With the implementation of AIFMD and UCITS V, the cost of launching EU funds has undoubtedly increased. Managers have to weigh up these costs versus the benefits of reaching a wider audience of European investors, compared to offshore funds. For those based in the UK, an added complication is Brexit.
For low-cost, business-friendly jurisdictions like the Netherlands, where English is nearly universally spoken, the UK’s decision to leave the EU could well work to its benefit, although only time will tell.
If a start-up manager does wish to set up a fully licensed AIF in the Netherlands, under the full scope of AIFMD, to benefit from the marketing passport, they will be required to set up a management company (an AIFM) and apply for a license with the Dutch regulator, the Authority for the Financial Markets (Autoriteit Financiële Markten or AFM).
“As a result, the manager will then need to appoint a full depositary to the Dutch AIF. The depositary needs to be domiciled here in the Netherlands, which is a requirement of the AIFMD regulation,” explains Sicco Plesman (pictured), Managing Director, KAS Trust & Depositary Services.
For some managers – especially spinning out of existing hedge fund groups that have only been running offshore funds – they will have never used a depositary before. Therefore, understanding what its role is crucial.
As a subsidiary of KAS Bank, KAS Trust independently acts as the depositary to Dutch investment funds.
“We do all the oversight and custody activities for these funds,” says Plesman. “One of the aspects to this that makes us quite unique is that we use an open architecture model. In comparison to other jurisdictions, if you domicile your fund in the Netherlands there are no requirements for the manager to appoint local parties (other than the depositary), in the form of the fund administrator, the prime broker or custodian.
“We have our preferences but we are open to working with any non-local custodians and administrators, provided they fit within our risk appetite and due diligence requirements. We would then take care of the oversight function. That includes, as part of the delegated activity, active oversight of the fund’s appointed administrator and/or custodian, to ensure they are operating within the rules of AIFMD.”
As a result of the increased liabilities and costs following the introduction of UCITS V, in part due to the increased liability depositaries face in segregating assets across the custody chain, Plesman says that in the Dutch market large custodians mainly want to act as the appointed depositary to funds if they are already providing custody services.
This mindset can be seen in many of the universal banks that are pushing more of an integrated model. This is where different divisions are able to perform the depositary, prime brokerage and fund administration roles within the same four walls of the organisation.
“There are advantages to bundling all the services together for the client but there is a strong focus on fund governance by the regulators.
“They are looking at where fund managers are concentrating their services and whether it is advisable for them to use service providers that are appointed as both the depositary, custodian and/or administrator as it creates potential conflict of interest, which means the manager has to create oversight on the Chinese walls legally separating the different duties and responsibilities with their service providers.
“What we are solely focusing on is our role as the depositary. If you have the possibility to delegate to a custodian you have to do the proper due diligence, but then you can work with other custodians as well. Those can be the custodians (and the fund administrators) of choice of the fund manager. If a fund manager has a specific preference for an administrator or a custodian, we will consider supporting them.
“That’s why we think the open architecture model is the most favourable to the fund,” explains Plesman. He adds that KAS Trust is “very transparent” on the custody side, with respect to the costs associated with sub-custodial arrangements.
By formally acting as the custodian to the fund, all of its assets are held in KAS Trust’s system for ownership verification purposes. The duties KAS Trust performs include all the due diligence on sub-custodians, cash flow monitoring within the fund based on the information it receives from banks and administrators, monitoring the fund’s NAV, as well as monitoring subscriptions and redemptions.
Plesman emphasises that as the appointed depositary it is important, when conducting the oversight function, not to duplicate tasks, as this would lead to unnecessary costs for the fund.
“We are not the appointed administrator, for example. They are responsible for striking the NAV and the whole calculation process that goes with that. We will perform on-site due diligence before working with a third party administrator, to ensure the proper systems and procedures are in place, that we understand their valuation policy, to determine whether the administrator works in accordance with what is required under the regulation.
“Based on that we will receive information from the administrator to allow us to perform our monitoring and checks to make sure they are doing what they should be doing,” remarks Plesman.
Ultimately, the role of the depositary has taken on greater significance under AIFMD and UCITS V. Therefore, choosing the right depositary is vital as it is they that assume full control and responsibility of the AIF’s assets. Plesman believes that the open architecture model is advantageous in that it gives fund manager greater flexibility to maintain existing relationships with third party administrators and custodians and can contribute to the funds’ governance structure.
“There is no stipulation under AIFMD that the administration and prime brokerage functions have to be conducted within the same financial entity as the depositary. On the contrary the financial entities providing both functions have to create Chines Walls in order to separate the different duties. Therefore independent depositaries solely focussing on depositary services gaining preference” says Plesman.
Going forward, KAS Trust sees big opportunities to support AIFs and build on the 50 years’ experience it has gained providing depositary services to traditional long-only funds.
“There is huge interest in alternative funds so we are focusing our efforts in this area, to complement our existing expertise.
“However, we need to do more to promote ourselves as a jurisdiction and put us in the spotlight.
“ALFI does a good job of promoting Luxembourg as a jurisdiction but The Netherlands does not have to be inferior as a fund jurisdiction,” concludes Plesman.
