies to turn to outside of Luxembourg and Ireland. 

"Fund centres tend to become substance centres," says Picone. "Counter-intuitively, AIFMs do not tend to establish themselves systematically in the same location as the portfolio management units. Rather, a significant proportion of the market players have opted for their AIFM physically residing in Luxembourg to ensure proximity with fund operations. This mechanically means the portfolio management being delegated so that risk management is retained in Luxembourg. This is a massive evolution which paves the way for Luxembourg to impose itself as a hub for risk management excellence."

Unlike Maitland, or Credit Suisse, Duff & Phelps' Kinetic Partners division specifically chose not to establish an AIFM umbrella platform in Luxembourg and sticks to offering ManCo services. 

"If you have a platform, you need to have an umbrella fund that is sufficiently wide in terms of legal restrictions to accept any types of investment strategies, otherwise it's economically pointless. Running such a structure with so much flexibility, you need to find service providers who are willing to support small fund mandates, you need to take legal risks having a large offering memorandum, so we took the decision to refrain from setting up a fund platform. 

"Rather, we encourage clients to establish their own funds and we can help them do this. This helps avoid dilution of a manager's brand, which might otherwise happen if they become one of many sub-funds in an umbrella structure," explains Picone.

One firm that is enjoying a good level of demand for its AIFM service is DMS Offshore Group. So far this year, it has picked up seven mandates for its outsourced AIFM solution, all from top-tier managers according to Derek Delaney, Managing Director of DMS Offshore Investment Services (Europe). 

"They tend to have a pan-European reach and prefer Luxembourg given that a lot of continental European investors are familiar with the Luxembourg fund structure. Nick Parkes heads up the AIFM business in Luxembourg where he will look to replicate the size and success of our Dublin office," says Delaney. 

The seven mandates are a mix; some are to appoint DMS as the AIFM and assist in establishing a standalone fund, some are to provide the investment manager with a sub-fund by availing of the DMS platform. 

"In addition to the mandates we've won, we've also taken on mandates to provide risk management support to other management companies; those where an investment manager has decided to set up their own entity in Luxembourg and they are putting one or two people on the ground but wish to delegate the risk management function," states Parkes.

"The other function that has become a focus in Luxembourg is more qualitative, i.e. can you identify a good trade. DMS can do this because we've been working with an 8-person strong investment management firm for a period of time, which we have now acquired. This means we are able to provide a real, qualitative oversight of how managers are performing. That type of substance is really resonating with the market."

To underscore just how important AIFMD could be to managers, more than half the money in the fund mandates that DMS has worked on this year originate from four markets: Germany, Denmark, Sweden and Norway. There is clear pent-up demand for AIFMD-compliant funds from non-traditional markets, where investors have never been comfortable investing into offshore hedge funds in any significant volume. Now they can get access to these strategies in a European regulated format.

That is encouraging news, especially for non-EU managers. Indeed, Parkes says that many of the mandates attract large tickets: "What we find, in the main, is an institutional investor will favour a particular investment strategy and write a ticket sufficient to make it worthwhile for the manager to establish a European regulated fund structure."

One AIFM that is going a step further, and not merely sub-delegating the portfolio management function back to investment managers, is Crestbridge. 

Under some scenarios, it is better to keep the portfolio management function internal and appoint the investment manager as an advisor. This is not something that would ordinarily be pursued for those running actively traded hedge fund strategies. As such, it is better suited to buy and hold, long-term asset classes such as private equity, real estate and debt funds. In this arrangement, where the investment manager operates in an advisory capacity, Crestbridge oversees an investment committee.

"We would play an active role within the investment committee, which would then appoint an advisor to run a particular mandate. We have appointed four or five advisors to run mandates, out of the 20 or so mandates that operate on our AIFM platform," says Daniela Klasen-Martin, Managing Director and Country Head, Crestbridge. 

Crestbridge was one of the first AIFMs to use investment committees when it received its AIFM license in February 2014. As the number of regulated PERE funds is expected to continue to grow, it could be that more AIFMs use this as a further tool to support managers. 

"Smaller managers might not be fully authorised as portfolio managers; they might be FCA-authorised, but as advisors, so there's not as much of an advantage for them to become fully authorised as an AIFM. That's why this solution can work well. 

"It only works for portfolios that aren't turned over regularly and held over a longer period of time. The investment committee will set out the guidelines and approve the model for what the advisor can and cannot do," adds Klasen-Martin. 

Typically, then, these will be newer managers with good track records that have recently launched a fund and are new to the whole regulatory regime, although as Klasen-Martin points out: "We have one exception which is a very large US manager. Generally speaking, it would be USD100million managers that explore this option, as opposed to USD1billion managers in terms of AUM."

Clearly, there are plenty of options for managers to consider when looking to comply with AIFMD. As the number of AIFMs in Luxembourg grows, and substance deepens, there's every reason to believe that it could become a leading AIFM hub, just as it has thrived as a funds hub over the last decade or more.

"What is clear is that the country has adapted quickly to regulatory changes and in my opinion it remains the leading domicile for investment fund managers. Luxembourg will remain a bastion of the funds industry. It really is the gateway to Europe," concludes Amistadi.

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