AIFM Hosting - How does it work?

27th February 2018

By Hanny Tirta, Head of AIFM

New entrants to the Private Equity and Real Estate (PERE) investment market wishing to sponsor a fund would need regulatory cover in order to market and manage the fund. However, this usually means a significant investment in time and money up front without the certainty that the fundraising may be successful. Langham Hall provides a platform solution to provide regulatory cover for such instances.

Having been involved with a significant number of new start-ups in the PERE investment sector over the last couple of years, one of our key observations is that new managers are unsurprisingly overwhelmed with understanding and obtaining the regulatory permissions they need to be able to run their business. Their task is made even more difficult by the ever changing regulatory environment. Typically, new entrants to the market may have been undertaking the following activities;

  • Pursuing a deal by deal strategy structured as joint ventures with known parties;
  • Proprietary investing of own funds; and
  • Investing in or advising on direct real estate assets on behalf of groups of investors.

Whilst limiting the business activities to the above, a manager should not need any sort of FCA permissions. However most businesses that begin this way may soon want to expand on advising acquisitions of real estate interests housed in special purpose vehicles or raise funds from investors outside of the proprietary funds/joint venture situations. 
In either of these cases, regulatory permissions must be sought from the FCA before undertaking these activities. New managers are often under pressure to complete their first deal and the cost of the regulatory set up may initially have to be funded from their own pockets. Given success is not guaranteed, there is little desire to ramp up internal infrastructure so resourcing is often stretched as they try to cover all aspects from marketing, office infrastructure, fund raising and deal making with a small team. 

Langham Hall Solution:
The Langham Hall regulatory platform provides both Appointed Representative and Host AIFM services which allows fund sponsors to achieve regulatory cover within a short period of time, with lower upfront costs. Fund sponsors opting for a more flexible approach often commence operations using the regulatory cover from an FCA firm with the appropriate regulatory permissions to conduct the business it wishes to undertake. 
By being an appointed representative, the fund sponsor may undertake the following regulated activities:

  • Advising on investments;
  • Arranging (bringing about) deals in investments; and
  • Making arrangements with a view to transactions in investments.

Having the permission for these activities would usually cover most of the activities of a PERE manager, save for actual discretionary management of a fund. For example, the appointed representative can market the fund, they can provide advice to a particular client or fund and they can act as intermediary to the sale and purchases of investments. In spite of this, they cannot make decisions for the fund as this is not allowed under the appointed representative regime.
To overcome this the fund sponsor may wish to appoint Langham Hall as the Host Alternative Investment Fund Manager (AIFM) in respect of the fund. As AIFM, we can act as the manager of the fund and consider the investment advice of the fund sponsor in determining the portfolio and risk management for the fund. The fund sponsor in this scenario would also be Langham Hall’s appointed representative since advising on investments is a regulated activity – as described above. Langham Hall would act as the principal for the appointed representative taking responsibility for the regulated activities of the fund sponsor. The appointed representative regime allows the principal to have oversight of an unregulated firm. 
Therefore between the fund sponsor who can market the investment opportunity and advice on the investment (as appointed representative of the principal) and the principal (as the Host AIFM) who can manage the fund vehicle, the fund sponsor has all the regulatory permissions to launch a fund to take advantage of its pipeline deals. The greatest advantage is speed and flexibility in case things do not work out as planned.

Regulatory Compliance of Services:
Under this appointed representative model, the Principal will have to conduct a thorough due diligence process on the fund sponsor to ensure they have personnel who are fit and proper and will deliver the services under FCA compliant controls, rules and regulations. The Principal would usually review this together with the appointed representative. The Principal will also have in place a regular reporting and continued oversight function in respect of the appointed representatives’ activities to ensure that it is operating in compliance with FCA rules as though it was directly regulated by the FCA. 
As the Host AIFM, the Principal will receive investment advice from the fund sponsor as investment adviser to the fund, and will exercise its discretion as to whether the investment is in accordance with what was marketed to the investors and acting in the best interest of the investors in making the decisions on managing the fund. 
As the AIFMD has prescriptive and detailed legislation, there is a risk that under resourced fund sponsors may not have time to understand and apply its intricacies and therefore they may benefit in engaging a professional Host AIFM to advise them. It also means the deal makers can concentrate on fund raising or sourcing better deals for their investors (under their appointed representative cover).
In summary, with fund raising and finding appropriately priced assets being so challenging and with the regulatory environment in a state of flux, it may make sense to opt for a more flexible solution to your regulatory needs. This can continue until the business is more certain of success and can afford the appropriate internal regulatory infrastructure.
In addition to the Host AIFM and appointed representative services, Langham Hall can assist fund sponsors with the administration and depositary services in the UK, Luxembourg and Channel Islands, allowing new sponsors to benefit from a more efficient “one stop shop” approach, and reducing interfacing time with service providers.