Third party AIFMs to focus on quality and expertise
As price competition increases in the provision of third party management company services in Luxembourg, the focus on quality and deep regulatory expertise is becoming even more important.
“It’s a competitive landscape with many new management companies starting up,” explains Daniela Klasén-Martin (pictured), Group Head of Management Company Services, Managing Director Luxembourg at Crestbridge a provider of global administration, management & corporate governance solutions.
“Quality is important because there is a lot of cost pressure. There are new players in the third party management company market who are putting prices down. This can be quite dangerous because there is a lot of regulatory pressure and having people who can respond to these regulatory demands in the right way costs money.”
She says that although cost pressure is good for the client because it gives them the ability to compare providers and their services, it’s important that the fees paid reflect the quality and the effort expended by the service provider.
Klasén-Martin emphasises the importance of reputation, which is of particular relevance in Luxembourg. “Luxembourg is an extremely regulated domicile. We’re under the watch of the CSSF and we are keen to keep our licence, which is why quality is so important to us. The regulator makes frequent visits to operators’ offices and they wouldn’t hesitate to place sanctions or to freeze licences in case of breach of the regulatory framework,” she says.
Crestbridge itself focuses on the expertise of its people. In particular, the firm’s strength lies in its deep regulatory knowledge and skill. Crestbridge was one of the first firms to provide third party AIFM services after the directive was transposed into Luxembourg law. This has allowed the firm to influence the industry’s development.
“Being a first mover, we were capable of shaping the processes and the operations needed when dealing with outsourced AIFM services. It meant we were among the first to devise what service providers need to have when it came to building a risk management framework which is compliant with the regulatory requirements while also being in line with what a PE manager would expect,” Klasén-Martin remarks.
She notes that a key ability for third party AIFM providers in the private equity space is to adapt the internal processes of the PE managers themselves.
She explains: “PE managers have robust processes and procedures internally. However, they do not know how to adapt them to ensure they comply with the regulation. Therefore, an important part of our job is to support them in transposing what they already have in place into a regulatory-compliant framework. We have been able to do this and shape what this looks like, having been early in the market.
“Crestbridge was one of the first firms to obtain and AIFM licence and launch AIFs. This has enabled us to gain a deep understanding of structuring such funds, in respect of the regulatory requirements and good governance of the Fund. Risk management systems have been a key focus as we developed. Very early on tools, which are specific for PE assets. We already had internal PE expertise which we were able to combine with local expertise and knowledge on regulatory constraints and fund structuring.”
Klasén-Martin describes how AIFMs now lie at the centre of the ecosystem of any fund being launched in Luxembourg. Before AIFMD, clients looking to launch a fund would first look to appoint a fund administrator. Now, their first port of call is an AIFM, after which they look for all the other supporting services. “We’ve been very strong in our proposal to clients and can ensure we can give a comprehensive solution – starting from the AIFM offer,” asserts Klasén-Martin. PE managers are attracted by the alternative investment structures available in Luxembourg – namely the Luxembourg Limited Partnership (SCS or SCSP) and the Reserved Alternative Investment Fund (RAIF).
Klasén-Martin points out the main features which are beneficial to PE managers: “One of the key advantages for PE firms is that you can launch a fund fairly quickly using these different structures as they do not require approval from the regulator. In addition, by appointing an AIFM both the Luxembourg LP and the RAIF give PE managers access to the European passport which is necessary, since post-AIFMD you cannot distribute your funds in Europe without this. At the same time, they are flexible structures which is key for PE managers as well.”
Although in essence, they are still unregulated funds, the Luxembourg LP and the RAIF are indirectly regulated through the AIFM. This also provides comfort to institutional investors investing in the launched funds, since it means they have an AIFM to keep the regulatory requirements in check and ensure all the controls are set as per the regulatory requirements.
Klasén-Martin explains Crestbridge is focused on regulatory substance. “We have a very competent team around regulation. Many of our experts are former legal advisers, risk managers or compliance experts so they understand regulation very well,” she says.
Crestbridge aims to double the 30-strong Luxembourg office over the course of the coming couple of years The group has been expanding in the past few years and Klasén-Martin expects future growth to continue organically, building on the firm’s robust track record for quality service.
“We protect our reputation as a third party AIFM provider and through the expertise and skill of our sizable team, we can solve issues which would be difficult to solve for managers with minimal local substance,” Klasén-Martin explains.
New regulation has seen Luxembourg authorities focusing on substance rules, thus making it cumbersome for managers to start new operations in the Grand Duchy.
This has seen the third party AIFM come into its own as managers who either do not have the money or time to invest in setting up their own office in Luxembourg can delegate this part of their business to a firm like Crestbridge.
The substance rules have also put the recruitment market under increased strain – the government circular 18/698 decreed players must maintain a sufficient level of substance with the Luxembourg office. Hiring skilled staff has always been a challenge in Luxembourg but as regulation demands more senior professionals be based locally, pressure has been building.
According to Klasén-Martin: “There is a lot of competition to recruit the senior staff members, both from current players and also from the new bigger managers who have elected to come to Luxembourg as a consequence of Brexit. In fact, we’ve seen quite a few large PE managers establishing full operations here, driven by Brexit.”
The increased struggle to recruit highly competent professionals also adds to the attraction of delegating to a third party AIFM, particularly for mid-size players or those who have chosen not invest in a substantial presence in Luxembourg.
Daniela Klasén Martin
Group Head of Management Company Services,
Managing Director, Luxembourg, Crestbridge
Daniela has over 25 years’ experience in risk management, financial management and corporate governance across various jurisdictions. She is a member of ILA, ALRiM, sits on various ALFI committees involved in risk management, fund governance and TER and is a regular speaker at industry events on topics such as AIFMD, risk management and management company. Daniela holds an MScBA and is fluent in four languages.