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For alternative investment fund (AIF) promoters wishing to domicile and market their AIF in Europe, the outsourcing of core alternative investment fund manager (AIFM) functions to a third-party management company service provider ( ManCo) and AIFM is a fast, cost-effective and compliant route to cross-border distribution.
Luxembourg, and more recently Ireland, are considered prime locations for AIFs wishing to distribute across Europe. Both of these jurisdictions have seen exponential growth in demand for AIFs in recent years.
The CAGR of AUMs with third-party Irish AIFMs increased by 45% between 2018 and 2020 (Monterey, PwC) and PwC expects this grow by 14.2% on average per year until 2025. Whereas in Luxembourg the AUM of its funds increased by 12.6% in the year until January 2022.
The main drivers of this growth are the ease of doing business of both jurisdictions, the range of fund structuring offerings and their sophisticated fund services industry.
Strong growth has made the EU alternative fund market increasingly competitive and regulatory oversight of fund governance has intensified. The implementation of the Alternative Investment Funds Management Directive (AIFMD) in 2013 imposed a heavy administrative burden on AIFs and many alternative investment managers have therefore appointed third-party ManCos.
ManCos bear the bulk of the administrative burden of AIFMD compliance – such as organizing a compliant portfolio, risk management and overall oversight setup. This offers a number of benefits to the AIF promoter:
- Optimizes fundraising: by accessing the AIFM’s marketing passport, the promoter obtains an efficient distribution channel throughout the EU, via a single point of contact. The AIFM makes the request in its home Member State and once the local regulator has approved, notifications are sent to its counterparties in the targeted EU countries and the distribution can officially start from that moment. There is no longer any interaction with local regulators. Note that AIF promoters can no longer pre-market their fund, investment strategies or investment ideas to get a sense of investor appetite without notifying relevant regulators. [Find out more about the new AIF pre-marketing
rules and how Ocorian can help here.]
- Optimizes the fund manager’s time: Setting up the necessary substance for a proprietary ManCo is expensive, resource-intensive and time-consuming. Using a third-party AIFM mitigates these issues and allows managers to focus on their core business.
- Minimizes operating costs: many small and medium-sized fund promoters do not have the size or the resources to deal with the cost and complexity of increasingly demanding regulatory requirements. Outsourcing these requirements to an experienced third party is therefore less expensive than managing a proprietary ManCo structure.
- Access to expertise: AIFMs are staffed with compliance, risk and accounting specialists experienced in managing the day-to-day operations of the AIF in accordance with the AIFMD and local requirements. In addition, an AIFM should have sector specialists on its team to ensure smooth alignment of investment processes with the fund originator, for example in the areas of private equity and real estate.
- Speed to market: AIFMs provide an established platform with the required legal documentation and service providers in place to enable the efficient creation and launch of a fund.
- Tax support: third-party AIFMs do not replace a tax specialist. However, they will assist the tax advisor of the AIF by providing the necessary information and the necessary accounting documents in order to considerably reduce the administrative burden for the client.
- Mitigate risk and reduce exposure to liability:the AIFM’s responsibility for risk management encompasses a wide range of risk areas, ranging from investment risk to market risk and operational risks related to the day-to-day operations of the AIF. The AIFM accepts responsibility for its role of ensuring that the AIF is managed in accordance with the fund documents and applicable rules and regulations. It has a regulatory capital requirement linked to the size of its assets under management.
- Fund initiator not subject to AIFMD remuneration rules: the external AIFM is subject to the remuneration rules of the AIFMD, not the initiator of the fund. So they can continue to incentivize their deal teams as usual, while the limits apply to the AIFM.
As the alternative asset industry continues to evolve, sophisticated and experienced AIFMs are uniquely positioned to provide the operational efficiency managers need to stay competitive.
Our AIFM services simplify the complex
As a fully licensed AIFM in Luxembourg and Ireland, we provide a platform for comprehensive third-party ManCo services to institutional investors, international fund promoters and investment managers.
We can also be appointed through a marketing agreement to facilitate the pre-marketing of your AIF to LPs and other potential investors in the EU and UK. Combined with our fund administration and AIF custodian capabilities, we can provide a seamless one-stop-shop solution to help fund originators realize their investment strategies and add real value to their investors.
To discuss how we could support your fundraising ambitions, contact our team below or learn more about our ManCo services here.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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