Growth of parallel funds in the face of EU complexity
Luxembourg remains a key hub of fund distribution. However, the complexity of the European regulation has seen a rise in managers setting up more parallel funds in other jurisdictions. This is done to accommodate non-EU investors, who may struggle with the demands of the EU fund regulations.
“Something we’re seeing quite a lot of is managers setting up a fund in Cayman or Delaware for US investors, a Singapore or Hong Kong fund to cater for Asian investors and then a Luxembourg fund for the EU market,” observes Anja Grenner, Market Business Development Lead – Fund Services at TMF Group.
It would be simpler and cheaper to have a one-size fits all solution, but this trend is largely driven by the regulation governing fund distribution in Europe. “Across the EU, the rules are undeniably more complex than for structures outside of the union. We see this from the investors’ perspective as well, as US or other non-EU investors in an EU fund sometimes struggle with the requirements to be met here in Europe,” Grenner remarks.
She confirms a development seen for a number of years now where investors prefer a fund domiciled in their local time zone, a preference which is further underscoring the trend for managers to set up parallel funds. In TMF Group’s case, it can leverage its presence across the globe to meet this demand. Grenner notes the overall client relationship manager would usually be in the fund manager’s home jurisdiction, to maintain high levels of communication and rapport.
However, she adds: “There are many synergies to be gained from working with one service provider with multiple locations. We can make sure managers who have parallel funds in the US, Europe and Asia don’t have to repeat everything three times. So, although you service the client from the jurisdiction in which they are located, certain services such as accounting or capital call statements can be performed in one place for all three jurisdictions.” The main objective of this is of course to keep costs at a reasonable level.
This said, certain services must be performed within the fund’s domestic jurisdiction. For example, in case of a Luxembourg fund the maintenance of the investor register has to be retained in Luxembourg.
The growth in parallel funds is also contributing to expansion in Luxembourg, as non-EU managers look to set up European versions of their product, using Luxembourg as their gateway. Grenner comments: “We still see increasing levels of new assets coming in and over the last few years the concept of Alternative Investment Fund Managers (AIFMs) in Luxembourg has risen to an impressive number. There are now more than 260 AIFMs in the country and although not all are third party AIFMs, a good number of them are. This has given non-EU asset managers, especially from US, an option to continue to market their funds in the EU.”
TMF Group itself has recently announced the acquisition of an existing AIFM in Luxembourg, which means the firm will now be able to offer clients a one-stop shop solution across fund administration, depositary and management company services. Being part of a large, global group, the firm benefits from constant evolution. Grenner points out: “We are always rolling out new systems, new architecture and new software to add onto existing systems worldwide. So, although TMF Group in Luxembourg has been a fairly small player on the funds side in the past, we have all the building blocks and ambition in place for growth.”
In order to see this growth materialise, Grenner explains the firm needs to excel in terms of automation and processes, while focusing on how different systems interlink: “We have one core system for administration, but can adapt the reporting to each client. Ultimately, clients often want a tailor-made solution and this is what we are offering them in the most transparent way possible.”
Grenner outlines the growing need for transparency on behalf of clients: “The demand for information is growing. Clients want to know about fees, valuations, reporting and performance indicators. Everything needs to be made more transparent and easily accessible.”
An elemental part of this rising need for data relates to the increased appeal of ESG-compliant investing. Although this manner of investing has not yet impacted fund administration services, Grenner explains that TMF Group is primed to take this in its stride once the potential requirements on the administration side become clearer.
She says: “We don’t want to be the last kid on the block, nor to be forced to rush. We are already in discussions with some of the leading ESG consultants in Luxembourg. We have also broached the discussion with our clients to understand what ESG mean to them and what they require in this regard. It’s still all in the discussion phase at the moment. However, we will address this on a more systematic basis to be prepared for what’s ahead within the next three to six months.”
For this development to be successful, system enhancements are critical. In Grenner’s view: “Good systems, processes and procedures are crucial. A strong technology platform is more than just a system. The key aspect is the ability to automate processes to make sure our people are not doing repetitive, manual work. We have highly qualified staff and nobody wants them spending time inputting data manually into a system. They should communicate with clients to assist and support them.”
According to Grenner, the continuous development of robust systems is one of the most significant challenges players in Luxembourg face: “Our clients are demanding more from us, especially the international managers. When dealing with technology and updating systems, security is a vital dimension. Adding a new tool or piece of software is good for the clients, but it has to be done in a secure manner. Luxembourg has made huge progress over the last years in terms of systems used here, but this development is also driven by regulatory requirements. Ultimately, it is our clients but also the regulator requesting more granular and tailored reporting, which consequently drives the continued development of systems needed to meet those needs.”
Market Business Development Lead Fund Services, TMF Group
Anja Grenner has been active in the Luxembourg fund services industry since 1993. Her extensive experience includes roles with the Big4 and several other large fund administration providers in Luxembourg. Anja holds a University degree from the University of Giessen (Germany) and a post-graduate degree from Royal Holloway, University of London. She also obtained the Investment Management Certificate (IMC) in the UK and qualifies as a Real Estate specialist certified by the Luxembourg training institution for the financial industry.