They might be experts in running their own businesses, but a number of Channel Island firms are making their mark by managing certain functions for other companies
One of the key outcomes of the Alternative Investment Fund Managers Directive (AIFMD) on the continent was the rise of the management company (ManCo) – a third party that monitors risk and provides substance for a fund management firm.
ManCos first registered on the funds industry radar following the arrival of UCITS in 2009 – EU regulation relating to protection for investors in equity or bond funds. However, the arrival of AIFMD in 2013 further strengthened the appeal of ManCos – the regulation this time applied to alternative investments too, such as hedge, private equity and real estate funds.
Both UCITS and AIFMD regulation were good news for ManCos in Luxembourg and Dublin and they were quick to seize the business opportunity offered. However, several Channel Island firms have since explored how the ManCo and Manager of a Managed Entity (MoME) model can work in the islands too. So, how successful has this been so far and what’s the rationale behind these moves?
David Crosland, Partner in the Corporate and Finance team at Carey Olsen in Guernsey, is encouraged by the progress so far. “ManCos in the Channel Islands are a slow burner – a couple of years ago there were none, and now there are five or six,” he explains. “So from that perspective, we’ve moved forward.”
He makes the point that the attraction of ManCos in general, not just in the Channel Islands, continues to develop as the growth of substance requirements are becoming increasingly important as a result of AIFMD.
Crosland asks: “Does a company have a board of directors that meets regularly? Does it have a genuine physical presence in the jurisdiction? Does it have professional employees who specialise in risk management?”
As Crosland explains, fund providers do have the option to take the DIY approach, but it can be very expensive when the more cost-effective option is to ‘plug into’ a ManCo. It might cost £150,000 to £200,000 to set up on the island on your own and recruit the necessary people – compliance specialists, for instance. By comparison, a ManCo might typically cost around £30,000 and there’s no recruitment pressure – the skills and experience are on tap.
James Tracey, Managing Director at JTC Group in Guernsey, agrees that the development of ManCos in the Channel Islands has been steady rather than rapid. “We’ve had our ManCo for over a year now and we’ve secured a couple of mandates to act for client firms. I agree that it’s a slow burn and is very much a complementary rather than core offering.”
That said, Tracey is keen to stress that ManCos in the Channel Islands do offer distinct advantages. “We offer something different to Luxembourg and Ireland as we’re outside the EU,” he explains.
In addition to this, the efficiency and pool of talent within Channel Island ManCos mean that they’re able to be extremely competitive on price in comparison with other jurisdictions.
So, what actually is a ManCo and what does it provide? Essentially, it’s an established entity that provides risk management services and gives substance and credibility to an investment manager – in this instance, in the Channel Islands.
The ManCo reviews the investments and monitors the risks related to them. It ensures the investors’ requirements have been met and that the risk/reward ratio is suitable and the remit in terms of what the fund can invest in has been met.
It also checks the level of liquidity. A ManCo is a third party, which provides essential support on an ongoing basis, allowing the fund manager(s) to do what they do best – invest money.
Talking MoMEs
But ManCos aren’t the only solution for investment companies looking for essential support. Manager of Managed Entities (MoMEs) offer a different kind of service and they’re also establishing themselves on the islands.
Whereas ManCos are more about outsourcing, MoMEs are more about incubating – helping a firm ultimately become a regulated entity in its own right. For some firms, the ManCo will be the preferred solution; for others it will be the MoME – it’s not a case of one being better than the other.
The structure of a MoME is markedly different from the ManCo though. With a MoME, the client business will have a lot more control – for instance, in the choice of directors. They aren’t just handing control to a third party.
There’s also more of a business plan associated with the MoME – typically that the company will eventually scale up to be a regulated business with substance.
As Pippa Davidson, Managing Director at Praxis Fund Services in Jersey, explains, the MoME smooths the whole process and enables a structured transition.
“Many companies want to move to the Channel Islands, but don’t want to bring a whole office with them. This is where the MoME comes in,” Davidson explains. “For instance, a company that has a regulated business in London wants to move to Jersey and also wants to be regulated here. We help set up directors, help with compliance and even help with HR and payroll if that’s what they require.”
Davidson adds that typically it would be three-to-five years before the company would go it alone and sever ties with the MoME. “Langham Hall was one of our clients and they’re now a stand-alone business – this took three-to-four years. Apex Fund Services [which recently announced the acquisition of Ipes] was also set up in this way.” Apex is due to go it alone very soon – once the Ipes deal has completed.
Alison Creed, Director and Head of Funds for Fairway Group, explains why companies that are looking to become regulated in their own right, appreciate the benefits of MoMEs.
“It’s partly a cost issue, but it’s also not easy for a company to establish themselves if they aren’t known to the regulator. A company such as Fairway is a known entity on the island and that helps.”
Creed adds that MoMEs appeal to companies of all sizes, not just smaller businesses looking to establish a foothold in the islands. “One of our recent clients was a global tech company. They wanted to put their toe in the water, with the view that if things proved successful, they would put more staff in there. MoMEs can be used in different ways and are very much tailored to the individual business.”
Brexit and beyond
Almost everything these days has a Brexit angle. So how will the UK’s expected departure from the EU affect ManCos and MoMEs? And with AIFMD passporting seemingly on hold – will the outcome have an effect on how funds are marketed through Europe?
Pippa Davidson believes that, on the whole, Jersey is in a good place. “With passporting, we were top of the list, but then Brexit happened. What London becomes is key to how we react in Jersey. After Brexit, companies might look outside of the UK but also Europe too. Jersey is attractive as it sits between both – close to the UK but not in the EU.”
James Tracey takes a similar line: “One of the key benefits of Guernsey is that we will continue to offer after Brexit what we offer now. We’re a stable, GDPR-compliant and AIFMD-compatible regime. It will be business as usual for us.”
Brexit aside, the increasing demand for substance and high standards of regulation may boost business for ManCo and MoME providers in the coming years.
“I think there’s potential for managers in jurisdictions such as Panama and the British Virgin Islands to want to be in a jurisdiction where there are higher minimum regulatory standards applied,” Tracey argues. This is starting to happen, he says, but could gather momentum. Even in uncertain times, the Channel Islands look well placed to prosper.