AIFMD: make sure you’re connected
Using an AIFMD compliant depositary network offers a range of benefits to support private equity and real estate fund managers.
The requirement for private equity and real estate fund managers to appoint an independent depositary under the Alternative Investment Fund Managers Directive (AIFMD) is a major development and, for many managers, a move into uncharted territory. From an operational point of view, AIFMs are examining in detail the steps they will have to take to become AIFMD-compliant. They are also determining the level of information that they will need to provide to their depositary.
Private equity and real estate fund managers are turning to their service providers for solutions that may be implemented quickly to ease the operational burden. While some AIFMs are appointing boutique players in each location, with its extensive European depositary network, BNP Paribas Securities Services is well placed to service and monitor the complexities of multi-jurisdictional fund structures under AIFMD.
Until now, many alternative managers have been reluctant to seek early AIFMD compliance, availing of the one-year ‘grandfathering’ period which runs until 22 July 2014. Large fund management houses, with their own compliance and legal departments, have had AIFMD in their sights for some time and are much better positioned to interpret the nuances of the Directive. Smaller groups, however, are still trying to work through the details.
“Now that AIFMD has been transposed by some Member States, managers are looking closely at the practicalities of complying with the Directive. It is only when managers examine the requirements at the operational level that they can fully understand what they will need to expect of their chosen depositary,” says Hugh Stevens (pictured), head of private equity and real estate services at BNP Paribas Securities Services.
“For example, how does a manager ensure that the depositary knows what cash is expected at the fund level? How do they identify what the significant cash flows are? What sort of control and oversight checks are they likely to employ? What information does the manager need to acquire on the depositary’s behalf?”
The complexity of working under the rules of the directive is heightened for AIFMs managing multi-jurisdictional fund structures. In such cases, the AIFM is faced with ensuring that every layer of the fund structure complies with the idiosyncrasies of each Member State’s interpretation of the regulation.
“It’s only now that people are looking at their structures and asking ‘What are the views of different European regulators? Are there any additional controls that they are looking to extend?’ All of these issues need to be addressed by July. Realistically, managers need to get their applications in now to ensure that they are compliant before the deadline,” says Stevens.
AIFMD will require much more than a simple review of operations. It is a highly pervasive and demanding directive that requires strong partnerships. Tracking ESMA updates and implementation is a full-time task for compliance, legal and product teams. Managers will have to implement an operational framework, understand the risks that need to be mitigated and demonstrate that they are doing as they say.
Even if a manager’s corporate governance is good, their contractual arrangements well supported and their relationships with third parties in order, AIFMD obliges them to reconsider these in the context of its requirements.
The strength of a depositary network
The depositary lies at the heart of the directive and plays a key role in the day-to-day life of the AIFM and its alternative investment funds. Managers should chose a depositary that can provide a strong network and demonstrate that it has real experience in each relevant European location of handling a variety of asset classes (global equities, private equity, debt instruments, real estate, OTC instruments, collateral management) along with good controls and appropriate interfaces.
The administration function, particularly with respect to not-in bank assets such as real estate, is equally important, given that the NAV calculation and reconciliation process will form a key part of a depositary’s cash monitoring and general oversight function. This plays to the strengths of global institutions like BNP Paribas Securities Services which has the scale and breadth to offer managers support as both fund administrator and depositary.
One clear benefit of this is that the operational process will be more streamlined - the depositary has fewer external third parties to deal with, and the frictional costs to the manager are mitigated. After all, the depositary role is to ensure safekeeping and oversight of the assets of the fund while ensuring that the AIFMs can pursue its investment strategy without introducing undue delays.
“We are in a position of strength to support managers with both an administration and depositary function. There are natural synergies that we can leverage off to make the process as efficient for our clients as possible,” says Stevens.
BNP Paribas Securities Services supports 334 private equity funds with USD27.5bn in assets, 298 real estate funds with USD39.5bn in assets and 50 debt fund structures with USD9.5bn in assets. Its depositary and trustee network is among the most extensive in Europe.
“Ultimately, managers want consistency of approach. If you can provide a network that gives the client that consistent approach to the operational framework it takes away a lot of headaches,” says Stevens.
Managers will ultimately want to keep their contracts and service level agreements as straightforward as possible and their practices and procedures consistent across Europe in terms of how they interact with their counterparties. Across the firm, BNP Paribas Securities Services can leverage the expertise of different teams to support the full range of complex instruments and asset classes used by alternative investment fund managers.
For example, its London office handles collateral loan administration for the CLO market and, increasingly, for the debt fund market. The automated covenant monitoring tools developed to administer CLOs over many years means that they can be effectively utilised to support the depositary function.
One scenario that private equity and real estate fund managers will want to avoid is overreliance on third parties. This can represent an increased operational burden and result in higher costs being applied by the depositary. Furthermore, it can result in over-engineered processes and duplication of tasks.
“By leveraging our depositary network our aim is simple: to make the process as straightforward and pragmatic as possible for our clients,” says Stevens, who stresses that helping clients understand where they stand, from an AIFMD compliance perspective, is very much a process-driven approach.
“For managers, the end-game is the adoption of a set of principles and operational practices that are consistent with the directive: Where are the assets? How can you as the manager prove it? Do you continually own them? When you sell an asset or receive income, does the depositary have all the requisite information and processes in place to monitor the cash flow coming back into the fund?
“My key message to private equity and real estate managers is to get engaged in the process as quickly as possible. Allow us to help you get to where you need to be in terms of becoming compliant so that you can get on with your core business of investment management,” adds Stevens.
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