The dawn of the “Dear Chair” letter from the Central Bank of Ireland (CBI) has had a mixed reception. Welcomed by many, including the industry representative body, Irish Funds, it has also received pockets of disappointment, confusion and incredulity.
Two days after the arrival of the “Dear Chair” letter, the European Commission issued its Public consultation on the review of the alternative investment fund managers directive (AIFMD) which also highlighted suggested changes to the UCITS Regulations. This has been eagerly anticipated following ESMA’s AIFMD letter in August 2020 to the European Commission which highlighted areas to consider during its review of AIFMD. Interesting to note that both the “Dear Chair” letter and European Commission expect a response in one form or another in Q1 2021.
The lifecycle of the European Commission’s consultation will play out over the coming year, if not two, but board approved plans to react to Dear Chair need to commence their formulation and have a plan in place by March 2021. The immediacy is driven by the fact that CP86 has been in existence for a number of years, procedures and structures have not been implemented appropriately by many, and a course of action takes time if it is to persevere and pass the interrogation of the board, and indeed the chair, to whom the letter was addressed.
Surveilling the landscape before the March horizon, five options are considered to be available to Fund Management Companies (FMCs). It is worth noting that included in the footnotes in the “Dear Chair” letter and in CP86 are Self-Managed Investment Company (SMICs) in the encompassing definition of an FMC.
The first option for a fund, unable or unwilling to meet the requirements detailed in the “Dear Chair” letter is to re-domicile the fund to another jurisdiction. This would be a lamentable outcome for the herculean efforts across the industry over the last thirty years to grow Ireland into the third largest funds domicile in the world, second in Europe. This growth has been achieved through a combination of commercial endeavour by all the service provider participants in the hinterland, but it has also been enabled by the tireless work of the industry body of Irish Funds. This work has not just been the executive or its council but the many volunteers across the industry who have participated and contributed to the committees and working groups influencing policy, guidance and professionally challenging emerging regulation to a higher plain.
Redomiciliation may only provide temporary reprieve. Dear Chair is a review of existing regulation influenced by the expectation of European Securities and Markets Authority (ESMA). Ireland’s embracing of that influence merely puts it ahead of other jurisdictions, not apart. Unless the redomiciliation is to a jurisdiction not within the ESMA family, then it is cost incurred only to kick the can. Lastly, the reaction of the investor to their resultant redomiciliation, and potential impact from a taxation or regulatory perspective should feature in the considerations.
The second option, which at first may sound rather novel, but on reflection makes economic sense, is that fund vehicles trading like-minded strategies, managed by the same portfolio manager merge. Amalgamating similar funds into one, gives greater purchasing power to achieve the expectations of Dear Chair. Investors remain serviced, management fees persist (although weighted average fees may need to be constructed), but fund and governance costs are reduced to a single instance from multiple instances.
The third option for a FMC is to staff up. This has challenges aplenty, depending on your starting circumstance. A FMC with no European footprint will find this journey more challenging. It’s not insurmountable, but with local relationships largely commercial in nature, with physical engagement only circling around board meetings, the network muscles to flex are limited to the lawyer, the auditor and the administrator.
Before reflecting on the costs, a FMC must assess its appeal to candidates. The most recent Indecon Report published by Irish Funds illustrates an employee base of 16,000 across the Irish funds industry with various links of the value chain. With approximately 200 Management Companies and several hundred SMICs, some of which have the minimum of three Full Time Equivalent (FTE) but a number of which do not as indicated in the “Dear Chair” letter, the forecasted FTE as required is expected to be north of 1,500. If we combine the demand for at least 3 FTE sought to fill the Designated Person (DP) functions, and a person that is expected to take on the role of the CEO, it is expected that the competition to hire experienced, skilled and seasoned individuals will be furious.
If the FMC is a desirable brand, they will succeed; respectfully, those that are not will struggle. Those that struggle will find some solutions, which in turn will be subject to CBI approval; but once the two years of experience in an FMC is garnered, they in turn will be a desirable commodity in a competitive market.
Finally, the cost consideration was discussed recently at Funds Ireland MiniCon by Jennifer Cahill of Savvi Recruitment. Three FTE, some of them senior, can be an average payroll cost of €450k, before real estate, facilities or other corporate recharges. Three FTE is the minimum, which is to be self-assessed to an appropriately higher number.
The fourth option is the growing footprint of the third-party Management Company (ManCo). The fund appoints the ManCo who ensures that each of the managerial responsibilities as detailed in CP86 are adhered to. The existing delegates and service provider relationships with the fund remain ; it’s more economical and can be a cost-effective option rather than staffing up and it keeps the fund vehicle in-domicile with no disruption to the underlying investors. Differentiating between Third-party ManCos is not difficult. There has been a proliferation of recent acquisitions and/or speculative venture capital investment in ManCos in 2020 and this is expected to continue over the coming months. Stability and sustainability of your ManCo is important as it is an integral part of good governance and structure for investment funds. Final point to note is that some ManCos can truly augment the distribution of your product and increase your investor base; some cannot walk the talk. Registration of your fund in a particular jurisdiction is only the first step in increasing your AUM. Having a meaningful and attainable distribution strategy is the other.
The fifth option is a platform solution that hosts and appoints a FMC to your fund. A complete infrastructure solution, in the form of a platform offering, shares the immediate advantage of solving the requirement for FTE. Platforms also have purchasing power with all the delegates and service providers in the life-cycle of a fund offering economies of scale.
It’s time for confident, not sheepish, action.
Look out for our next article ‘Horses for courses’, co-written with my colleague Umran Akhtar. This article will explore third-party ManCo and platform offerings to clarify the paths available. Swift decision making will be imperative if you want to secure the preferred, robust and sustainable solution.
Photo credit: Eoin Motherway