By Kristina West – The management company concept was first created to provide assurance of good governance and control with self-managed fund entities and vehicles. As funds proliferated and as the industry matured, the management company concept was born as an entity that would provide the necessary governance, oversight and services.
Many firms took the decision at this time to create their own, internal management company; but since that time, the industry has seen greater development and detail of the rules, particularly with the focus on liquidity and sustainability, and expectations have grown, leading to the establishment of third-party ManCos servicing UCITS funds, AIFMs, or – more recently – both.
Internal or external?
There are still compelling arguments for both inhouse and external ManCos, depending on the stage or situation of the firm; for example, those who want an EU European licence, whether for European distribution or individual account management, may wish to set up their own ManCo, while most of the top tier managers who required an EU contingency are now set up with their own regulated firms somewhere within the EU.
However, for many, the costs of market entry are high, so firms need to consider how long they will be in the market, whether the costs are too prohibitive, and if the size of the investment is justified.
Craig Blair, VP, General Manager, Board Member and Conducting Officer at Franklin Templeton, also flags risk appetite as an issue. “You have to have substance and specialisms in the domicile that the management companies are in.”
The benefits of using a third-party provider can include lower financial outlay for new market entrants, time to market, and going into a new area of investment where an experienced third-party provider knows the asset classes and can provide good governance.
Super ManCos
Key services offered by third-party providers revolve principally around the six key management functions required by legislation, either UCITS or AIFMD, with supervision of delegates, risk management oversight, and investor management oversight at their core.
However, more recently, some third-party providers have begun to offer services in both UCITS and AIFMD funds. While the capital requirements, reporting and regulation structures may be different between the two, third-party ManCos have seen a gap in the market and are willing to cater to demand from large and sophisticated clients.
The battle of the jurisdictions
Luxembourg remains at the head of the European market for fund administration and related services, with more than EUR5.3 trillion in net assets under management in regulated funds. And funds domiciled in Luxembourg pay lower taxes on their funds under management than in other EU nations, an advantage which helps investors to benefit from a larger slice of the payouts.
The Association of the Luxembourg Funds Industry (ALFI) has a dedicated Management Company Technical Committee, with more than 200 leading industry experts, who have combined to form working groups looking at issues including due diligence on ManCos and service providers, marketing and distribution, and ESG and EU SFDR requirements.
Waystone is currently seeing client preference for Luxembourg over Ireland for private debt and illiquid asserts, as Luxembourg has built up a brand awareness and expertise that Ireland has not yet achieved.
However, David Morrissey, Global Head of Client Solutions at Waystone, believes that the regulatory framework and market support will evolve. He says: “Luxembourg has the SCSP which is basically a GP-LP investment structure. Ireland earlier this year launched the AILP, which is a very innovative new structure, but unfortunately it hasn’t gained the market traction we’d like to see at this stage. It just needs a bit more time.”
Yet third-party ManCos have a significant presence in the Irish market too. Patrick Robinson, Managing Director (Ireland), AIFM and ManCo Services at MJ Hudson Bridge in Ireland, points to the massive burden of regulation under which Ireland has been operating for years as a key driver, but also believes that service will become the key differentiator between service providers going forwards, with areas such as ESG ripe for expansion.
Creating opportunities
With increasing demand for services from clients and a continued focus from regulators across the world, it seems the third-party ManCo structure has never been more important. And with opportunities to follow clients into new markets and passport services into ever-more jurisdictions, the future is bright. 
