What is the maximum AuM managed by a single third-party ManCo currently, and how do you think this will evolve over time?
The largest third-party ManCos are managing somewhere in the region of €30-35bn ($37-43bn). However, given market activity and the industry’s mentality towards third-party solutions, it seems likely this figure could exceed €100bn in AuM within the next five years. And there does not seem to be a limit for how big a ManCo can become.
This rise will be driven by trust. Since AIFMD implementation, it’s taken managers some time to comprehend fully what the directive meant, how it works, and who the trusted AIFMs are. We have now reached a stage where these factors are understood, and this has resulted in an additional level of comfort from investment managers. When they are faced with a decision to set up their own AIFM for a fund they wish to launch into Europe or go the third-party route, they are nowadays far more comfortable with the third-party option because they know there are trusted providers in the market with proven track records.
What other factors may drive the adoption rate of ManCos?
General market performance and resultant fund launches within Europe will be influential and will more than likely generate a stronger demand for Ireland-, Luxembourg- or UK-domiciled products from foreign managers, all of whom will need ManCo services.
The other considerable factor is market consolidation. There’s a lot of regulatory pressure on ManCo/AIFMs because most regulators view them as their primary gatekeepers to the service providers active in the delegated environment. Due to this pressure, and with a lot of new regulation to navigate, some of the smaller players can’t keep up with the infrastructural demands, and neither may they have a book of business which allows them to compete. Therefore, they are faced with closing up shop or finding someone to partner up with. As a large amount of M&A activity is taking place, the stage is set for ManCos managing a combined, and therefore larger, AuM than we have seen in the past.
What other factors are driving M&A activity?
ManCos with different specialities are merging, allowing them, as a single entity, to offer a wider range of services. What’s also being seen recently is a different phenomenon; large banks have been floating their own ManCos, or acquiring larger ManCo/AIFMs. This is notable as banks have not been especially interested in this in the past, or have viewed it as a conflict of interest.
The final area is the one-stop shop industry. We at Maitland are one in this particular space, and such providers are offering fund admin, depositary and corporate services, and possibly even have law firms attached to them. To complete the ‘package’ it is essential for these firms to build or acquire ManCo/AIFM capabilities.
Esma has recently raised questions around the appropriateness of the delegation model. What do you believe the impact from these will be?
The initial reaction from the market was to raise the question ‘Does this mean the end for delegation?’ and the answer is a categorical no, in my opinion. What these initial questions do mean, though, is that the controls around the delegation model are set to become more onerous. Central to ensuring that the delegation model operates effectively is the ManCo/AIFM industry. Esma’s opinion is that there’s systemic risk in this model due to the extensive reliance on using third-party service providers, and it is therefore vital that the control point for oversight and risk management must rest with the ManCo/AIFMs. As a result, pressure is being placed on the local regulators to make sure the regulatory control and oversight they have over ManCos is beyond question.
Which jurisdictions are the current leaders in third-party ManCo and AIFM?
Currently, Luxembourg and Ireland are the leaders in this space but the UK’s Manco/ACD market is also substantial. It remains to be seen what magnitude of impact Britain’s exit from the EU will have on the UK’s ACD market. In the event of a hard Brexit, more business will be pushed towards the likes of Ireland and Luxembourg, and we may see a rise in prominence of other jurisdictions, such as the Channel Islands.
Why has the ManCo grown more quickly in Luxembourg than other European domiciles?
Luxembourg has done a good job of creating a toolkit of flexible fund options. The domicile now has a full suite of easy to use products, which will suit any form of asset class and demand the client may have – whether this is a regulated or unregulated structure. They have created the full package, and their central location in Europe has paid further dividends.
But Ireland is catching up. The domicile is learning quickly, and while their ManCo market is less mature, it’s begun leading to larger providers, such as ourselves, who are jurisdictionally agnostic, having ManCo solutions in Luxembourg and Ireland to cater to the full spectrum of clients’ possible requirements.
Are there many new entrants to the space recently who are likely to challenge the leaders of the pack?
There is nowadays a greater argument for the one-stop shop standpoint than before, and so fund administrators and banks are setting up and acquiring AIFMs, and establishing very clear segregation of duties. This trend is likely to continue going forward.
What is your view on the current business models of ManCos?
If we examine the current industry leaders, their operations are people and process heavy. They are often dealing with legacy IT systems and trying to improve upon those as they go along.
I believe the future leaders in the space are going to have a slightly different model – with a much greater focus on IT-driven solutions, creating efficiencies through central governance models and IT tools that will help provide easy and effective oversight over all of the delegated functions. Whereas historically ‘substance’ has largely referred to people, in the future ‘substance’ may be defined, less by the number, than by the quality of people, and a greater focus on infrastructure and control of data through IT. I believe that risk management will become more integrated into governance models, which I think will change the complexion of the market.