AIFMD Depositary: Lessons from Experience
By Ben Cook, MD, Ipes UK
“An investment in knowledge pays the best interest”.
Back in 2008 the G20 concluded that the concepts of investor protection and financial stability would be better made reality through the regulation of ‘all significant market actors’. This led to the Alternative Investment Fund Managers Directive (AIFMD) that will be enacted by Regulators across Europe on 22 July 2014, which among other things, requires the appointment of a Depositary.
It seems a contradiction in terms to talk of something conceived in 2008 as being new, yet with less than 30 days until formal implementation, that is where we are. In any new market, knowledge is critical and on this point we agree with Mr Franklin. Additional clarification about the implementation of AIFMD in the UK was issued by HM Treasury (HMT) on 19 December 2013. HMT confirmed that provided a manager is complying with the requirements of the Directive and that its application has been received by the FCA by 22 July 2014, they can continue to manage Alternative Investment Funds (AIFs).
This clarification led to many managers choosing to delay their application submissions. As a result, in the last couple of months, we have seen a marked increase in activity as managers confirm their regulatory application packs (in conjunction with their advisers) and seek to appoint a Depositary.
At Ipes, we currently act as Depositary for over 115 AIFs, representing more than $47 billion of commitments. Our clients tell us that there are a number of areas that are important when choosing a Depositary and I have highlighted a few here:
What type of Depositary service do you require? Full Depositary or AIF Depositary? What is the difference? AIF Depositaries, such as Ipes, are not custodians and cannot directly hold Custody Assets, i.e. quoted shares. If assets like these are contained within the Fund’s portfolio, a sub-custodian can be appointed by the AIF Depositary.
The Implementing Regulations (FUND 3.11.12R) use the terminology of ‘generally’ in relation to the use of Custody assets as the core investment policy of the AIFM. If the AIF holds more than 20% in listed assets, it is unlikely that an AIF Depositary will be suitable. What’s the most appropriate form of legal agreement? The legal agreement should be finalised prior to the Depositary’s set up phase for a new client. Depending on the structure of the AIFM / AIF, the type of assets held by the Fund and the Fund’s domicile, there are two main types of agreement that could be used.
How can technology help? Depositaries can act on an ex-post basis and the efficient flow of information from Managers’ systems, Banks, Registrars (if any) etc. are core components for Depositary solutions. Ensure that your provider has the right technology to connect to your chosen Bank and that information flows seamlessly between systems. This should lead to immediate cost benefits.
Can the Depositary help with additional reporting? By working closely with the Depositary, relevant data should be captured for regular reporting, including the requirements under Annex IV. This report can then be largely automated, even if many of the fields do not apply to the typical Private Equity fund.
What experience does the Depositary have? Every AIFM and AIF is different. By focusing on the Directive’s principles, refined and efficient processes should be built to handle asset oversight and verification within Private Equity structures. Above all, clients are looking for pragmatism and a deep understanding of Private Equity. How do I ensure value for investors? Look for a Depositary provider that gives clear, activity based pricing. Depositary services are an additional cost to the Fund and value for money is a core consideration.
Make sure your Depositary can back up its pricing line by line. The Depositary industry for Alternative Funds is new. The market has worked hard to interpret the requirements of the Directive in the context of Private Equity and there is more to come. Pan-European adoption of the Member State of Reference (MSR) rules will have excellent cross-border benefits. Those Funds that are capital raising, will find it easier across multiple jurisdictions. It is worth noting that, at the time of writing, the timing of the introduction of MSR is unclear. That is unfortunate as the current implementing legislation in member states is creating a jurisdictional arbitrage. I would wager that that was not the intention when the G20 met back in 2008.
If you have yet to select your Depositary, I hope the information in this piece helps you to make your decision. I would recommend that you take a leaf from Benjamin Franklin and speak to as many people as possible in order to gather knowledge. For a friendly chat about depositary issues, I would be delighted to speak with you further.
Managing Director, Ipes UK
T: +44 (0)20 7798 0929