Brexit: Fund Domicile Options for London based Hedge Fund Managers
Over recent weeks and months, there have been numerous articles speculating on how Brexit might unfold. Whilst the UK government’s White Paper sets out their ambitions for Brexit, the reality is that we do not know what the eventual position will be. In this briefing we focus on what we do know and explore what this might mean for London based hedge fund managers and the domicile options available to future-proof management and fund structures.
“There are known knowns; these are things we know we know. There are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know….” (Donald Rumsfeld 2002)
So what do we know?
- That in a referendum the UK electorate voted to leave the EU.
- This will be achieved by the triggering of Article 50 of the Lisbon Treaty, which the UK prime Minister has stated will be before the end of the first quarter of 2017.
- From the triggering of Article 50 there is a two year window to negotiate the withdrawal.
- If no agreement is reached within two years, and no extension has been agreed then Brexit occurs with the UK leaving the EU and all EU treaties, with no replacement regime in place.
- For a negotiated agreement to be reached it will need to be adopted by a qualified majority of 20 of the remaining 27 member states representing 65% of the total EU population and also approved by the European Parliament which has the right to veto both any agreement and any extension of the negotiation period.
We also know that if no agreement is reached the free movement of goods, services, people and capital will be severely impacted.
In the alternative investment arena, aside from any impact on the availability of talent in London as a result of restrictions to freedom of movement, the key impact of Brexit as the UK becomes a third country will be the loss of the EU marketing passport for both Alternative Investment Fund Managers (AIFMs) and managers of Undertakings for Collective Investment in Transferable Securities (UCITS). This means the loss of the right to freely market funds across the member states of the EU.
What is equally certain is that whatever form Brexit takes - including the much touted “equivalence” route where companies from countries that are deemed to have equivalent regulatory standards are permitted to trade freely across borders - it will result in a period during which UK managers will not be able to directly access investors across the EU and possibly EU managers will also lose access to UK investors.
This is because of the two stage process required. Firstly any agreement will be subject to a technical review by the European Securities and Markets Authority (ESMA), which is under-resourced and therefore slow. ESMA’s advice will then be considered by the EU Parliament, Commission and Council which must reach a political decision acceptable to all three bodies. Further, EU Member States may have a limited appetite for an amicable agreement with the UK, due to a desire not to leave the UK in a better position post-Brexit than it was as a Member State. The issue of the loss of the passport and access to EU investors is the key point to address.
Future-proofing your business to retain access to EU capital
The obvious answer for larger managers is to open offices within the EU to maintain operations compliant with European regulations and preserve access to the passport.
This is a costly option for smaller managers for whom a less costly route is to appoint an EU third party Management Company (ManCo) which benefits from the passport.
However, Preqin statistics indicate that the majority of UK managers only market into one or two EU countries. If the target investors are in countries that have an accommodative private placement regime (NPPR), this may be a better solution.
EU countries are not required to permit private placement and may set national conditions if they do so. Because the requirements for pre-marketing notifications and ongoing reporting are different in every member state it is not practical to use NPPR to sell into more than one or two countries. In contrast using the passport enables reporting solely to the home regulator and a single pre-marketing notification, albeit the latter needs to include the various requirements of different member states.
Globally 20% of investment in hedge funds is from European investors, of which half is from the UK and Switzerland. For managers seeking to distribute into the EU, a Jersey-based manager can use NPPR to access at least three quarters of the European Investor base.
As at 30th June 2016 there were 115 Alternative Investment Fund Services Businesses promoting 251 funds in this way. Jersey’s efficient and world respected regulatory regime coupled with its ability to offer funds to investors outside of the scope of AIFMD, and therefore without the need for a depository, capitalisation and other associated costs, can result in higher investor returns in a more attractive and certain tax environment.
Meanwhile our Luxembourg UCITS and AIFM ManCo caters for managers intending to distribute more widely, or to EU countries that do not welcome private placement and to institutional investors that request a EU based product. From either centre we are able to provide a more cost-effective route for fund managers than establishing and operating a proprietary structure.
Why use a Crestbridge ManCo?
In Luxembourg, we can act as your EU AIFM (through the passport route) and UCITS ManCo, whilst in Jersey we can act as your non-EU AIFM (NPPR route) and your ‘rest of the world’ ManCo, offering a turn-key solution to support your distribution needs.
Our team of experts has many years’ experience in managing regulated structures and specific sector and asset class knowledge, to support your operations seamlessly as an extension of your own team structure. Use of our ManCo services, as an alternative to your own management and board services, will save you time and money with the added benefits of future-proofing against regulatory change and giving assurance to investors, boards and regulators. By aligning our fees to reflect your AUM, we are able to grow with you, ensuring that you always have the appropriate level of support.
Our established multi-jurisdictional teams have long experience in fund governance and administration, combined with a deep understanding of AIFMD and UCITS. They appreciate the need for diligence, rigorous attention to detail and total certainty in the day-to-day management of funds and in the local compliance and legal framework, enabling you to focus on investment management and distribution.
Crestbridge is a leading provider of ManCo services. Clients benefit from our:
1. Experience – we were one of the first companies in Luxembourg to become a Super ManCo (a ManCo holding both a UCITS and AIFM licence), as well as becoming the Manager of the first multi-manager RAIF platform. We were also one of the first in Jersey to offer ManCo services and are still the only Channel Islands headquartered ManCo.
2. Expertise – we have substantial skill and experience across front, middle and back office roles to fully support independent risk management and oversight services, enabling you to meet regulatory requirements and also full UCITS and AIFM ManCo services.
3. Independence – we are privately-owned and therefore free to operate independently, which is particularly important to investors in the current environment of robust governance requirements. Our independence enables us to take a flexible approach, tailoring our service to suit your specific needs, while ensuring that all regulatory obligations are met.