For start-up managers wishing to run an onshore European AIF, the compliance and regulatory complexities might, at first glance, appear overwhelming. There are significant reporting obligations under Annex IV and regulatory capital considerations, whilst risk management is far broader in scope, extending into every facet of a fund manager's operations.
Luckily, however, there are solutions in the market that remove the burden of acting as the AIFM to an AIF, which provide start-ups the option of using a so-called hosted third party provider. One such firm is London-based Lawson Conner, a market leader in investment management solutions for the alternative funds industry. As Daniel Maycock (pictured), Director, Investment Management Services with Lawson Conner highlights, people spinning out of existing hedge funds or private equity groups might be highly skilled investment professionals but do not have the time or resources to operate the investment manager function.
"That's where we come into the equation as a launch partner for new investment managers. We provide the entire regulatory and compliance infrastructure, risk management and governance functions and even operational capability. Our infrastructure allows new managers to set up a fund and conduct regulated activities within the UK and EU," says Maycock.
By regulated activities, Maycock is referring to the key functions of an AIFM: portfolio management, risk management and the marketing and distribution of funds as outlined within AIFMD. But with the UK voting to leave the EU, is having a UK AIFM still a viable option?
"AIFMD sets a clear framework under which an AIFM operates and markets its AIFs and when passed into law, created a scenario where, should managers/sponsors establish an AIFM as well as an AIF within any EEA member state, they would have unrestricted distribution access to professional investor capital within these states," confirms Maycock. He adds: "With Brexit, UK managers will be treated as third country managers which means the world will revert back to pre-AIFMD days and the individual national private placement regimes. However, if the UK chooses to remain as a member of the EEA, then it is likely that there would be minimal disruption from a regulatory perspective."
If the UK leaves the EEA, it is almost certain that the UK will lose access to the single market and passporting rights under AIFMD. "However, if we do have to revert back to the private placement of funds, this should have very little impact on the existing fund distribution status quo in Europe as the overwhelming majority of AIFs distributed are via private placement rather than via the passporting mechanism," says Maycock.
So it appears the potential impact of Brexit may be limited but all may not be as simple as it seems as not all jurisdictions will have the relevant infrastructure in place.
"In France, Italy and other Southern European countries, private placement mechanisms are underdeveloped and in some cases, do not exist at all. Therefore an EU passport would be the only way to access this capital unless a reverse solicitation approach was received but this is very difficult to prove in practice," confirms Maycock.
So as long as the UK remains in the EEA, what are the benefits of using an outsourced AIFM?
One benefit is speed to market as the FCA application process to conduct regulated fund activities can take nine to 12 months but by becoming an Appointed Representative of Lawson Conner, on either a temporary or permanent basis, it enables new managers to start running their fund within three to four weeks.
"From a timing perspective it creates huge efficiencies. If you're left waiting upwards of a year to receive your FCA license, the questions are, will your investors still be around and will the market opportunity still exist?
"Acting as a launch manager, we put new managers in touch with the right counterparties at the beginning of the process, introducing them to the best lawyers and administrators as well as provide introductions to seed capital and distributors. The operational aspects of a new launch are critical, with hundreds of decisions to be made and it is essential you get all of them right," adds Maycock.
Although there are a number of EU jurisdictions in which one can use the hosted AIFM solution, the Appointed Representative model only applies to the UK.
"From that perspective, we can facilitate a full AIFMD compliance solution for start-up managers. We have launched in excess of 60 funds on our platform so we know how to support managers across a range of liquid and illiquid investment strategies. We understand what is required to operate in this regulated environment," says Maycock.
Lawson Conner provides an institutional-grade infrastructure with a dedicated team of experts handling all the operations and compliance requirements. When it comes to doing their due diligence, the hosted AIFM model provides investors confidence and reassurance when deciding on whether to invest in a start-up or emerging manager.
At the beginning, emerging managers are often overwhelmed with the operational aspect of fund management, such as legal, compliance and IT, which does not leave them much time to do what they are good at: trading and generating alpha.
"When they join our AIFM platform, they are able to outsource those operational issues. In addition, the investor faces a much larger entity with a stronger balance sheet and a larger team in place with tried and tested risk management processes. That gives investors the confidence that the chances of something going wrong with the manager are greatly reduced.
"Furthermore, on the whole, we have seen that most allocations are going to big name hedge fund managers. However, statistics prove that the highest alpha generators are smaller and emerging managers. Therefore, not only can start-ups potentially generate more alpha but, by working with the third party platforms, they can also benefit from operational cost savings," says Maycock.
Up until now, clients of Lawson Conner have only been able to appoint the firm as the AIFM. In the coming weeks, however, a hosted AIF platform, located in Ireland, is set to go live. This will provide clients with the opportunity to avail of a plug-and-play solution, using Lawson Conner's regulated AIFM in London and Irish QIAIF umbrella structure to act in a sub-advisory capacity.
The benefit of doing this is that it would avoid the costs of setting up a standalone AIF. This is a strong move considering the possible implications of Brexit.
"The potential implications of the Brexit scenario are both uncertain and wide reaching. From a fund distribution perspective, in the short term it is unlikely that much will change as there will be a period of a minimum of two years that the existing legislative framework will remain. Should passporting be required, there are alternative models available for managing your fund from London while still accessing the distribution capabilities of the AIF marketing passport such as appointing an AIFM in another EEA member state, where we can still support the advisory entity in the UK – so it looks like in all probability, even in a Brexit scenario, this may not cause the pandemonium predicted from a regulatory perspective.
"With or without Brexit, third party AIFMs have become a new standard in the industry for both emerging managers and investors who are looking to capture the alpha from new strategies," concludes Maycock.
