Since 23 June 2016, when the UK decided to leave the EU, the fund industry in the UK found itself in a limbo between a future as a third jurisdiction and a past of benefitting from the EU passporting rules for their funds.
Today, UK-based alternative investment fund managers continue facing two strategic challenges: where to manufacture and how to market their own funds into Europe.
When it comes to the first challenge, the main questions are: what do I do with my UK Alternative Investment Fund Manager (AIFM)? Can I still rely on it to manage funds domiciled in the EU? Even more important: where should I domicile my fund at all?
The main concern here is that an existing UK AIFM may no longer be able to act as the management company for funds domiciled in the EU. It comes therefore as no surprise that one solution is gaining increasing popularity among UK fund managers—to create a fully EU-based infrastructure for their funds by either setting up or appointing a (third-party) AIFM in Luxembourg.
As many UK asset managers prefer to have as much flexibility as possible, we at GAM Private Labelling often see clients interested in exploring two viable options. The first option is to act as an investment advisor to our AIFM in Luxembourg (the latter assuming the responsibility for the portfolio and risk management). The second option is to continue to act as the investment manager of EU-domiciled funds without interruption.
Furthermore, appointing a third-party AIFM has various additional merits: Establishing an own EU AIFM in an unfamiliar jurisdiction can become a complicated, time-consuming and very costly endeavour. GAM Luxembourg S.A., being the largest third-party management company in Luxembourg, provides direct access to strong ground expertise, the local ecosystem of relevant service providers, short and efficient time-to-market and a competitive cost structure. By contrast, creating an own AIFM is linked to a substantial investment in local employees, infrastructure, significant legal costs in attaining regulatory permission and an implementation period, which can easily exceed your initial expectations.
When it comes to the second challenge, the marketability concerns of UK asset managers who want to continue to distribute products in the EU, the European buy side has already given quite strong signals. Institutional investors have expressed and shown a clear preference for EU-domiciled vehicles, backed by a solid infrastructure and regulatory framework. Furthermore, the Alternative Investment Fund Managers Directive (AIFMD) non-EU passports have not been introduced and a number of the EU27 countries do not have any or only very restrictive private placement regimes.
In addition, the growing nervousness around locations such as the Channel Islands, Isle of Man or Gibraltar in the light of Brexit have caused more and more UK fund managers to future-proof their funds with a strong, large AIFM in the EU, whereby Luxembourg with its global network, long track record and overall market position is seen by GAM Private Labelling as one of the top choices.
That being said, the key criteria for the choice of the best fund domicile remain the targeted investors. While some smaller UK asset managers might initially be able to focus on offering their funds only to UK investors, we have seen many asset managers who have outgrown their local investor base, now targeting international investors, many of which are institutional and EU-based.
These clients tend to choose to partner with well-established companies with existing platforms and proven track records in order to ensure that their funds meet the criteria of their target investors, preferably with a strong footprint in both jurisdictions—the UK and Luxembourg. GAM Private Labelling is able to build a bridge between both.
For UK asset managers, GAM Private Labelling provides a future-proof infrastructure for their funds that would allow them to approach an international institutional investor base outside the UK while benefitting from the strategic advantages of a strong partner in the second largest fund domicile worldwide—Luxembourg.
