Investment managers (IMs) seeking to access new markets and investor flows in Europe by establishing a regulated fund have many options to consider. Primary among these is whether they should launch the fund on a third-party hosted platform or establish a proprietary, standalone platform. In this article, we outline the key points to consider when making that decision.
The EU regulatory framework governing the funds industry is constantly evolving in its efforts to improve investor protection, increase transparency and harmonise the regulatory compliance requirements for cross-border funds operating under the UCITS and AIFMD directives. Against this backdrop, third-party hosted platforms – available to support both UCITS and alternative investment funds (AIFs) – have become increasingly popular in recent years.
At a basic level, a third-party hosted platform is an umbrella fund structure operated by a Management Company (ManCo). The platform comprises multiple sub-funds (or compartments), each with segregated liabilities and operating its own investment strategy.
Hosted platform practicalities
An IM considering a platform approach will likely want to ensure there is no diminution in its relationship with its underlying investors or to the value of its brand. Setting up the structure so that the IM is a directly appointed delegate maintains the IM’s direct link to the investment strategy of its sub-fund and upholds brand identity in terms of the sub-fund’s naming convention, marketing strategy and investment story. Underlying investors identify directly with the IM, with the platform simply providing the supporting operational and regulatory infrastructure. In short, this is a turnkey solution that sees the IM ‘plug into’ an established framework with clear speed-to-market advantages.
Key benefits of a hosted platform
- Specialist expertise: In ever-evolving markets, the IM can benefit from the expert knowledge and guidance of the platform manager, which comes as a core part of the platform service, without incurring ongoing advisory fees
- Economies of scale: The IM benefits from economies of scale and the operational and legal efficiencies of a hosted platform, a key consideration in today’s environment of fee compression
- Speed to market: A hosted platform manager can simplify and streamline the legal process by using an existing suite of legal agreement templates. Having many service provider agreements already in place at umbrella level saves further time and money and enables speedy access to market. Many hosted platforms will also have a range of platform agreements in place to facilitate distribution
- Platform-level compliance regulation: The platform is accountable to the regulator for ensuring ongoing regulatory compliance and governance of the platform
- The IM focuses on what they do best: The IM is free to focus on investment management and managing investor relationships while the platform manager’s team and platform service providers focus on ensuring the platform is operating in line with regulations and industry best practice
- Performance transferability: Should the IM ultimately wish to establish its own standalone platform, its fund’s performance track record can be carried over to the new platform (provided that the investment policy and objectives remain the same and there is no change to the entity providing investment management).
Limitations of a hosted platform
- Restricted choice of service providers: Service providers, including the administrator, depositary and auditors, are selected at umbrella level. The IM’s selection of service providers is restricted to the sub-distributor, broker and counterparties for trading
- No board representation: The board of directors sits at umbrella level and determines the governance model for the umbrella fund. The IM does not have a representative on the board of directors
- No input to regulatory documents: The prospectus and many of the regulatory compliance documents are at umbrella level so the IM has limited input to such documents. However, the IM may tailor to their specifications the supplement to the prospectus that covers their own dedicated sub-fund.
What about a standalone proprietary platform?
While we continue to see increased interest from IMs looking to launch funds on hosted platforms, there is ongoing demand from IMs wishing to establish their own standalone platforms. In our experience, there are two main reasons why an IM may choose this route:
- The IM doesn’t have a corporate culture of outsourcing and instead wishes to control all aspects of running the platform, including the appointment of service providers and the fund’s board of directors
- The IM plans to launch multiple sub-funds that will gather significant assets under management, thus making the proposition of a standalone platform economically viable
In either case, the IM would need to ensure it has the financial resources and in-house expertise to set up and run the platform. It would need to assess the costs and benefits of establishing a proprietary platform, most notably the resource and time commitments involved. These would include hiring a board of directors with the optimum mix of skills and sourcing suitable service providers for the fund. In reality, many management companies can assist the IM with this selection process.
Choosing the right ManCo
Selection of the ManCo is a vital decision no matter whether your platform is hosted or standalone. In both cases, the ManCo assumes responsibility for ensuring regulatory compliance of the fund platform, compliance with all applicable EU regulations and engagement with the local regulator.
The ManCo should have the depth and breadth of expertise to support the IM in complying with regulations and best practice. It’s also important to assess the ownership structure of the ManCo to ensure it has the necessary substance, resources and balance sheet capital to meet the expectations of regulators and investors. Given the global nature of the funds business, a ManCo with global presence can add value for clients by providing in-market expertise.
Importantly, irrespective of whether the IM’s fund is on a hosted or standalone platform, the ManCo is the entity responsible for meeting the capital adequacy requirements of funds under management.
Support with navigating the EU funds landscape
IQ EQ Fund Management (Ireland) Limited is an EU-based fund management company that works with global investment managers seeking to establish a European footprint either via our hosted platform or through establishing their own proprietary platform. Our team combines practical experience with sound regulatory and technical expertise to support and guide you through your fund’s life cycle, regardless of the fund structure you choose. If you are an investment manager entering the EU funds environment for the first time, we would be delighted to help you navigate the EU funds landscape working in a guided and supportive partnership.
A shorter version of this article was originally published by IoD Ireland.