Alternative funds: New EU rules for “professional” investors have encouraged fund service providers to move into a completely new market, writes contributor Fabrice Buchheit.
The AIFM directive has set several new challenges for private equity and real estate structures falling under the scope of the new directive, one of them is the obligation to appoint a depositary.
While the role of depositary is not new for some European countries like Luxembourg, the concept of centralising the safekeeping of assets, the monitoring of cash flows and the oversight of activities in a single dedicated entity is a brand new approach for all.
Alter Domus, as a leading global provider of corporate and fund services, has decided to launch depositary services under the AIFMD regime. Over the past months many of our clients and industry contacts have encouraged us to provide depositary services to complete the range of our services and to be able to provide them with a complete service, assisting them in establishing compliance with the regulations.
For example, many of our UK-based general partners for which we manage Luxembourg holding companies and other multi-jurisdictional special purpose vehicles are asking us to provide depositary services for UK-based funds. They consider that a fully integrated solution will provide the opportunity for them to gain in efficiency with one single point of contact that has proprietary knowledge of the manager’s business model and processes.
Independent function required
However, a complete merger between fund administration and depositary services is not recommended. The directive clearly imposes oversight duties of the depositary over fund administration services. Therefore both services need to be reasonably independent and segregated from an organisational point of view.
Consequently new depositaries should consider the setup of a new legal entity which will imply the necessary consideration of minimum capital requirements, independent governance, etc.
Ahead of global depositaries--which offer a full range of automated and standardised custody services to an extensive range of financial products--new professional depositaries, such as Alter Domus, as niche players, will be able to customise their services for private equity and real estate structures.
Moreover, to be able to provide new services at fund level under the AIFMD, depositaries emerging from the administration business will able to leverage on the existing expertise in providing a full range of services for holding companies in many jurisdictions.
The advantage of this vertical approach gives more comfort to the depositary, facilitating its access to information and documentation available at the holding companies and SPV level. This will further contribute to fostering efficiency and cost containment, which is key in a performance driven environment.
The pricing model is also still under discussion in Luxembourg, in particular, in comparison to other jurisdictions. For example, in the jurisdictions where the depositary requirements are new, additional cost will have to be borne by the funds. Luxembourg will have to enhance its competitive approach and demonstrate its ability to adapt the model in a sense that service providers implement integrated service delivery processes and avoid controls overlap and the duplication of work or information.
With the objective of attracting new investors, asset managers are constantly looking to launch new creative products in the alternative asset class. From an administrator point of view, the impact of the new regulation is limited as accounting remains accounting from a depositary point of view. However, assessing existence and ownership of assets on various asset classes will become more and more challenging.
Depositaries will have to adopt a risk based approach and establish dedicated processes allowing them to have sufficient comfort to meet their obligations.
Grand Duchy providers ready
Asset managers in Luxembourg are used to working with depositaries and the AIFMD will not drastically change the landscape. All major service providers in Luxembourg have already adjusted their processes and are ready to service their clients under the directive.
Across the Channel, many general partners have started to look into their current model and structures, most often with the support of external advisers, and they are struggling to determine how the post-AIFMD model will look like. They often find it challenging to recognise the added value of depositaries. Many suspect that depositaries will add another layer of cost and slow down processes by performing controls that are already performed in the current model.
The key focus for depositaries must be to deliver perceived added value to the fund managers and their investors by raising their awareness of roles and responsibilities of the new depositaries.
Fostering this industry awareness and delivering real value to fund managers is the only way to avoid ending up in market of low quality service with dumping prices. This would indeed mean that the objectives of the directive have not been met.
Fabrice Buchheit is head of depositary services at fund administration firm Alter Domus.