It is fair to say that alternative fund managers are feeling a degree of regulatory fatigue. Every month, it seems, there are updates, developments and areas of additional compliance. But whilst on the surface this can appear overwhelming, digging a little deeper reveals that service providers are positioning themselves to offer a more complete set of value-added solutions.
As a leading European domicile, Luxembourg is seeing this develop first hand. One firm, Credit Suisse Fund Services, has moved quickly to bring a menu of options to help managers address today’s fund management issues.
“Focusing purely on security services, asset servicing is not the main issue; The initial discussion with a client is more about finding the right domicile, fund structure, the right distribution strategy and how to cope with regulation for different fund structures…then comes the discussion about asset servicing. Today, managers are looking more for a banking partner that can support all of their needs and make their lives easier. You don’t make life easier just by settling trades faster than anybody else,” says Jean-Daniel Zandona (pictured), Director, Financial Institution/Asset Managers at Credit Suisse Luxembourg.
As fund managers needs are moving up the value chain, Credit Suisse offers a large range of services ranging from fully-fledged labelled fund platforms and management company services through to administration services, financing services, asset management services, etc. “Offering a wider range of services is for us a clear advantage. At Credit Suisse, we recognise the specific needs of the Assets Managers segment and have designed end-to-end solutions for them.” adds Zandona.
This is important as it is allowing institutions like Credit Suisse to benefit from this new era of regulation under AIFMD to bring its fund manager clients more deeply into the bank as regulation increases the costs of doing business.
“Being one of the first licensed AIFMs in Luxembourg clearly helped us anticipate the market and better understand the specific needs of in-scope fund managers, being ourselves one of the largest fund managers of Luxembourg funds. We leveraged this experience to also reinforce the management company that we offer for rent to both UCITS and AIFMD-compliant managers, which in turn significantly increased its 3rd party AuM over the last 12 months,” says Zandona.
Indeed, under AIFMD, the ability to act as the AIFM on behalf of both EU and non-EU managers is proving to be a real fillip for global banking institutions. Straight away, it takes the regulatory burden off the investment manager’s shoulders, leaving them free to focus on running the strategy and raising assets.
Whilst the Management Company for rent is clearly useful, some non-EU managers without a EU footprint need something more complete: that is, a turnkey solution for both the manager and the fund.
“We are seeing non-EU managers coming to Europe to replicate a fund strategy they’ve been running successfully in their home market to widen their investor base. The AIFMD and UCITS regulation is still a bit unclear to them. We don’t realise just how complex and fragmented things can still look from a non-European perspective, despite the recent EU-wide harmonisation efforts deployed. That’s the feedback we’ve been getting from non-EU managers”.
“What we realise is that these managers don’t want to take too much risk penetrating into Europe. That’s why we see more turnkey solutions where firms are coming from outside the EU and renting a cell on a fully-fledged platform,” explains Zandona.
By providing a white labelled SICAV fund platform, Credit Suisse is meeting the speed to market and cost challenges that non-EU managers face head-on.
It is, in many ways, a win-win situation. Using a fund platform to test a new product, without having to incur all the set-up costs of a standalone fund, gives the manager a longer runway for raising assets. If successful, they can choose to revert out of the platform and go solo. If it fails, they can terminate the contract with 90 days notice. It basically takes the pressure off launching a regulated fund and trying to raise EUR100-200m within six to 12 months to break even.
“Clients who don’t need to use our labelled fund umbrella can create their own fund and rent our management company services. We provide the substance; i.e. the technical infrastructure, operational means, governance and people that need to operate, amongst other duties, risk management, compliance, corporate services and reporting locally to ensure that the fund fully complies with these substance requirements, which really matters from a cross-border distribution and tax perspective.” says Zandona.
He adds: “A mid-sized private equity manager might want to focus exclusively on sourcing and executing deals. They may not want the administrative burden imposed by the AIFMD and prefer talking to a single counterparty doing the heavy lifting.”
“The global coverage of the bank, both in terms of geographies and products, is a clear advantage when it comes to proposing integrated solutions encompassing various needs along the lifecycle of an investment, from investment structuring, distribution, execution and administration”.
“We continue to see strong demand for these ‘alternative’ fund services in addition to the more traditional asset servicing capabilities that we provide at Credit Suisse”
That Credit Suisse also has a strong credit rating and a fortress balance sheet are key points for managers to consider at the initial discussion phase. An independent management company or custodian might only have the minimal capital reserves. “When institutional investors perform their due diligence on the fund manager, teaming up with a bank or a management company offering sound financials is key,” says Zandona.
It is precisely because of the fact that large bank-owned institutions can bring scale and a comprehensive menu of services that Credit Suisse also offers depositary services under AIFMD. The operational responsibilities are not new, per se, as the firm has been providing custody services for a significant time, given the depth of Luxembourg’s UCITS market.
“Depositary services is a low margin business. By offering a widened suite of services including brokerage, custody, management company services and administration, it allows you to leverage off connectivity between each business division across the value chain. You might not be making huge revenues from custody on a stand-alone basis but you are able to achieve greater cost efficiencies by offering a one-stop shop,” comments Zandona.
Most managers view regulation as a necessary evil. Yet because many target a relatively limited number of institutional investors, they could have lived with private placement, observes Zandona.
“Fund registration for distribution in foreign countries is becoming an increasingly important topic, where some grey zones subsist. AIFMD is bringing more harmony on paper. As industry practitioners, we are all trying now to make it work practically,” concludes Zandona.