By Mark Crossan, Bridge Consulting – Irish Funds are on the move again. Every couple of years there is a new product evolution. In 2015 we had the introduction of the ICAV (Irish Collective Asset Management Vehicle) and 2018 is shaping up to be no different. Not only could this year be the year that Ireland gets its eagerly awaited revamped Investment Limited Partnership (ILP) structure, but it looks like other changes are afoot as well.
In years gone by, the majority of new funds travelled down the self-managed fund route. This was the de facto standard fund structure in Ireland. However, a new trend has evolved in Ireland over the last 2-3 years, with more and more asset managers electing to use either a Management Company or a Fund Platform when setting up new funds.
So why the change and what are the drivers behind these new trends? In order to analyse this in more detail, let us take a closer look at the fund structures available;
1. Self-Managed Investment Company (SMIC)
Of the 6,800+ funds domiciled in Ireland this is still the most common fund structure in the Irish market, mainly because of its historical usage. Whilst Management Companies and Platforms may have taken over as the “new norm” from 2015, the bulk of existing funds came from the previous era of self-managed investments companies. A SMIC can be set up as one of the following:
• A Public Limited Company (“plc”) under the Companies Act or
• as an ICAV under the ICAV Act 2015.
Both structures utilise a Board of Directors who are ultimately responsible for the running of the fund. In this case, the level of involvement for the asset manager in running the fund would generally be considered “medium to high”, as the increased regulatory ‘drag’ which comes with running a fund is generally pushed back on the asset manager.
2. The Independent Third Party Management Company
When the fund appoints an independent third party management company the asset manager is effectively outsourcing all of the day to day running, operations and oversight for the fund. Discretionary portfolio management is generally delegated back to the asset manager. The management company becomes the responsible party in the eyes of the Central Bank and the fund’s Board of Directors now monitors the activities of the Management Company. The fund Board still maintains overall control. They can select their preferred delegates and they retain the power to hire or fire the Management Company as deemed necessary. The fund retains its own branding. The level of involvement for the asset manager is “low”.
3. Fund Platforms
A fund platform comes as a pre-branded package. This is a “plug and play” solution for an asset manager, with fund delegates already selected e.g. administrator / depositary. Time to market should be short e.g. 4 to 8 weeks. The control rests with the platform and they effectively drive the business relationship. The platform should act as a one stop shop for the asset manager. The level of involvement for the asset manager should be “low”.
As we can see, the three structures offer different levels of involvement for the asset manager. The structure selected should reflect how involved the asset manager wants to be. Other factors can also influence this decision, so it’s best to also consider the market environment and some of the key business drivers that have been impacting companies over the last 2 to 3 years.
Drivers to Change:
CP86: This was a three-year consultation process run by the Central Bank of Ireland and it addresses the substance requirements of Irish regulated funds. It culminated in the publication of “Fund Management Companies – Guidance” in December 2016. In this document, the Central Bank outlines its findings and expectations for effective management and oversight required by Irish fund management companies. It outlines its expectations for the role of the Board and similarly for Designated Persons who can be appointed by the Board to carry out day-to-day oversight of the six specific management functions that apply to both UCITS and AIFs i.e. Investment Management, Fund Risk Management, Operational Risk Management, Regulatory Compliance, Distribution, and Capital & Financial Management.
The rules became effective for all new Fund Management Companies from 1 July 2017 and from 1 July 2018 for existing fund companies.
BREXIT: The UK’s scheduled exit from the EU is forcing UK asset managers to examine their current fund structure and reassess whether BREXIT affects their sales strategy in Europe and how they can market their funds. This can directly affect not only UK AIFMs, but it also has the potential to affect a UK-domiciled MiFID subsidiary firm that was established by a global asset manager. If the UK MiFID subsidiary loses its MiFID distribution passport because it is no longer located in the EU, then it too needs to reassess the potential impact.
CP86 is currently generating a number of changes in the Irish market:
• A growing number of asset managers establishing new funds in Ireland only want to focus on core functions such as investment management and /or sales and distribution, and are happy to outsource fund governance and compliance.
• As the costs of regulatory burden continue to grow, asset managers are looking to generate cost efficiencies where possible from companies that already have the relevant technology and regulatory solutions in place.
• In the case of larger firms, a number are contemplating setting up proprietary Management Companies that will allow their sales force to continue to market funds under their own brand. As a Management Company licence can take between 6 to 9 months to establish in Ireland, a number of firms are opting to start the authorisation process in mid-2018 in order to be ready for BREXIT in March 2019.
• For smaller firms there may be greater interest in third party Management Company options as the cost of establishing a management company, implementing the required technology, relocating staff (if required) plus the ongoing cost of regulatory capital can act as disincentives. Leveraging an established third party Management Company should reduce the authorisation time frame.
• We are also seeing a shift within existing self-managed funds where some fund Boards are moving from Designated Directors to Designated Persons due to CP86.
When we consider all of these factors together i.e. the structures available to managers, the burden of new regulation and the emphasis on best practice in fund governance, regulatory compliance and organisational effectiveness, we start to understand why asset managers are choosing a different path to that of old.
Management companies and platforms are offering off-the-shelf solutions to a number of current challenges. These challenges are distracting managers from what is becoming an increasing competitive, fee conscious market. We are now at a junction familiar to other markets and we appear to be leaving the self-managed road and travelling down the Management Company / Fund Platform route.
From the Central Bank’s perspective, might this be considered a positive evolution?
Ireland will have enhanced its fund governance model, however, potentially reducing the number of fund entities it will be required to regulate. We will have to wait and see. nAlthough most institutional investors are comfortable with the idea of fund managers outsourcing middle- and back-office functions while they focus on managing the investment strategy, they are taking great care and attention at the pre-allocation stage, as part of the ODD process.
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