Robert Mirsky

This article was sponsored by EisnerAmper.

What should fund managers first consider when it comes to Brexit?

Whether they are UK fund managers, European fund managers or US fund managers, the first question is which markets they need to access and for what reason. If you’re looking for investors in a specific market, focus on that in the first instance and on what you’re going to need to do to get your fund ready to attract money from whatever country that is. You have to drive things from a commercial perspective first. Second, you have to figure out how you do that from a regulatory perspective.

What happens in the case of a no-deal Brexit?

Assuming a no-deal Brexit, which you need to think about and prepare for, there is likely to be some form of transition that allows fund managers to continue acting in a similar fashion to the way they have been acting, for at least the next couple of years. What happens is that the UK becomes a non-EU jurisdiction, not unlike the US. However, as the EU treats the UK, the repercussions are the same for the US. As such, we believe they will act with some caution because the US (and the UK for that matter) are such important components of the global financial markets. When that decision will be made is another question.

What are your clients most concerned about?

From a trading perspective, you’re probably okay no matter where you are. The UK has already agreed that they are putting in transition rules for EU fund managers’ access to UK markets.

Most of the questions are about the investors in their fund and distributions of the fund. That’s what’s going to be driving a lot of the decisions.

Assuming a no-deal Brexit and assuming no transition rules, you’re going to end up in the exact same position as a non-EU alternative investment fund manager. The question will be how a manager distributes its funds if it has a Cayman Islands fund, for example, or if it has a UK-based fund, into Europe. That question is much more difficult to answer.

My assumption is that there are going to be some transition rules that will allow you to distribute. The UK has already said it has rules that are going to go in place the day after March 29, which will allow EU funds to continue to be sold into the UK for up to a three-year period. I would be surprised if the EU didn’t reciprocate to some degree.

Our clients are also looking to alternatives including sub-delegated investment managers, where the primary investment manager in Luxembourg, for example, sub-delegates that responsibility to the UK. They’re going to be looking very hard at these delegation rules.

Distribution is going to be the biggest challenge assuming a no-deal Brexit.

What does Brexit mean from a fund domicile perspective?

If you look at private equity funds established in the EU, the vast majority of them have been set up in Luxembourg because it has a very stable limited partner/general partner structure, which is the preferred route for investors. It’s in Luxembourg’s interest, and also Ireland’s interest as the secondary market, to continue to push very hard for the UK’s ability to be able to distribute through their Luxembourg and/or Ireland funds.

How does Brexit impact the Channel Islands as a jurisdiction?

The Channel Islands, because of the proximity to the EU27 and the UK and the strength of the asset management service provider space there, are good places to do business. They are third-country jurisdictions. What has been put on the backburner since the Brexit referendum is the Alternative Investment Fund Managers Directive passport and I think the Channel Islands ended up losing out a bit on the back of that. They were in a pole position to take advantage of it. They are now in a similar third-country position to the US or the UK, assuming a no-deal Brexit. They will get equivalence as well at some point. That said, for the moment, many are still looking to Luxembourg or Ireland, or hypothetically Malta or Gibraltar – the other two secondary jurisdictions people talk about to some degree.

What is the attraction of Malta and Gibraltar?

They are both EU, although Gibraltar is only EU by virtue of its relationship with the UK. As the UK goes, Gibraltar goes, too, because the UK has made it very clear Gibraltar will remain a British Overseas Territory. Gibraltar could be out of the race, but Malta is out fishing for this business now. The island is seen as a strong jurisdiction, with good service providers, good rule of law and in the EU, but often at a lower cost than Luxembourg or Ireland.

What do you anticipate will eventually happen to national private placement regimes?

The European Securities and Markets Authority said they are going to be shutting down NPPR by the end of this year. But ESMA actually can’t shut down NPPR. It’s up to the national legislators and regulators. For example, the UK stated pre-Brexit it would not abandon its private placement regime. That may well be a way to continue distributing funds into Europe. I’m not of the view that all the 27 national private placement regimes are going to be shut down.

What are some of the tax ramifications fund managers should look for?

The tax implications of Brexit are really limited to the investments of the portfolio companies into which the fund is invested. You get potentially different answers having a Luxembourg fund from having a Cayman Islands fund or a Channel Islands fund, for example. It is possible, at times, to avail yourself of certain tax treaties, which allow for a reduction in withholding tax on things like dividends, interests and capital gains because the tax treaty between whatever country the portfolio company is in and whatever country your fund is set up in allows you to reduce those rates.  This will ultimately depend on the structure of the fund, tax treaties and type of investment.

The tax question comes up much less for the investors, given most funds attempt to provide tax neutrality for the end investor.

Do you have advice for funds that need to address their jurisdiction issues? Is it too late?

I don’t think it’s too late but I think you need to contingency plan for both your trading activities and your distribution activities. All of that is going to be very fund-manager specific and I still believe there are going to be some transition rules to come into place. I am also hopeful that cooler heads ultimately prevail. It is not out of the realm of possibility that we have a hard Brexit and things are very difficult in the near term. Not apocalyptic but very difficult.

Robert Mirsky is head of EisnerAmper’s asset management group and head of EisnerAmper UK. He has more than 20 years of experience in advising financial services companies, investors and asset managers.