June 23 looms large and there is significant consideration being given within the asset management industry to what its impact might be. As post-Brexit relations with Europe may take one of several forms, this is a difficult task. However if one is prepared to make a basic assumption that whatever form Brexit takes, if it does not allow for a free movement of people, it is unlikely that the UK will continue to benefit from unfettered access to financial services and marketing passports, then one can begin to assess its impact on certain aspects of asset management businesses.
This article looks at the fund management aspect of such businesses. In this regard, the impact of a Brexit will depend on the how the asset manager has organised its fund management and marketing.
LOST PASSPORTS
An asset manager that currently manages UK funds using a management entity that is also in the UK is unlikely to be affected in its ability to continue to manage such funds post-Brexit. Where such a manager may suffer is if such products are marketed widely across the EU. For example, at present a UK manager of a UK Ucits can market it across the EU pursuant to a Ucits marketing passport, which gives access to both retail and professional investors in each EU state.
Following a Brexit, such UK Ucits would likely technically cease to be Ucits. They would be non-EU ‘alternative investment funds’ that would therefore have lost the right to market under a Ucits passport. Instead, the funds would only be able to market under individual national private placement regimes. The important question is whether, and to what degree, this loss of a passport would have a material impact on the raising of capital. The answer will vary between funds. If the marketing of an affected fund was principally to professional investors in countries that are receptive anyway to the distribution of funds (such as Luxembourg, the Netherlands and Ireland), then the effect of losing the passport will not be as significant as if the fund relied on capital flows from countries that are generally only accessible because the passport penetrates what would otherwise be a closed market (France and Italy) or if the capital flows were heavily dependent on retail investment.
A QUESTION OF GEOGRAPHY
Moving away from the example of UK Ucits, another potentially problematic arrangement would be where UK management entities directly manage non-Ucits funds established elsewhere in Europe, e.g. Luxembourg.
Cross-border fund management requires a passport which, if lost, will mean that the ability to continue to provide such services will depend on the local law in the domicile of the relevant fund. These funds will also cease to benefit from the marketing passports they currently enjoy once the UK is determined to be outside the EU. The impact of such a loss will again vary from fund to fund, as described above.
It is hopefully clear from the examples above that, insofar as fund management is concerned, the impact of Brexit will depend on the geography of individual arrangements. Managers that have organised themselves such that on the one hand their UK management entities manage UK funds marketed to UK investors and on the other hand their European management entities manage their European funds marketed on a pan-European basis, should be fairly well insulated. It is those managers doing their business from the UK, and which rely on a wide range of European capital flows, that stand to lose the most.
Nish Dissanayake is a senior associate at Herbert Smith Freehills LLP
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