A true sign of how well a fund jurisdiction is doing is the level of growth, not just in new fund formations, but asset growth within administration firms. The onset of the AIFMD has opened up a new range of services for administrators, in particular by providing a Depo Lite solution to managers running non-EU funds.
Ipes is one of the world’s leading private equity fund administrators. According to Justin Partington (pictured), Commercial Director at Ipes, “clients are continually asking us about Management Company solutions and providing substance in Luxembourg. There are significant hurdles to set up a ManCo because we think it’s a bit conflicting with the administration role.”
What Ipes has done, however, is establish a depositary service in the UK. The reason for this was because a lot of managers operating funds out of Luxembourg needed to have a depositary in place from day one. “Also, we work closely with a number of custodial banks so we didn’t see the switch play (that is, managers rotating out of existing depositary agreements) as an obvious place to start. We do get some clients asking us to do depositary services in Luxembourg on new funds,” adds Partington.
Over the last 12 months, Ipes has seen its client numbers grow from 103 clients to 117 clients. The firm’s AuA has similarly grown from USD43bn to USD62bn. On the depositary side, despite only operating since July 2013 it already has 26 clients. On 1 Aug 2014, the FCA listed 17 PE AIFMs, of which Ipes can count 10 of them as clients. The fact that another four of these also use independent depositaries gives a clear insight into how PE managers are approaching the Directive. They want specialist providers, not necessarily bank-owned depositaries.
Bob Brimeyer is Group Head of Fund Services at Alter Domus in Luxembourg. In his view, the introduction of the SCSp was perfect timing. Fund managers have been highly motivated by their investors to consider onshore jurisdictions and as Brimeyer says: “For Luxembourg it was an intelligent initiative to offer a broader suite of products including, regulated vehicles, less regulated vehicles and non-regulated vehicles.
“Having the SCSp is a key success factor, as we are now able to tell global PERE managers who historically have preferred Cayman or UK LP structures, ‘Now we can provide the same thing here’. It has certainly helped to remove some of the hurdles that we have faced in the past.”
Brimeyer remarks that some competitors have decided to centralise their operations in one jurisdiction, in effect using Luxembourg only for client fronting. However, many of these outsourcing projects do not seem to deliver the expected quality and Alter Domus has been able to win a substantial amount of business as a result: “Our strategy is to service the vehicle out of the jurisdiction where the vehicle is based but using a vertically integrated global platform; all of our offices use the same technology and the same processes, but we deliver the service locally where our clients need us to be.”
Simon Henin is the Managing Director of Ipes (Luxembourg). He has no doubt that the SCSp will raise interest from the global PE community, especially for those who chose to go down the non-regulated route. That said, Henin does not yet see any clear push to set up new funds. “Whilst we don’t see any clear trends of fund redomiciliation we certainly see more new fund manager startups expressing interest in the SCSp structure. Luxembourg is increasingly being placed on the list of jurisdictions for managers thinking about their next fund,” says Henin.
Partington re-emphasises the point by adding: “A lot of US managers have holding companies in Luxembourg. Indeed, most PE managers do if they have Continental European assets. The overwhelming trend that we see is that fund managers aren’t changing their fund structure. There have been a couple of notable exceptions (e.g. Swedish PE manager EQT Partners) but in general, people are sticking with the same fund structures for now.”
Brimeyer says that there is a move towards onshore funds, initiated in part by the fact that the AIFMD has created more of a level playing field. Brimeyer sees this as a real benefit to Alter Domus going forward.
“There has always been a requirement to appoint a depositary in Luxembourg. We can therefore inform clients, that if they want to set up an AIFMD-compliant fund, Luxembourg is ready with depositaries that have been up and running for the past 15 years. Everyone understands what needs to be done,” explains Brimeyer. Since 2008, Alter Domus has serviced PERE funds as well as the holding companies.
This is why these specialist administrators are enjoying a period of growth in Europe. Brimeyer estimates that 80 per cent of new clients opt for a more complete integrated solution, using Alter Domus for both administration and depositary lite services. Of its existing client base, that number is more like 30 to 40 per cent.
“In Luxembourg a new regulatory category of service providers has been introduced specifically to act as the depositary for AIFMD-compliant funds. We decided it was definitely something we should be offering as not many of the custodian banks here are specialised in handling PERE assets. We were the first non-banking financial institutions to acquire a depositary license from the CSSF in Luxembourg,” says Brimeyer.
He continues: “Many banks have been reluctant to service the different holding companies below a PERE fund. Alter Domus was incorporated in Luxembourg 11 years ago and we have always specialised in handling PERE holding vehicles. We have full control over the holding structure so that makes our lives as a depositary quite straightforward as we know exactly what happens in the structure. It isn’t difficult for us to supervise.”
Previously, if a PERE manager chose to launch a fund out of Luxembourg they needed to appoint a depositary with a bank license. Now they are free to choose from a wider selection of non-banking service providers.
The big shift for PERE managers under the AIFMD is having to prepare for regulatory reporting – namely Annex IV. The complexity of fund structures and multi-line items in portfolios makes it more of a challenge for the GP to deliver the same kind of transparency that regulators are asking for than say a hedge fund manager. A move into more of a risk transparent environment will take a period of adjustment but software providers like Advent Software are well prepared, not only for PERE managers, but increasingly hedge fund managers who are choosing to launch bank loan and hybrid fund strategies.
