Unveiling the Super Management Company
For the past 20 years or more the growth of the UCITS brand has been an unrivalled success: total assets are now an eye popping EUR7.1tn. Alongside this growth Europe has seen the emergence of management companies to handle the critical functions that a regulated UCITS fund entails – risk management, reporting, governance and distribution.
With the introduction of AIFMD in Europe (the Alternative Investment Fund Managers Directive), a new management company has emerged: the Super Management Company (‘Super ManCo’).
“The Super Management Company allows investment managers to consolidate their operations into one entity for both UCITS funds and AIFMD-compliant funds. If you take that one step further and use the ManCo passport it allows you to have one Super ManCo in one EU member state supporting fund distribution in the EU and beyond,” explains Guy Mettrick, Head of Regulated Fund Sales, Europe at SumiTrust GAS.
This ability to use one ManCo structure to support both UCITS funds and AIFs represents a huge opportunity for both existing management companies as well as new entrants.
UBS Fund Services has been operating fund platforms in Dublin for a number of years specifically supporting UCITS funds. Over the last nine months, it has been busy extending that capability to support AIFs.
“We have a lot of substance and infrastructure in place and that’s how we differentiate ourselves from others who may not have as robust a framework as we do,” says Gavin Byrnes, Head of Business Development UK, UBS Fund Services. “We have a platform that we are able to leverage. The genesis of our AIFMD solution really was to increase the capacity of our existing operations by helping clients establish the appropriate European product to support their wider European distribution activities; the two went hand in hand.”
UBS expects to have its AIFM management company in place by the end of Q3 this year. To be clear on what a Super ManCo offers, as well as handling 15 of the 16 core responsibilities under AIFMD it will also act as the third party AIFM on behalf of the manager; an important feature for non-EU managers who don’t have the capital base needed to set themselves up as an AIFM.
The 16th responsibility – namely portfolio management – will be delegated back to the investment manager who chooses to use UBS or any other external management company provider.
“It will be an umbrella structure for managers to join with each allocated a specific sleeve to manage. We won’t set up separate umbrella structures for each individual manager; if a manager with scale requires more control and involvement in the governance aspect of the platform then we can facilitate such managers with customised solutions.
“Our AIFMD solution will give managers the ability to freely market their AIFs across all 31 EEA member states,” adds Byrnes.
Carne Group, a global leader of governance and risk management solutions to asset managers, became the first firm to obtain a European Independent Management Company license under AIFMD in Dublin last August. “We now have the Super ManCo capability both in Ireland and Luxembourg having earlier this year received the license in Luxembourg. We bought a management company there 12 months ago. We’ve been in Dublin for six or seven years now and that puts us in a good position with respect to AIFMD because we have a proven track record of being a UCITS ManCo and all that that entails,” comments John Skelly, Principal with Carne in Ireland.
Carne’s existing UCITS and non-UCITS management companies have over USD10bn in assets managed by third party managers.
Carne has always operated an oversight business, providing governance support for UCITS funds and alternative funds. Skelly says that AIFMD represents an opportunity “for us to extend our management company services to AIFs. We can bring independence to the investment management function. It gives us a better proposition to provide that independent risk function and we’ve had good feedback from investors and managers on this more comprehensive offering.”
To strengthen its risk team Carne Group has brought in proprietary investment management professionals and technical risk people to develop a robust risk function. Gerry Grimes and Albert Prendiville lead the risk management team, which will provide a critical service to Carne’s ManCo under AIFMD.
Hedge fund managers who appoint a third party AIFM will benefit from the ability to passport their AIF but this passport function also applies to external management companies as well. Given that Carne has the license both in Ireland and Luxembourg it should be well placed to support managers.
“What we are seeing is that managers of Irish funds want an Irish ManCo and managers of Luxembourg funds want a Luxembourg ManCo. From a third party perspective we don’t expect much crossover. The implementation regimes of AIFMD between Ireland and Luxembourg are quite different. It won’t be that practical for one ManCo to manage funds from the other’s jurisdiction. It could happen but we certainly believe it is a benefit to have the ManCo capability in both jurisdictions,” states Skelly.
Kinetic Partners became the first advisory and consulting group to be granted an AIFM license by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg earlier this year. Like Carne Group and UBS, it now has a Super ManCo capability to offer outsourced fund management services to managers of both AIFs and UCITS.
“We are cultivating an advisory mindset in addition to being a management company here in Luxembourg. We have the possibility to really help our clients every step of the way. Many other firms in Luxembourg are just management companies. They cannot offer advisory services,” says Alan Picone, Managing Director of Kinetic Partners (Luxembourg), who adds: “By choosing an external management company it gives managers two things: the ability to offset the cost responsibility and avail of a scalable solution.”
Picone says that the challenge of supporting AIFs should not be significant as it will involve duplicating many of the processes already in place to service UCITS funds. “With respect to risk management, we don’t see too many differences apart from certain reporting on instrument restrictions (for UCITS funds). We provide AIF reports that in their way are already UCITS-compliant. There will be some fine-tuning to do but the truth is, in spirit, the approach to risk reporting for UCITS and AIFs is the same,” states Picone.
One of the most recent firms to acquire an AIFM ManCo license in Luxembourg is Maitland, a leading legal, fiduciary and funds services group with over USD200bn in AuA. The firm acquired its license in May 2014.
