Being Brexit-savvy

Fund managers have the ability to navigate even the trickiest of outcomes. Rebecca Akrofie lays out the marketing options

While the shock may have waned considerably since the Brexit vote last year, private fund managers are still no clearer on what ‘Leave’ actually means for them.

In September, chancellor Philip Hammond told City of London business lobbyists that he will seek a “bespoke deal” for the UK financial services sector in the negotiations, to avoid a “cliff-edge” end to passporting and marketing of financial services from the UK to the EU.

But Julie Patterson, head of investment management and regulatory change at KPMG, tells pfm there are still “no answers at all” on how UK private fund managers will market their products to European investors if the UK leaves the single market in 2019.

Patterson highlights the top concern for private fund managers: removal of the right to automatically market funds in the EU. Under the Alternative Investment Fund Managers Directive, non-EU managers must apply to the national regulator in each country in which they want to access investors, and all have slightly different requirements.

“The biggest concern for us is uncertainty around passporting and marketing of funds in the EU,” says Jillian Regan, senior compliance officer and counsel at Apollo Global Management, speaking at the BVCA summit in October.

There are a number of ways managers can navigate access – albeit with varying degrees of difficulty. The first is to domicile funds in another jurisdiction. Firms including BC Partners and EQT have already said they will domicile all new funds in Luxembourg, so they will continue to have access to EU investors.

“We are looking at ways of future-proofing every single part of EQT; consolidating the GP presence is one way,” Peter Veldman, head of fund management at EQT, told pfm in April. “By having the hub in Luxembourg, we also secure that future funds are managed under the AIFMD within the EU which is an important aspect for us.”

A second option is fund migration, which involves moving a live fund to another country. This has already been tested by the market in a different context, Alexandrine Cerfontaine-Armstrong, a funds lawyer at Goodwin, tells pfm.

“The funds that migrated were aggregator funds investing in private equity funds as well as private equity funds themselves. The first migrations were completed from Jersey and Guernsey to Luxembourg in 2013-14, when there was some uncertainty as to these jurisdictions’ tax status.  This triggered issues with fundraising with certain continental European investors at the time.

“There are different legal techniques to migrate a fund. It can be pre-agreed as an option in the limited partner agreement under the AIFM’s control.” The LPA can also be amended to include such a clause.

Other firms, including Ares, are cautiously considering a third option, establishing a manager in the EU. Moving the AIFM or setting up an additional AIFM is an option in some countries, including Luxembourg, but comes with some challenges due to substance requirements.

“We’re exploring establishing a manager on the European continent – it would be irresponsible to assume anything other than a ‘hard Brexit’,” says Stephanie Shepard Cobb, a managing director and head of European compliance at Apollo Global Management.

Hamilton Lane is mulling that option, although Frederick Shaw, the firm’s compliance officer, told pfm in May that it will not move from London completely.

Establishing a manager in a new jurisdiction involves, in many cases, moving investments to maintain substance in the new location, Cerfontaine-Armstrong says.  “Fund managers also need to consider staff relocation, or hiring locally.”

HarbourVest’s Nick du Cros, its vice-president legal and compliance officer, echoes this. “We want to launch an EU structure but it would take a while to staff it properly. We do have a few holding structures in Luxembourg which may push us to expand operations there,” he says.

To date, firms have remained cautious about putting relocation plans into action.

“Anecdotally, the firms that are considering moving an AIFM haven’t pulled the trigger, owing to continued uncertainty,” Ted Craig, a funds partner at MJ Hudson, a law firm, tells pfm.

“Recent spin-outs I’ve worked on are still choosing the UK [to base their manager], which aligns with our view that London is still a strong center for funds expertise and services,” he says.

A fourth option is to use a white label or ‘rented’ AIFM. These are AIFMs that act as authorized managers for unaffiliated fund sponsors. The rented management entity is advised by the GP.

Consequences

Alternative assets consultancy MJ Hudson recently launched one in Luxembourg in response to increased client demand. The manager provides AIFM compliance, risk and portfolio management, operating and financial services as well as EU passports to its asset manager clients. The firm’s plans to set up in Luxembourg pre-date the Brexit referendum, but were sped up as a consequence of the Leave vote.

Small, new managers often take this route to market and register as a third party to a fund administrator, Richard Anton, co-founder and general partner at Oxx, a venture capital firm focused on Europe and Israel, tells pfm.

“Fund administration firms are a regulated entity, and can operate as formal fund managers. This means we can carry out fund marketing under their aegis, under the FCA [the UK regulator] rules,” he adds.

Patricia Volhard, a funds partner at Debevoise & Plimpton, says in light of Brexit, these could increase in popularity.

“The rented AIFM is an option, as national regulators seem to be fine with them. We used to think of them as exotic, but they’re being used more and more,” she said, speaking at the BVCA Summit.

There are options available to managers, even if the Brexit deal struck is ultimately a ‘no deal’, but the decision to relocate centers on functions to move and to where. Factors to consider include the costs and benefits of AIFM relocation or locating fund vehicles outside of the UK. While certainty on Brexit remains elusive, managers have time to decide.