Expert Insights by Annette Stack, Director, IQ-EQ Fund Management (Ireland) Limited. This blog has been written exclusively for IoD Ireland.
Investment managers (IMs) seeking new markets and investor flows in Europe by establishing a regulated fund in the region 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. I outline below the key points to consider in making that decision.
Third-party hosted platforms have become increasingly popular in recent years and are available to support both Undertakings for the Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs). 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.
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 of the chosen platform maintains the IM’s direct link to the investment strategy of its sub-fund. This ensures there is no dilution of the IM’s brand in terms of the sub-fund’s naming convention, marketing strategy or investment story. It also ensures that the underlying investors identify directly with the IM and view the platform simply as supporting the operational and regulatory infrastructure. This infrastructure is in turn supported by independent service providers that undertake the fund administration, depositary, and audit services. Platforms can streamline the process of setting up funds by pre-negotiating agreements with such service providers. This creates a turnkey solution that IMs can simply ‘plug into’, allowing a more efficient product development process and quicker speed to market. Hosted platforms offer economies of scale and operational and legal efficiencies that can be key in today’s environment of fee compression.
IMs can leverage the knowledge and expertise of the platform manager’s team, generally as a core part of the platform service. Another advantage to IMs of a platform solution is that the platform is accountable for ensuring the ongoing compliance and governance of the platform. This lets IMs focus on what they do best – investment management and managing investor relationships – while the platform team and service providers ensure the platform is operating in line with regulations and industry best practice.
It is worth noting that the IM will not be involved in the decision-making for the selection of certain service partners; for example, the administrator, depositary, and auditors are selected at fund umbrella level. The IM can select their own distributor, brokers and counterparties for trading but has no representative on the board, which sits at fund umbrella level.
In our experience, one of the main reasons IMs choose to establish a standalone platform is that the manager’s corporate culture favours in-house control of establishing and running funds over outsourcing. A standalone platform might also be appropriate if the IM plans to launch multiple sub-funds, for example five or more, that will gather significant assets, which would make 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.
Choosing the Right ManCo
Selection of the ManCo is a vital decision whether you are looking for a hosted or standalone platform. The ManCo must 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. A key detail to note is that, irrespective of whether the IM’s fund is on a hosted or standalone platform, it is the ManCo that must meet the capital adequacy requirements of funds under management.
Part of the IQ-EQ Group, IQ EQ Fund Management (Ireland) Limited is a European fund management company that assists global assets managers in establishing and operating UCITS and AIF structures across the region.