Regardless of whether a hedge fund manager has an AIF, a UCITS fund, or one of each, the end objective is the same: to improve their capital raising opportunities in Europe.
This is all well and good, but for non-EU managers in particular, there are significant costs and operational challenges to launching additional fund products; indeed, it is one of the key reasons why some of the large banking platforms like Deutsche Bank’s db Platinum platform and Morgan Stanley’s FundLogic Alternatives platform for alternative UCITS funds have grown so fast in the last few years. These platforms take the burden off the manager.
What AIFMD now represents is the potential for existing management company providers to extend their support to AIFs using the Super ManCo structure. This could prove helpful to hedge fund managers keen to diversify their investor base and boost the coffers.
Cost benefits & synergies
Speaking about the cost benefits to using a third party AIFM, Maitland’s Kavitha Ramachandran says that the first advantage is that managers “don’t have to come and set up in Luxembourg and go through the authorisation process. This in itself is a significant cost saving. Second, they won’t need to satisfy the capital requirements. We take care of that.
“Time to market is another benefit to our platform. The CSSF has vetted all of the service providers on our platform so we believe the time for authorisation of sub-funds is going to be a lot less than a manager starting from scratch.”
Alan Picone of Kinetic Partners says that there are substantial synergies between the UCITS business and AIFMD. It won’t just be a case of hedge fund managers launching AIFs in Europe. The UCITS option will remain viable and in Picone’s opinion might even strengthen under AIFMD, saying: “It is likely that clients will diversify their products and launch UCITS funds as well as AIFs.
“For two clients of ours, they’ve just received interest from two significant German pension funds. They have AIFs and the two pension funds said that if they were able to replicate their strategies in a UCITS wrapper they would be very happy to write a large ticket.”
This suggests that within the Super ManCo structure, UCITS funds will be just as important as AIFs for managers going forward. Think about insurance companies, for example. Under Solvency II, they don’t have too much flexibility in the types of structures they can invest in. They need good transparency and ‘look-through’ capabilities; something that UCITS funds can provide.
“We can facilitate and support different fund types – UCITS, alternative UCITS, QIAIFs. Also, for managers’ offshore funds we have senior directors in Cayman, Ireland, Jersey. We can therefore support managers globally. We’ve got solutions that are consistent across all those jurisdictions. We can provide a good independent, substance-driven solution around risk management and governance for hedge fund managers.
“This represents a real cost-effective solution. Otherwise managers will find themselves using different providers in different jurisdictions,” explains John Skelly of Carne Group.
“Given that the cost of setting up funds has increased over recent years through increased regulation and compliance, the Super ManCo presents a real opportunity for managers who have wider ambitions to better manage their cost of distribution,” says Mettrick.
Capital raising opportunities
The emergence of the Super ManCo has the potential to shake up Europe’s hedge fund industry in a good way. Overnight, conservative institutional investors in Germany, France that hitherto avoided investing in offshore hedge funds now have a regulated fund option whose performance will be unimpeded: unlike in UCITS funds where concessions have to be made for liquidity reasons.
“I was in Chicago recently. A German pension fund said they had a USD500mn allocation in a Chicago-based fund. They wanted to know that they could continue having a relationship with the manager and they said that having the depositary guarantee (under AIFMD) was important to their end investors. They told the manager that they wanted to put their USD500mn allocation into an EU regulated fund.
“We now have four funds on our AIFM platform that have come as a result of that market sentiment among investors,” confirms Derek Delaney of DMS Offshore Group.
Aside from the reassurance of an independent depositary, institutions are also pushing managers to offer AIFMD-compliant products because they offer certainty in the relationship. An institution allocating to a manager who insists on pursuing private placement – a short-term solution – is likely to feel disenfranchised.
“The potential buyers in Europe, the big institutions, are deep into AIFMD compared to US and Asian institutions. They expect a minimum level of protection and insurance to protect their own end investors. They want to see strong substance in relation to liquidity, valuation and risk management,” says Picone.
He adds: “To guarantee their ability to raise assets managers need to have an AIF and/or a UCITS structure.”
When asked if the AIFMD could be a tipping point for Europe’s hedge fund industry, Picone says: “Absolutely. It’s still in its infancy but I see signs of this happening already. Institutions are more than happy with managers’ investment strategies in an AIF. There is a sort of unhidden lobbying going to ensure that AIFs become the same trademark as UCITS. I foresee a lot of Cayman-based fund strategies being launched as AIFs or UCITS going forward.”
The inference here is that by offering third party AIFM solutions to the market, not only will European investors continue to get access to a wide choice of managers but the managers themselves will potentially see a lot more doors opening when they hit the capital raising trail.
“We think that ultimately most of our clients are going to need dual domiciliation to attract investors globally. They’re going to need a Master fund with a Delaware LLC for US taxpayers, a Cayman fund for US tax-exempt investors, and a European AIF for mainland European investors. Both Europe and Cayman will benefit as a result of this need for dual domiciliation,” suggests Delaney.
The trend for greater product proliferation to boost company AuM is not confined to just alternative fund managers.
Mettrick sees a lot of convergence taking place and this goes some way to explaining why SumiTrust will expand their current UK and Irish solutions and, going forward, provide a Luxembourg solution.
“For the exact same reasons that alternative managers are looking to diversify (their products) and increase their ability to raise assets, long-only traditional fund managers are looking at opportunities to launch AIFs because they are under pressure from their investors to deliver additional funds offering different performance profiles. Both sets of managers need a range of products and not just offer a flagship fund. The pressure is certainly on traditional managers to expand into alternative investment products and vice versa,” says Mettrick.
If that is the case, and more traditional managers launch AIFs, and more hedge fund managers launch UCITS, each availing of the consolidated Super ManCo structure, then Europe’s fund industry AuM could blossom. Not that it will happen overnight.
Gavin Byrnes of UBS concludes by offering a cautious outlook: “Personally I think we’ll see managers actively taking decisions next summer. That’s because the passport for non-EU AIFMs technically becomes available at that stage. Managers are going to look at this and think that in summer 2015, with the potential abolition of private placement in 2018, it will give them the chance to build a three-year track record for the AIF. We believe that most managers will start using AIFMD platforms from 2015 onwards similarly to how UCITS platforms have developed over time.”