Stephan Schilken, Director & Operational Leader AIFM of SGG Fund Management S.A. in Luxembourg, gives his thoughts on the implications of Brexit for UK Fund Managers marketing their products to EU investors and the solutions to remain marketable in the European Union post-Brexit.
What comes to your mind when you hear the word ‘Brexit’?
The well-known proverb, ‘there is nothing certain but the uncertain’. Although it’s clear that the UK will come out of the single market, it’s still uncertain whether a free-trade agreement or a radical departure is to be anticipated, which has created a real sense of doubt.
How will UK-based fund managers be affected by Brexit?
Today, UK-based fund managers are able to market their funds to EU investors through the AIFM passport. However, these licences in their current form will be potentially void post-Brexit unless the EU agrees to equivalence of regimes or a third-country passport is negotiated as part of the exit process.
Alternative routes are currently being investigated, such as a future Free-Trade Agreement, including a passporting solution for the Private Equity industry. Another possible route would be to use a marketing passport for ‘third-country’ firms that the current Alternative Investment Fund Managers Directive (AIFMD) includes – however, the process for obtaining this passport is likely to be fairly complicated. The European Securities and Markets Authority (ESMA) indicated that there were “no significant obstacles impeding the application of the AIFMD passport” to six jurisdictions in August of 2015. However, no such passports have been granted yet.
Another option could be the national private placement regime (NPPR) – currently very popular with non-EU managers. However, with AIFMD II on the horizon, there is little guarantee that the regime will continue to exist, with some countries already having indicated their plans to end such placement in their local markets.
So, how can UK fund managers keep accessing the EU market?
According to Bloomberg, moving headquarters within the EU is an option that some larger financial companies are considering. This approach requires the establishment of an Alternative Investment Fund Manager (AIFM) in an EU jurisdiction, which allows firms to continue marketing in the EU while insulating their activity from the uncertainty caused by Brexit.
And is this the only solution available?
Definitely not. Let’s take the Luxembourg example: While some larger managers have decided to launch their own AIFM in the Grand Duchy, many are choosing to employ the skills and services of established service providers by using a third-party AIFM. This solution is by far the most flexible and most cost-effective. It secures UK managers access to the European market, gives them access to highly skilled professionals regulated by the Luxembourg Financial Authority, and allows them to stay focused on their core business by outsourcing non-investment management activities.
What does this mean?
Opting to ‘rent’ a Luxembourg-based AIFM allows alternative asset managers to swiftly establish their presence in the EU.
By appointing a fully authorised and licensed provider as their dedicated AIFM for their alternative investment vehicles, UK fund managers are able to keep their products’ marketability in the EU, with zero delay and a highly reputable service quality.
What are the advantages of such a solution?
Fund managers can benefit from best market practice and an existing regulatory set-up that is compliant with all substance requirements, is fully licensed and achieves market acceptance EU-wide. Such a solution ensures cost efficiency through lean processes that focus on the clients’ needs, while securing complete regulatory compliance. Appointing a fully authorised AIFM also ensures full distribution access within the EU.
I believe using a third-party AIFM is the best option both for fund managers seeking a long-term solution, as well as for fund managers needing a medium-term solution while they go through the necessary regulatory procedures in order to set up their own AIFM in the future.
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