The management company is called MS Management Services SA. It will act as the third party AIFM to AIFs. In addition, the MS SICAV SIF is a platform that will allow managers to set up their own sub-funds to market across Europe.
The establishment of the ManCo under AIFMD is, according to Kavitha Ramachandran, Director of MS Management Services SA, ‘phase one’ of the Maitland service offering. Given the firm’s expertise in administering hedge funds it will focus on AIFs before potentially extending the ManCo structure to support UCITS funds as a Super ManCo.
“Managers need sufficient capital to comply with AIFMD. They need substance, people on the ground to make sure their portfolio and risk management functions are clearly separated and to ensure that good governance is in place. Fund managers want to concentrate on their core function of managing the portfolio and making sure that they are generating the returns outlined in their fund prospectus. As a third party AIFM we can provide them with precisely that solution,” says Ramachandran.
To distribute or not to distribute…?
One important differentiator is whether the appointed management company under AIFMD has the necessary infrastructure and flexibility in place to effectively support investment managers in their distribution capabilities.
Derek Delaney, Managing Director of DMS Offshore Investment Services (Europe) Limited, is keen to stress that aside from taking care of post-trade compliance, oversight, risk management and all the other heavy lifting under the Directive, DMS has an EU distribution license as a registered AIFM.
“If we’re dealing with a London-based manager and they’re looking to distribute in the UK, the Netherlands, Germany, France, we as the management company will go to the Central Bank in Ireland and say ‘We are going to distribute to these designated countries and we’re delegating the distribution to the investment manager’.
“That means the manager can continue to market as normal across the EU but under full AIFMD compliance by availing of our distribution license,” says Delaney.
Not all external management companies under AIFMD will be in position to support the distribution side of things. Ramachandran anticipates that clients will initially want to do their own distribution in terms of exploring existing networks.
“Over time, this will be one of the areas that we will look to develop and bring distribution capabilities to managers who maybe don’t have existing networks in place. We will have them to connect with different fund distribution platforms but that will be further down the line,” confirms Ramachandran.
Other platforms may go the other way and provide what Byrnes refers to as ‘active distribution’. The problem with this is that it constrains the number of managers running similar strategies that can sit on the platform.
“A lot of other third party AIFMD solutions offer no distribution support whatsoever. They are purely an infrastructure solution. Substance is very important; when you look at an AIFM there are sixteen management functions so you need to have the adequate framework capable of handling various strategies of differing complexity. We have excellent people with a great deal of expertise working with different hedge fund structures. What really differentiates us though is that we won’t just offer the infrastructure support but the distribution support as well.
“Third party fund platforms will have constraints in terms of the numbers of managers they can on-board while offering active distribution. Our proposition of an infrastructure solution coupled with a distribution support platform is a compelling one for the market. These platforms also won’t be able to offer the same level of open architecture as we intend to build out,” says Byrnes.
What this means is that any manager wishing to avail of the AIFM solution at UBS Fund Services had better be prepared to have their distribution strategy scrutinised.
“We will want to understand exactly what their marketing distribution strategy is, how well resourced it will be, will they be using third party marketing firms or establishing a local sales presence? What markets and types of investors will they target? All of this will be relevant for us when we speak with potential managers,” confirms Byrnes.
Skelly says that Carne Group has people in place to support a US manager’s sales team in marketing their funds in Europe. Once a manager has their AIF up and running, however, it won’t be a case of just distributing the fund free and easy, and it’s a point that Skelly is keen to stress: “It’s something (distribution) we support but it’s not necessarily that straightforward. What some managers will find out is when they go to France, Germany etc they’ll be told ‘Sorry, you don’t have the authority to sell this fund’. Managers have to ensure that the third party AIFM has the infrastructure and support in place to do that. That’s why established management companies like ours are a better proposition for managers than those who only offer an infrastructure solution.”
With respect to non-EU managers who wish to launch an AIF with their appointed AIFM, Picone says that Kinetic Partners will allow them to choose any service providers they want “in principal”.
“Bear in mind, however, that because we are the AIFM we have responsibility to ensuring we conduct the necessary due diligence but we essentially work under an open architecture. We will appear in the fund’s prospectus only as the AIFM – there is no risk of a manager diluting their identity by launching a European fund on our platform. This is often something that is misunderstood. We see ourselves as a collaborator with managers more than anything else,” says Picone.
Whether it is a full Super Manco solution or, initially, an AIFM solution, there are plenty of choices for managers who are keen to absolve the costs and responsibilities of building their own infrastructure. Distribution capabilities are certainly going to be a key consideration for managers, as are the heritage and size of infrastructure a service provider has in place.
Delaney says that at DMS, the firm has spent three years developing its AIFM solution: “Many other firms have an existing UCITS management company and they’ve essentially looked to see how they could tack AIFMD onto it. We’ve developed our AIFM solution precisely because we serve hedge funds.
“What does that mean? It means that unlike our competitors we do not take all the reporting from the investment manager. What other management companies are doing is taking reporting from the investment manager, reviewing it, making sure they are staying within the VaR constraints etc. They are qualified people reading those reports but if the manager has a mind to deceive them they have no way of knowing that.
“We don’t do that. We take the information directly from the counterparties and we generate the risk report. We back-test everything to show a manager that they would still be compliant in different market stress events and we run ‘What if…’ scenarios. If someone has been trading European CMBS, for example, and they want to start trading US CMBS, we run the models, back-test them and highlight potential issues.”
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