With the UK exiting the EU this week, Jonathan Jennings, Group Head of Institutional Client Services, looks at the implications for cross-border fund structuring…
Q: With Brexit now a reality and the UK now entering a transition phase, what’s the impact on UK and EU fund managers?
Jonathan Jennings (JJ): Market access is the really key issue and managers will have had an eye on how they can ensure seamless ongoing access to investors for some time now.
After 31st January, the UK effectively becomes a third country in relation to the EU, and this has clear implications for both EU and UK managers. However, there are transitional arrangements in place, and the regulators in the UK and EU have put in place mechanisms for managers to submit notifications to enable them to continue to market across UK/EU borders – managers should have submitted those notifications by now. That effectively means that nothing much changes during the transitional period in 2020.
What happens longer term is still unclear though – as third country AIFMD passports have not been introduced, for instance, UK AIFs will, when the transitional arrangements come to an end, only have access to EU investors under National Private Placement Regimes. Likewise, there are question marks over how EU managers could access the UK investor market in the long term.
There is some talk around equivalence, for example, and of opting in to AIFMD compliance, but it is not clear how this would work – or indeed if it would be beneficial for all managers. In practical terms, most UK managers will probably not need to access investors across the entire continent.
Q: What should managers be focusing on during the transition period?
JJ: It is absolutely vital that managers look sooner rather than later at their model, stay close to and analyse developments in the environment around them, and assess how they could adapt to best meet their needs in the post-Brexit environment – there are options open to them.
Managers should consider where they are marketing their funds today, where they want to continue marketing their funds post-Brexit, and where their investors are. For instance, a UK manager with a UK fund may not be able to maintain a large pan-European investor pool in the long term, and it might be best to establish or bulk out an operation in the EU, by setting up a management company (ManCo) in a jurisdiction such as Ireland or Luxembourg or by outsourcing the ManCo function.
Equally, if a fund has a predominant investor base in the UK, Ireland, Netherlands and Switzerland, or a limited number of EU member states, structuring through the Channel Islands to make use of their tried and tested private placement routes to market could well be a lot more cost effective, less onerous, quicker and simpler.
The choice of which option to go for depends on investor demographics, the size of the manager and on anticipated future fund launches. Whatever, the advice is to make that assessment and draw on relevant external expertise now so that there are no shocks or tight deadlines to meet in the future.
Q: So is restructuring necessary, or should managers adopt a ‘wait and see’ strategy?
JJ: This depends. In the case of private funds which are fully invested and have some years yet to run, there is probably no need to do anything immediately because no marketing is taking place. If a manager is looking to launch a new fund or if that manager has a UCITS or other open ended/retail fund, however, then restructuring options should be looked at now.
Pragmatism should reign and the equivalence that is so obviously already in place will be recognised. Nevertheless, politics is unpredictable and as the transitional period unfolds, a long-term strategy should be at the forefront of manager’s mind – certainly at JTC we are speaking with and supporting more and more managers who are focused on their long-term structuring solutions. We’ll also be releasing a technical funds bulletin that addresses regulatory changes that will impact fund managers looking to raise capital in 2020.
Q: How important is substance as part of post-Brexit preparations?
JJ: Substance is hugely important and becoming more so. Every financial centre, inside and outside the EU, has been strengthening substance requirements over recent years, with regulators issuing updated guidelines. Guernsey and Jersey produced updated substance guidance late in 2019, for instance, which should provide managers with some certainty around how substance is applied and approached in those jurisdictions with a view to meeting international standards.
Managers must be able to demonstrate the requisite level of asset class and governance expertise in the country where their ManCo is established. So, for example, if you have a debt fund that you need to market into a country such as France, private placement will not be available – an EU-domiciled ManCo would be necessary instead. It will also be necessary to be able to demonstrate clearly that a ManCo has sufficient expertise in the type of debt instrument being invested in, and show that decisions are being made in the country where the ManCo is established as well as other criteria. In many cases the simplest option will be to use an outsourced AIFM in an EU state, who can amply demonstrate the requisite depth and staffing levels.
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