The official grandfathering period of the AIFMD only ended this July so assessing how different jurisdictions and their fund industry networks are adjusting to the new challenge is a little too early to call. Nevertheless, as burdensome as the Directive is for managers, it is at least pushing service providers to further extend their solution sets; whether that be from a regulatory reporting perspective, providing depositary services to AIFs – both onshore and offshore – or simply providing platform capabilities to allow new managers to feel their way; to get up and running without incurring the full cost and glare of regulation.
Malta, in that sense, is no different to any other European jurisdiction. In fact, many would argue that it has a distinct competitive advantage, certainly from a fund structuring perspective.
Speaking to Hedgeweek about the importance of Malta to its strategic growth plans in Europe, Mike Hughes, Global Head Fund Services, Institutional Cash & Securities Services at Deutsche Bank says: “Malta has established itself as a domicile of choice for financial services providers and our local presence gives us the opportunity to provide a platform of services to fund managers not available through any of the other financial institution channels in Malta. In essence, Malta is vital to the expansion of our global footprint and European business.”
These services are comprehensive for managers needing to comply with the Directive.
“Where our competitors rely on passporting their depositary services into Malta, we contract directly with our clients locally – this makes us unique in Malta,” explains Hughes. “We have an extensive depositary and fund administration product suite covering banking services, collateral management, middle office, fund accounting, custody, foreign exchange and investor services for locally domiciled fund managers.
“Currently, we service in excess of USD2.5bn in assets across our product portfolio. Our award winning fund administration is a vote of confidence in our business and that too for Malta.”
One of the biggest adjustments under the AIFMD is the need for managers to appoint a depositary to their AIF. Whilst the number of local custodians in Malta remains limited, those that are there – including Deutsche Bank, HSBC and Sparkasse Bank are more than prepared. Indeed, as Paul Mifsud, Managing Director at Sparkasse Bank Malta plc confirms, the firm adopted a highly principled approach to monitoring client portfolios way before the AIFMD was even conceptualised.
“After all, these are investor funds and they need to be protected. A look-through capability has always been ingrained in who we are and what we do. So AIFMD for us was basically reaffirming what we thought from day one,” says Mifsud, who confirms that the majority of enquiries currently are coming from EU-based managers.
“People are waking up and smelling the coffee. Fund managers now realise they need to get aligned under the Directive. The depositary, which until recently was the last service provider a manager talked to in the overall chain of service providers, has now become a focal point.
“In 2014 we would have doubled the amount of clients from two years ago. We are seeing a mix of managers; start-ups as well as existing funds that previously operated under the PIF regime but now, because of their size, have had to be re-licensed as AIFs under the Directive,” says Mifsud.
The problem managers have in appointing a depositary, besides the fact that it is another layer of cost, is that there is now someone monitoring what they are doing and looking over their shoulder. That’s not something they’ve ever had to experience before; especially private equity managers.
“Previously managers could trade and do pretty much anything they wanted. Now, by appointing a custodian to hold the fund’s assets, the AIFM has to make sure that they are happy holding those assets; indeed can they even hold the assets? Can they verify the ownership? Can they provide adequate record keeping and safekeeping of the assets? It puts a manager’s portfolio under more strain.
“The fact is we are on the hook for the safekeeping of the AIF’s assets if the fund is domiciled in Malta. We are responsible for loss of liability,” says Mifsud. This is very different to the “Depo Lite” solution under AIFMD; here, the custodian (or prime broker) is not on the hook for loss of liability as these are non-EU funds.
Given the complexities of asset verification for non-financial assets – private companies, land, real estate – Mifsud says that they are largely working with clients trading transferable securities.
“Land and property are not the easiest assets to work with; planning permissions, insurance issues, the list just goes on and on. If you find a depositary willing to work with these assets, they will need independent experts on the ground working on behalf of the depositary to verify the assets wherever they may be. That’s not going to be cheap. Will the manager be willing to pay for that?” questions Mifsud.
TMF Custom House Global Fund Services launched a Depo Lite platform on 15 September 2014 to provide the cash flow management and general AIF oversight functions needed under the AIFMD. As the administrator is not attached to a bank it cannot provide the asset safekeeping function; something the prime broker is able to continue doing on behalf of the manager running a non-EU fund.
“It’s an area we wanted to move in to. Not only will it add value to us as a business, it was a case of ‘We can’t not offer this solution to our clients’,” says Kevin Caruana, Managing Director of TMF Custom House Global Fund Services (Malta). “The important thing is that we can provide clients with exactly what they need as the regulatory environment changes. We have a FATCA solution, a Form PF solution and we now have a depo lite solution. We are also in the process of finalising our Annex IV reporting solution for AIFMD, which should be ready in Q4 this year.”
On the issue of providing cash flow monitoring and general oversight functions to non-financial assets, Caruana explains that this is something any good administrator currently provides: “As a member of the TMF Group, we now offer full depositary services to private equity and real estate funds as well as funds of other nature that do not primarily invest in financial instruments typically held in custody.”
