Heritage Depositary Company (UK) Limited (Heritage Depositary) operates what the FCA refers to as a `PE Alternative Investment Fund (AIF) depositary'. Whilst it is able to provide full depositary services to most AIF structures, Heritage's depositary services are focused on, but not limited to private equity, real estate, infrastructure, venture capital and esoteric alternative funds investing in both developed and emerging markets.
"The AIF's we oversee invest in what are classed as non-financial assets. We do however have the capability to hold such `Financial Assets' through our recognised and authorised global custodian," explains Gerry Warwick, Director of Heritage Depositary.
Under AIFMD, the depositary has four main functions: cash monitoring, asset verification, safekeeping, and oversight.
"Initially there was some resistance to appointing a depositary but we find that the sentiment among managers has mellowed somewhat and they are now recognising the added value and comfort that an independent depositary brings to the AIFM, the AIF, its board and investors," says Warwick. He adds "over the last couple of years, AIFMs have steadily adopted a more collaborative mindset to working with the depositary and Heritage Depositary offers tailored services that not only ensures compliance with its responsibilities under AIFMD but also minimises disruption to existing roles and relationships.”
Certain AIFM's take the opportunity to avoid a potential conflict of interest and appoint depositaries independent to their other service providers while non-EU AIFs in particular are not required to appoint a single entity to carry out all of the functions required by AIFMD. This allows non EU AIFMs to maintain existing relationships with their appointed administrator and/or custodian by having them perform cash monitoring and verification of the AIF's assets in an arrangement known as `Depositary Lite'. A depositary however is still appointed to carry out the oversight function.
While this arrangement may be referred to as Depo Lite, Warwick emphasises that such an arrangement should not be misconstrued: "It does not mean reduced oversight as all the functions required under the full depositary service still need to be carried out but with the option for the AIFM to use multiple providers, but, the work is effectively the same. We, as the depositary, must still perform the oversight function on those service providers looking at the processes and controls, stress testing etc., to ensure everything is robust."
Heritage Depositary has clients that already use Heritage as their appointed administrator, those that retain a third party administration relationship and indeed those who perform their own administration function in-house.
"There are obvious benefits to appointing an Administrator and Depositary under the same roof although we have to emphasise that our Administration company and our Depositary are set up as independent companies with operational autonomy," says David Price, Heritage Depositary Services Manager.
"It can be highly frustrating when waiting for information from an external third Party especially as our services have been tailored to ensure compliance with depositary functions under AIFMD and in a way that minimises disruption to the AIFM."
Having easier access to all the required information and the ability to put in place an effective integrated operating model allows for reduced risk and a more efficient service to the AIFM. Given how sensitive costs are within the alternative funds industry, the more an AIFM can minimise them the better.
"However, if we are the administrator and the depositary we must avoid potential conflicts of interest. Heritage Depositary Services is a separate legal entity to Heritage Administration Services, and both have their own separate boards," explains Warwick.
"The risk component will influence the depositary fee but it will also be based on other factors such as volumes and access to necessary information. Heritage Depositary makes it clear from the outset that whether an administration function sits `inside' or `outside', this will not alter its own operating model. Its oversight duties therefore will not be compromised."
It should be noted that Heritage Group has an office located in Malta offering fund administration as well as the same depositary services described above.
Although managers are not going to necessarily appreciate the costs of having to appoint a depositary under AIFMD, Price is keen to stress that they are counteracted with the comfort the AIFM, its Board, and investors have from the added value that an independent depositary brings.
"Heritage Depositary provides depositary services to a number of funds that fall outside of the scope of AIFMD but have elected to be included within scope because it gives the manager extra credibility when talking to prospective investors," confirms Price.
As with any financial service function it can be difficult for Managers to find the `right fit' when appointing a depositary. Heritage Depositary believes the other key aspects AIFM's should look for are:
• Knowledgeable, experienced professionals with a thorough understanding of the alternative fund industry who possess deep knowledge of the asset classes they service.
• Provision of flexible solutions and agile responses to meet the varying demands of each unique structure that add value not cost to the AIFM.
• Effective Systems and Controls with efficient reporting functions.
• An operating model which delivers a service that is compliant with AIFMD while ensuring that the needs and expectations of the client are met.
• A competitive fee that is proportional to the structure and complexity of the AIF.
To ensure compliance with AIFMD, it is essential that fund managers consider and address their depositary requirements particularly if they plan to market to investors in Europe. As an affiliate member of the Depositary and Trustee Association and chair of the Private Equity, Real Estate and Venture Capital Working Group, Heritage Depositary is well placed to offer assistance and added value to the AIFM.