“We’ve always had good coverage within Geneva for credit-type instruments, whether they be bank loans, structured products, asset-backed securities. It’s really just a case of taking the business that someone has and understanding how that business behaves. In terms of accounting, our approach is to have all the necessary parameters in place for managers that generate cash flows, P&L flows from whatever kind of instruments; it’s all parameter-driven,” confirms Roger Woolman, senior solutions consultant at Advent.
Transparency is available for managers throughout Advent, not just in solutions like Geneva World Investor, a piece of Geneva that supports LP-type onshore structures and offshore unit-type structures.
“It depends on where you need to look from and to. Ultimately, for investor look-through capabilities it could be Geneva World Investor or it could be the core Geneva platform; it depends on the type of investor,” adds Woolman.
Partington says that middle office services to provide LPs with more granular reports are not yet high on the agenda simply because GPs see that as their job. He does however note that LPs are doing increased due diligence on third party administrators and other service providers although “it’s still a tiny fraction of the ODD that hedge fund investors conduct”.
Henin adds: “Reporting on capital accounts for LPs is new to a lot of Luxembourg service providers under the SCSp but we’ve been doing this for Anglo-Saxon LP structures for the past 16 years. Our people and systems are fully focused on private equity.”
One area of asset class growth that Luxembourg seems to be benefiting from is that of real estate debt funds. It is, says Aexandre Jaumotte, partner and Real Estate and Infrastructure Tax Leader at PwC, Luxembourg, “an area where we are seeing good trends. We now have a specialised team dedicated to supporting these debt funds.”
The same is true at Alter Domus which now has a team of 20 people focusing on this asset class.
According to Amaury Evrard, partner, Real Estate Leader at PwC Luxembourg, the rise of real estate debt funds is a combination of managers capitalising on the opportunity to fill the funding gap as banks strengthen their balance sheets and a response to Solvency II.
“It wasn’t always straightforward for investors to know in which bucket these real estate debt funds should sit so it took a bit of time to define what type of product it was. It’s not completely real estate, it’s not completely like other debt or bond funds in the market so it took a bit of time; it’s effectively a mixture of the two.”
Hugh Stevens is head of Private Equity and Real Estate Services at BNP Paribas Securities Services. Stevens says that some of the world’s leading asset managers are taking more of a portfolio approach to structuring real estate. Some refer to the approach as the “four quadrants of real estate”: namely public versus private assets, and equity versus debt.
As Stevens explains: “If an investor wants to invest in Emerging Market real estate, for example, a manager will first look at the fundamental economics and decide which countries to target. The next decision is how to structure the product. That will depend on the investor; where they are domiciled and what regulations they are exposed to and what capital charges might apply.
“If the best option for the investor is to structure something in public equity then a Reit might be chosen. If the option taken is private equity, then a private real estate fund might be the best option as a closed-ended fund structure. Or the investor may prefer to go down the private debt route, in which case a real estate loan fund might be an option. Finally, if they decide on public debt a listed debt fund or a CMBS vehicle might be used.”
East Capital is a Swedish frontier and emerging markets asset manager with a well-established UCITS business as well as an alternatives business. According to Magnus Lekander, General Counsel at East Capital, the AIFMD “has been a catalyst for consolidation of our business and has brought us efficiency gains. When you look at PERE managers, they have struggled more than hedge funds because they’ve never had to come under supervision and have had to make more changes to their businesses to accommodate these new rules.
“We have all the necessary processes in place because we’ve been running UCITS funds for 17 years. We run real estate and private equity funds as a separate silo to our main business. By establishing one management company – East Capital Asset Management SA – last year, we’ve been able to consolidate our business. Our Luxembourg management company manages both our UCITS and SIF platforms,” explains Lekander.
East Capital has been running daily traded retail funds out of Luxembourg since 2005 under a SICAV structure. Back in 2009, the firm recognised that the AIFMD was coming and started to explore which domiciles it thought would best cope the new regulations. In that sense, Luxembourg was an easy choice. What resulted was a gradual migration of its offshore Cayman funds onto an AIFMD-compliant SIF platform.
“We currently have six strategies on our SIF platform: one real estate fund, a special situations fund, a China A Shares fund, a Russia domestic growth fund, a deep value fund and the East Capital New Markets fund. The last two funds were Cayman funds that we moved onshore as part of our adaption to AIFMD. Originally these two Cayman funds were four separate strategies which we decided to re-model. We could see the operational benefits of plugging these offshore strategies into our SIF platform,” states Lekander.
The most recent fund launch was the East Capital China A-shares fund last December. The fund is long-only but sits on the SIF platform as China’s QFII regime does not lend itself favourably to UCITS limitations. Despite only being available to Swedish investors, based on the Memorandum of Understanding between Sweden and China to avail of the QFII quota, the fund is already closed with USD125mn in AuM.
“Our current QFII license goes through Sweden but the special treatment that Luxembourg has received is definitely something we’ll explore further. We can see a niche in this market. We want to establish ourselves as a leading player offering this limited access to China’s market,” says Lekander. With real estate debt funds on the rise, a potential Reit product on the horizon and an RQFII programme to tap in to, global managers suddenly have a number of compelling reasons to use Luxembourg as their springboard.