Service providers face substantial costs upgrading their technology infrastructures and strengthening their capabilities to monitor and report on funds, many of which are moving into ever-more complex areas such as direct lending, asset-backed lending, etc.
“In order for fund managers to achieve cost efficiencies whilst abiding to the new regulations, they are relying to a greater extent on their fund administrators to deliver an array of solutions,” explains Joseph Camilleri, Head of Business Development at Valletta Fund Services, the fund administration arm of the Bank of Valletta.
Camilleri continues: “The AIFMD has been pushing consolidation in the market and possibly over the next couple of years we’ll see a squeezing out of smaller service providers who opt out from providing services that cater for the requirements of these regulations, both on the depositary side and the fund administration side. The key for those who want to survive is to invest more in training and IT infrastructure and provide all the necessary services that managers now expect. If not, managers will simply move on and look for service providers who tick all the boxes.”
Valletta Fund Services is fortunate to be able to use the robust infrastructure built by the Bank of Valletta and to that end it is helping the administrator develop a FATCA solution.
“We are now availing ourselves of the infrastructure that Bank of Valetta has put in place to do the necessary registration and ongoing reporting for managers under FATCA. VFS has communicated with all of its clients offering our services in relation to FATCA obligations” confirms Camilleri. “It’s an area where we have invested a significant amount of time and energy.”
One other important area of development to help support emerging managers in particular is the provision of multi-fund platform services. In effect, umbrella structures in the form of an open-end SICAV.
These structures can best be thought of as incubation platforms that enable start-ups to build their track record and assets steadily without having to incur all the costs of setting up a standalone fund.
“The Primary European Fund SICAV is the name of our Malta umbrella structure. Like our Primary Development Fund in Cayman it is a turnkey solution for managers wishing to launch in Europe,” explains Derek Adler, Group Director of fund administration firm ifina. “If you’re a three-person start-up you’re not going to have the resources – both in terms of personnel and finance – to take on the burden of regulation. Our umbrella structure helps to accommodate the little guy that would ordinarily find it difficult to get off the ground in Europe.”
Another firm that has long been active in this space is TMF Custom House Global Fund Services. Indeed, they were the first to launch such a platform in Malta back in 2010; the Nascent Fund SICAV plc.
There are currently six or seven different managers running sub-funds on the platform spanning managed futures, FX and fixed income to name but a few. This umbrella structure is far from unique but what it is likely to do is become even more popular under AIFMD for the reasons that Adler refers to.
“It’s a trend we’ve seen in the UK where start-ups managers become appointed representatives of FCA-registered managers. The start-up focuses on portfolio management while the regulated manager takes care of all the regulatory and risk management issues,” says David Barry, Head of Sales & Marketing, EMEA at Custom House.
“We are currently working with a couple of clients in Malta who have applied for their AIFMD licence and are awaiting approval from the MFSA. Once approved, they will themselves be able to offer a full AIFMD compliant structure to emerging managers. Each manager will be able to avail of the EU passport which will help with distribution and capital raising under the Directive.
“It’s important for an administrator to be able to service the manager across their entire evolution. That often starts with a managed account. Then they might move into a sub-fund structure on a platform like Nascent. Finally, the manager launches their own standalone fund and, eventually, becomes AIFMD-compliant. TMF Custom House supports their clients at each stage of evolution. Our philosophy is to grow with clients and we have been doing this for over 25 years,” explains Barry.
In that sense, Malta is an excellent environment in which to allow managers to grow and feel their way in to becoming regulated asset managers under the Directive.
Adler says that interest in the Primary European Fund SICAV has been good and is confident that it will continue to grow now that the AIFMD grandfathering period has ended.
“The barriers managers face today are off putting. We want to get a message out there and tell these start-up managers, “All is not lost!”
“We act as the project manager. We are the link between the manager and the lawyers, the auditors, the brokerage account, and help get the licence. We are the hub basically. That makes getting set-up far quicker and cost-effective for the manager. If you don’t know what the regulators want when you apply for a licence you could run into trouble. We make sure all the Ts are crossed and Is are dotted. We know what the MFSA is looking for and that’s important for managers who want to get up and running yesterday,” says Adler.
Ifina charges a set fee of EUR13,000 to establish a sub-fund on the platform and according to Adler “launching a standalone fund would cost double that. We’ll consider funds that are launching with as little as EUR1-2m.”
All of which is very reassuring for new talent coming to market.
As a concluding remark on the need for Malta to have more custodians in case, as predicted for 2017, AIFMs will be required to appoint local depositaries in the same jurisdictions as their AIFs, Mifsud says:
“My gut feeling is that it’ll be difficult for the simple reason that banks are downsizing rather than upsizing and are going back to basics. It’s difficult to predict the future but that’s what I see today.
“Is it good for the jurisdiction? No. Do we need one or two more custodians? Yes. Will they come? I don’t know.”