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OVERVIEW Substance over style: ManCos look to the future
SUBSTANCE OVER STYLE:
MANCOS LOOK TO THE FUTURE
BY KRISTINA WEST
The management company concept was first created to provide assurance of good governance and control with self-managed fund entities and vehicles. As funds proliferated and as the industry matured, the management company concept was born as an entity that would provide the necessary governance, oversight and services. Many firms took the decision at this time to create their own, internal management company; but since that time, the industry has seen greater development and detail of the rules, particularly with the focus on liquidity and sustainability, and expectations have grown, leading to the establishment of third-party ManCos servicing UCITS funds, AIFMs, or – more recently – both.
INTERNAL OR EXTERNAL?
There are still compelling arguments for both inhouse and external ManCos, depending on the stage or situation of the firm; for example, those who want an EU European licence, whether for European distribution or individual account management, may wish to set up their own ManCo, while most of the top tier managers who required an EU contingency are now set up with their own regulated firms somewhere within the EU. However, for many, the costs of market entry are high, so firms need to consider how long they will be in the market, whether the costs are too prohibitive, and if the size of the investment is justified. Craig Blair, VP, General Manager, Board Member and Conducting Officer at Franklin Templeton, also flags risk appetite as an issue. “You have to have substance and specialisms in the domicile that the management companies are in.” The benefits of using a third-party provider can include lower financial outlay for new market entrants, time to market, and going into a new area of investment where an experienced third-party provider knows the asset classes and can provide good governance.
SUPER MANCOS
Key services offered by third-party providers revolve principally around the six key management functions required by legislation, either UCITS or AIFMD, with supervision of delegates, risk management oversight, and investor management oversight at their core. However, more recently, some third-party providers have begun to offer services in both UCITS and AIFMD funds. While the capital requirements, reporting and regulation structures may be different between the two, third-party ManCos have seen a gap in
the market and are willing to cater to demand from large and sophisticated clients.
THE BATTLE OF THE JURISDICTIONS
Luxembourg remains at the head of the European market for fund administration and related services, with more than EUR5.3 trillion in net assets under management in regulated funds. And funds domiciled in Luxembourg pay lower taxes on their funds under management than in other EU nations, an advantage which helps investors to benefit from a larger slice of the payouts. The Association of the Luxembourg Funds Industry (ALFI) has a dedicated Management Company Technical Committee, with more than 200 leading industry experts, who have combined to form working groups looking at issues including due diligence on ManCos and service providers, marketing and distribution, and ESG and EU SFDR requirements. Waystone is currently seeing client preference for Luxembourg over Ireland for private debt and illiquid asserts, as Luxembourg has built up a brand awareness and expertise that Ireland has not yet achieved. However, David Morrissey, Global Head of Client Solutions at Waystone, believes that the regulatory framework and market support will evolve. He says: “Luxembourg has the SCSP which is basically a GP-LP investment structure. Ireland earlier this year launched the AILP, which is a very innovative new structure, but unfortunately it hasn’t gained the market traction we’d like to see at this stage. It just needs a bit more time.” Yet third-party ManCos have a significant presence in the Irish market too. Patrick Robinson, Managing Director (Ireland), AIFM and ManCo Services at MJ Hudson Bridge in Ireland, points to the massive burden of regulation under which Ireland has been operating for years as a key driver, but also believes that service will become the key differentiator between service providers going forwards, with areas such as ESG ripe for expansion.
CREATING OPPORTUNITIES
With increasing demand for services from clients and a continued focus from regulators across the world, it seems the third-party ManCo structure has never been more important. And with opportunities to follow clients into new markets and passport services into ever-more jurisdictions, the future is bright.
REGULATION PUSHES IRISH MANCO ADOPTION
BY ARMIN P. CHOKSEYIn recent years, the Irish fund market has struggled under a burden of regulation that would break a lesser jurisdiction. From regulatory reporting to UCITS V, and from CP86 to CP140, the need for regulatory compliance across the board has resulted in increasing interest in and take-up off third-party management company (ManCo) offerings.
Until 2017, most people setting up UCITS funds in Ireland used the self-managed fund (SMIC) model. However, there was a whole stream of continuing regulation – UCITS IV, UCITS V, AIFMD, EMIR, FATCA, CRS, the introduction of Central Bank online reporting systems, a huge increase in in regulatory reporting, PRIIPs, KIIDs, EMT/EPT, MiFID II – with none of the traditional delegates in the SMIC structure responsible for managing that regulation.
According to Patrick Robinson, Managing Director at MJ Hudson Bridge in Ireland: “This really started to lead to the growth in third party management companies in Ireland.”
While some firms set up third party management companies early on, MJ Hudson Bridge came later to the market with its ManCo, launching its first funds in 2017 when people were then starting to look at what management companies could offer in terms of a more effective operating model or an outsourced operating model.
Robinson explains: “Shortly after CP86 started, the Brexit referendum came along and the number of asset managers looking to set up their own management companies in Ireland to provide a post-Brexit EU distribution solution gave regulators an opportunity to push increased local substance expectations very quickly. The push for increased local substance has continued post-Brexit, resulting in the traditional self-managed funds appointing third party management companies.”
Of course, there is still an appetite for internal ManCos for those who want an EU licence, whether for EU distribution or individual account management, and scale still matters, with most of the top tier managers who required an EU contingency now having set up with their own regulated firms somewhere within the EU.
However, many managers are still waiting for final clarity on post-Brexit UK access to the EU and decisions on financial services equivalence before making longterm decisions on setting up their own EU licences..
“They’re looking at all the workaround solutions in the interim, including MiFID hosting licences including in jurisdictions such as Malta and Cyprus, at how robust those are from a regulatory standpoint and from their investors’ viewpoint, and waiting until UK financial services access is clear before making decisions about setting up their own licence within the EU,” Robinson says.
Robinson believes that, when the current regulatory change in Ireland settles somewhat, service will become the key The push for increased local substance has continued postBrexit, resulting in the “ “ traditional self-managed funds appointing third party management companies
PATRICK ROBINSON MANAGING DIRECTOR (IRELAND), AIFM AND MANCO SERVICES AT MJ HUDSON BRIDGE
differentiator between third-party ManCo offerings, with areas such as ESG a particular area for expansion.
“We’re looking at assisting our managers with the real implementation of ESG into their investment processes, investment due diligence and how investment managers are assessing the underlying companies they are investing in for ESG. Our specialist ESG consultancy business at MJ Hudson has been providing ESG services to asset managers for over 15 years and has been a huge benefit to a number of our clients in developing real ESG into their investment strategies and policies,” he says.
“The next stages of growth and opportunity in management companies will be about breadth of service and that one-stop shop outsource model,” Robinson concludes.
PATRICK ROBINSON
Patrick Robinson has over 20 years experience in the asset management and funds services industry. Patrick began working for MJ Hudson Bridge in October 2009. Patrick has an in-depth knowledge of UCITS and AIFM requirements and has project managed a number of UCITS Management Company /AIFM authorisations in Ireland and has provided assistance on numerous fund structuring /product development projects. He has established the risk, compliance and operational infrastructures of a number of asset management firms.
