No less than 16 months after the Brexit referendum and seven months since the triggering of Article 50, it is hard to argue that the future has become any more certain. Hard or soft Brexit? Transitional period or not? These are the seemingly philosophical questions being grappled with in a dark room in Brussels…
All the while, we have to somehow deal with the reality that the world in which we operate might change immeasurably in a relatively short time from now. Or it might not. Who can say for sure?
What we do know for certain is that a large number of fund managers have decided that they can’t wait for the Brexit negotiating team to come back with the right answer.
A recent survey of the fund management community, conducted by consultancy firm MJ Hudson, revealed some interesting findings regarding the expected impact of Brexit on the headcount of the UK’s asset management industry by 2020. UK fund investors predicted a relatively modest a fall of 13%, while fund investors based outside of the UK anticipated a far more severe impact on headcount outflow, predicting almost a quarter (23%) to move to other financial centres.
At IQ-EQ, we are finding that around half of incumbent fund managers raising a new fund are assessing a new domicile for that fund, while the other half are keeping the status quo. Clearly the most pressing question is this: what will be the best domicile for fund managers to access the European market post-Brexit?
Luxembourg is already the largest fund domicile in Europe and the second largest centre for funds in the world (after the United States), with a total of €3,957.581 billion in net assets under management (AUM) at the end of July 2017. The Netherlands is already home of some of Europe’s largest funds, with total AUM reaching €845 billion by the second quarter of 2017. Dublin may seek to strengthen its position as a home for hedge funds, like Malta, while Paris and Frankfurt may wish to leverage the benefits of scale and sophistication in their markets.
In terms of the fund structures being adopted, we are seeing a significant number of new managers choosing Luxembourg. The special limited partnership (SCSp) is becoming popular, as is the Luxembourg reserved alternative investment fund (RAIF), as neither of these are regulated at the fund level and the RAIF is AIFMD compliant. We are also witnessing a major pick-up in private clients and family offices turning to RAIF funds.
The Netherlands is another example of a jurisdiction with a compelling proposition as a fund domicile. It has a number of efficient structures, including a light regime operated under AIFMD, which makes it appealing for start-up managers and FinTech companies. The Netherlands has witnessed recently a notable increase in the number of fund managers setting up Dutch vehicles, especially in the alternative assets space.
So as we look ahead to Brexit, what does the future hold for our sector? There is still a chance of a win-win situation, where London reaffirms its position on the international stage while European fund centres avail of opportunities for growth. While the details remain to be worked out, such as the future of the AIFMD third-country passport, London and European centres may yet continue to collaborate to the benefit of the global funds industry.