15th April 2015
The beginning of 2015 has seen a number of international fund managers come to the European market from as far afield as Asia and the US. Those fund managers who have decided to tackle AIFMD head on are getting to grips with what needs to be done before they can market to Europe. Non-EU funds, marketed by non-EU managers, are still in a blackout period where they are excluded from applying for a cross border marketing licence in Europe. Instead they have to apply separately to each country where they hope to secure investors. Known as the private placement regime each country has its own rules which increases the amount of work involved.
Two countries where there are extra steps to obtain licences are Denmark and Germany. Regulators there have decided that, unlike the rest of Europe, non-EU managers of alternative investment funds (AIFs) need to appoint a depositary before starting marketing in these countries. However, this is most likely a short-term difference. Within the next 12 months it is expected that, if a non-EU fund manager is allowed to apply for an EU-wide passport, then having a depositary is likely to be needed before marketing to investors in the rest of Europe as well.
A depositary performs certain functions designed to protect investors, including monitoring cash flows of a fund, verifying if a fund actually owns a named asset and monitoring the fund manager and fund to ensure it is running in accordance with key documentation and in the way in which it was sold to investors. It is not a custodian role but very much a lighter touch monitoring role.
Given that there is significant available capital outside Europe, it is easy to see why Asian fund managers might ignore countries within Europe. Many of them view an overall commitment of less than 5% to Denmark and Germany as not worth the effort or the cost to existing investors. In many cases they are right, however if a fund manager genuinely thinks there is an opportunity it is difficult to ignore the prospect accessing new capital.
For those deciding to market to Germany or Denmark, the timing of these applications needs to be thought through carefully. Recently, one firm launching a non-EU fund wanted to target European investors, but was under enormous pressure to start and complete fundraising quickly. Having registered in various European countries under the normal private placement regime the placement agent pushed hard to target German and Danish investors, traditionally major investors into private funds. However, the problem faced by the fund manager was the time required for Denmark and Germany's regulators to approve an application. This can take up to 8 to 12 weeks to determine and the regulators insist on seeing a depositary agreement at the time the application is submitted. The fund manager considered reverse solicitation but the perception within the market was that this is becoming rarer because the German regulator is apparently monitoring German LPs’ commitments to funds.
To delay Danish and German LPs to a second close is unfair as this excludes them from preferential first close terms offered to domestic investors. The only way to side step this and allow everybody an opportunity to secure incentives for coming into a fund early is to run the marketing applications and depositary selection process right at the beginning.
On the face of it, this doesn’t sounds too difficult; however, the Asian market is not used to providing this service at the required cost and in a light touch way. A fund manager might consider appointing a bank that can act as a depositary. However, banks often have a rigid way of dealing with the funds which seek their services due to them having up to US$1tr or more liquid assets in custody and therefore not wanting to introduce a less expensive and more flexible business model. As such banks’ processes can be intrusive, perhaps insisting on pre-approval of investment transactions, or being unable to accept information after the event – this is not unexpected when most of a bank’s assets are held in custody.
One can understand that this is not attractive to Asian firms that have to move very quickly to complete a deal. This is why some are now talking to the small number of fund administrators who provide these services to explore a more user-friendly way of working.
Langham Hall is one such depositary; from London it provides services to private equity and real estate fund managers both in Europe and more recently outside Europe for Cayman or Delaware funds or “non-EU AIFs” as they are known. It operates quietly behind the scenes and provides a non-intrusive monitoring role which uses the fund managers’ existing procedures and internally generated information. Managers have been reassured that, once over the initial set up of securing their marketing licences and appointing depositaries, the ongoing operation has not been as time consuming as anticipated.
It appears that the Asian market has moved forward significantly in the past 12 months towards accepting the proposed changes to doing business in Europe. Once up and running, Annex IV reporting for each of the countries they register in is another area where fund managers will need assistance. It will be of no surprise that the formats differ from country to country; it has been a sharp learning curve for the whole industry.
It may be that the decision is not just about whether or not to pitch to Denmark and Germany but whether to pitch to Europe, as it is likely the rest of the market will go in that direction. Even non depositary requirement countries are asking if funds have depositaries in place. It is still possible to defer the need to comply but ultimately the need to embrace it feels somewhat inevitable.
Langham Hall would be delighted to explore your options for future or existing AIFMD requirements. For more information or an informal discussion, please do not hesitate to contact:
Head of depositary
Langham Hall UK Depositary LLP
t: +44 20 3597 7934
Further details on Langham Hall Group can be found on our website, www.langhamhall.com.