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Since AIFMD officially went live two years ago, much advice and guidance has been proffered on how to approach the issue of establishing an AIFM or management company presence in Europe. Of course, non-EU managers can still choose to avail of national private placement regimes to market their funds, but those looking for a long term advantage are giving careful consideration as to whether to set up the AIFM internally, to outsource specific functions of the ManCo, or to go down the full outsourcing route and appoint a third party ManCo.
Arriving at such a decision can be complex depending on the nature of the fund manager’s existing business activities and expectations for the future, specifically as they relate to Europe.
Choosing the most appropriate operating model will depend on a number of factors.
Firstly, which should not be taken for granted, the investment manager needs to have a clear idea of what their investment plans are for Europe. “When looking at the AIFMD, it is a collection of rules on risk management, oversight of delegates, on remuneration, distribution, disclosures etc. The question is, does the investment manager feel comfortable taking on these regulatory risks? asks Alan Picone, Managing Director at Duff & Phelps.
The next important factor is judging one’s operational robustness. To what extent can the investment manager leverage its existing infrastructure? “The way that information is shared and the way that the manager interacts with service providers is important to assess. “The overall efficacy of the operating model is a key consideration, without doubt,” says Picone.
The third factor is cost. It is important to design the operating model in such a way that is not necessarily systematically driven by cost reduction, but rather incorporates costs that could be amortised along the way; one of those costs is selecting the right service providers with the appropriate systems, technology and expert skill-sets. “This is a very important element of regulatory risk that one can mitigate. The initial costs pay off as the fund evolves,” adds Picone.
The whole concept of using a separate, regulated management company is entirely novel for alternative fund managers who have never operated UCITS funds in Europe. As such, there is still a lot of conceptual work involved when it comes to establishing an AIFM, particularly for non-EU managers.
Operating models are fluid and evolve as market conditions and the regulatory pipeline changes. Even if a manager makes the initial decision to use a fully outsourced AIFM model, there’s nothing to stop them from eventually becoming their own internal AIFM a year or two down the line. In many ways, this may be the most sensible route for managers as it allows them to test out a fund in Europe; if it works and they raise a good level of AUM, they might decide to become an AIFM. If it doesn’t work as well as expected, at least they haven’t spent a significant amount trying to build a footprint.