Demystifying managed account platform providers
By Abali Hoilett & Benoit Sansoucy, Maples – Canadian institutional investors have been at the forefront of investing in the alternative investment space, utilising innovative bespoke structures that reduce operational and investment risk and enhance returns. The widespread adoption of managed account platforms (“MAPs”), which create optimal conditions to generate and preserve alpha, while mitigating the risk from investing in commingled structures, has seen the vast majority of Canadian institutional investors engage a managed account platform provider (“MAPP”).
This trend accelerated following the financial crisis and a number of well-documented frauds within the industry. It has also gained greater relevance today, amid the significant challenges of the current market environment.
When structuring MAPs, Canadian institutional investors regularly look to engage MAPPs to overlay their MAP structure. In contrast, aside from a small number of more sophisticated players, most US institutions tend to lag their Canadian peers in the use of MAPPs. Investors in the US show a clear tendency to use funds of one or separately managed accounts (“SMAs”), albeit with the use of side letters. This is despite the inherent principal agent risk in commingled structures.
Benefits of MAPPs
Managed accounts (“MAs”) can reduce the operational risk typically associated with investing in commingled structures. The use of a MAPP allows the investor to leverage the MAPP’s technology, reporting, risk and legal expertise in negotiating agreements. This negates the need to rely on their own internal infrastructure and resources, while providing enhanced liquidity, cash efficiency and a level of transparency not traditionally associated with investing in commingled structures.
Investors can select the underlying trading advisor (“TA”) and delegate that function via an investment management agreement (“IMA”) negotiated by both the MAPP and the investor. This agreement provides the authority to manage a pool of capital with a specific investment mandate and risk and return target profile. Investors, in conjunction with their MAPP, can incorporate greater control over the portfolio construction and asset allocation, which can be highly advantageous in times of market turmoil and volatility.
They can also leverage the MAPP’s reporting functionality and risk attribution tools to parse their MAP’s portfolio of TAs or enable direct data feeds into an investor’s risk management systems.
Furthermore, utilising a MAPP is not only beneficial in highly liquid strategies. From our work supporting many of the largest Canadian institutional investors, we have seen a significant uptick in credit related strategies with varying liquidity profiles now being on-boarded via a MAPP.
Another misconception is that the use of a MAPP is cost prohibitive for smaller investors. Changes in technology and the competitive nature of the industry have materially reduced the cost of using a MAPP for such investors. Combined with the ability to extract potential management fee concessions with the TA, this can mean the cost of a MAPP is neutral or even beneficial when compared to a traditional form of allocation.
Selecting a MAPP
As with any service provider, it is imperative that proper due diligence be conducted by the investor in the selection of a MAPP. Hence, a formal request for proposals should be sent to prospective target entities, including some of the following points of discussion:
• Due diligence – Does the MAPP have an experienced dedicated team to conduct investment and operations due diligence on the TA?
• Risk oversight – Does the MAPP have a risk team and customised reporting functionality in order to meet the requirements of the investor, or have the ability to feed portfolio position level data to the investor’s risk aggregator on a frequent basis?
• Operational bench strength – Does the MAPP have the required back office functionality and controls including cash management, margin calculation, expense processing, NAV reconciliation, financial statement preparation, etc?
• Reporting – Does the MAPP have the required reporting functionality? Can they extract, organise, and analyse data while layering in an investor’s KPIs?
• Legal – Does the MAPP have a complement of well-seasoned legal staff to take on the heavy lifting in order to negotiate the multitude of agreements (administration, ISDA, custodial, banking, IMA, etc) required to on-board a TA?
• Information technology – Does the MAPP have a robust redundant IT infrastructure and the systems required to support all of its functions?
• Regulatory and tax – Is the MAPP itself a registered and regulated entity and does it have the staff and systems to monitor and oversee regional regulatory requirements and can they actively monitor and follow up on any TA investment guidelines?
Implementation of the MAPP
Once the selection of the MAPP and the structuring is decided, a platform agreement will need to be put in place between the investor and the MAPP. This may include, but is not limited to, the type of reporting, compliance affirmation, due diligence activities, notices, financial statement preparation, net asset value calculations, trading level and other portfolio and financial information as well as monitoring of investment guidelines as required by the investor. The agreement will also govern numerous other considerations such as the types of service providers engaged, conflicts of interest, the valuation policy applied, warranties and representations, MAPP fees and portfolio construction control, among others.
Depending on the structure and jurisdictions involved, various other constitutional documents will be required and agreed to. Although these requirements may seem exhaustive, a MAPP with experienced legal staff coupled with onshore and offshore legal counsel, will greatly facilitate the negotiations of all relevant agreements. Once finalised, these agreements can then be used as a template for any new TAs to be on-boarded to the platform so on-boarding a new TA can be quite quick.
Oversight of the platform
Once the MAP is structured and the first TA is ready to be on-boarded, it is important that proper governance protocols are adhered to through a formal launch meeting and regularly scheduled board meetings. This will allow the independent directors the opportunity to review the launch resolution, constitutional documents, service provider agreements, investment management agreement and due diligence reports and direct questions to the platform manager.
Furthermore, regularly scheduled and properly minuted board meetings, will allow the independent directors to ensure that proper ongoing governance of the MAP and its service providers is maintained.
Termination of a trading advisor
Redemption from the TA will be in accordance with the subscriptions documents and negotiated notice periods. If the investor’s investment with the TA is fully being redeemed then, depending on the structure, the MA may need be liquidated in accordance with the laws of the jurisdiction in which it has been established.
Abali Hoilett, Co-Head, Funds Fiduciary, Cayman Islands
Abali is Co-Head of the Maples Group’s Cayman Islands Funds Fiduciary business, servicing a wide range of investment fund structures including hedge funds, private equity funds and unit trusts. He primarily serves as a director to funds for clients across the Americas and Asia and brings specific expertise in the infrastructure and renewable energy sectors. Abali has authored several articles and participated in numerous industry panels on a variety of topics that explore the evolution of both the investment funds industry and corporate governance practices globally.
Benoit Sansoucy, Vice President, Funds Fiduciary, Cayman Islands
Ben is a Vice President in the Maples Group’s Cayman Islands Funds Fiduciary business. He serves as an independent director on a wide range of alternative investment funds including hedge funds, fund of funds, segregated portfolio companies, private equity vehicles and related structures. Ben has over 15 years’ experience in the alternative investment industry, ten of which were dedicated to operational due diligence and fund governance.