6th October 2014
Now that we are out of the AIFMD transitional period, EU managers of in scope EU AIFs are required to be fully compliant with the directive and appoint a PE AIF depositary. Non- EU managers may also be required to appoint a depositary to perform depositary lite services if they are marketing their funds to certain EU countries, such as Denmark and Germany.
Langham Hall has now been “live” and providing PE AIF depositary services for almost a year and were one of the first in the market to provide these services. We have now been approved by the FCA to act as a PE AIF depositary and to provide depositary lite services. We now provide these services to 50 AIFs for 25 AIFMs.
Over the last three or four months the role of depositary lite has been especially topical and we have signed up clients as far away as Australia. European AIFMs are now more or less up to speed on how the interaction with a depositary will dovetail with existing AIFM processes around cash monitoring, verification of ownership of assets and monitoring of the AIFM. For non-EU AIFMs there is a great deal of uncertainty with how we will interact with existing custodians and overseas in-house teams who are not used to additional oversight of fund processes. Much education has been required to de-mystify the depositary role although in our experience, non-EU AIFMs have in parallel sought out ways to avoid or postpone the need to comply by avoiding or delaying marketing to countries such as Denmark or Germany or using reverse solicitation.
There is no doubt the market is quickly maturing; so where two or three depositaries have been living and breathing the issues for a couple of years now, new entrants such asChannel Island based administrators are forming small offices in the UK and are starting to get authorised. This is presumably to protect their existing clients since an anomaly of the rules is that a UK depositary can provide depositary lite services to Channel Island (non-EU) AIFs.
Experiences so far
Most people are now acceptant that the depositary regime is here to stay, for a few years at least, but there are still a large number of people we meet who challenge whether anything positive will ever be achieved given the costs involved. In order to win the battle of hearts and minds, one of our first objectives was to ensure our services were as un- obtrusive as possible. Langham Hall has achieved this by taking a risk based approach which allowed us to tailor our depositary services to each client by meeting with the clients and getting to know their processes in detail at the beginning of the relationship. By taking this approach, we can advise clients on any weaknesses in their control framework and tailor our testing to ensure we fit into their current processes as seamlessly as possible.
The key to not being intrusive is deep experience in the relevant asset class. The depositary team at Langham Hall has a range of alternative investment fund and internal audit experience which means we can identify risks in control frameworks and compare with best practices we have seen on other fund managers. This avoids the tick box approach that a number of other depositaries adopt.
To date all of our clients’ businesses appear to be extremely well controlled and the risks would appear low. However, despite the size of funds under management, the teams are small and it is inevitable that we have uncovered a number of control weaknesses. Examples of these would be a fund which was technically reporting late by a couple of days compared to a timetable defined in the Limited Partnership agreement. This might not appear to be a material event in today’s market however we still remember in 2009 LPs searching for technical breaches to exit funds.
Another example would be bank mandate forms which accidentally gave one person sole signatory rights on an LP’s bank accounts. Again, an adverse event may never have happened however we know from running our own business that once cash is gone it’s gone and the only safeguard is prevention.
These are typically all items that might have languished half way down a CFO’s “to do list” but which the provision of depositary services has brought to the fore. A little like the preparation for Y2K in 1999, you may never hear of resounding successes and it will be difficult to know if it was due to the appointment of depositaries or whether there were never any risks in the first place. We have heard the same about our provision of FCA monitoring Operator roles (Langham Hall has around 40 of these) yet in our experience one in ten of these have had instances where we had to step in and mediate issues.
On the depositary side, it might only be one in twenty or thirty where we will encounter an issue but we work on the basis that to think nothing will ever happen feels a little like the halcyon days of 2005 and 2006 where “nothing could go wrong”.
As the market matures further it will be interesting to monitor how the role continues to evolve. For more information, please contact:
Head of Depository
t: +44 (0) 20 3597 7934
Director, Business Development
t: 020 3597 7909