FastTrack to Reaching European Investors Through Our One-Stop-Shop Solution

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Delphine: Hello, everyone, and welcome to today's webinar, "FastTrack to Reaching European Investors Through Our One-Stop-Shop Solution." My name is Delphine Jones. I'm the Managing Director of Client Solutions for CSC U.S. Fund Solutions, and I will be your moderator.

Joining me today is Johannes Höring, the Head of AIFM in Luxembourg, and Joe Flannery, the Head of Depositary in Ireland. Why don't we move on to Johannes? Why don't you share with us your perspective on why Europe is an attractive place for private fund managers?

Johannes: Yeah. Thank you, Delphine. Good afternoon, everyone. So I think it's a very interesting question, and I think both is reflecting also, from a Luxembourg perspective, why it's quite an attractive place. It's not only the question of having a large and diverse market, but also that Luxembourg is offering a very stable framework requirement, which is necessarily required for the investor protection.

So just to give you also some background and some figures to manifest the first answer, so Luxembourg is, beside the U.S., the largest market for funds business. So it has a very robust environment, be it from an economic perspective but also established an infrastructure of legal, tax, and financial professionals in Luxembourg just to assist the clients from multiple jurisdictions to set up their alternative investment funds or their funds in general.

So in Luxembourg, just to give you also an actual figure, based on the 31st of January of '23, we have a net asset Luxembourg investment funds over 5600 billion U.S. dollars. So this is manifesting the market and the market size that we have out of Luxembourg because also Luxembourg is the hub for distribution into the EU and EEA countries.

Globally, alternative investment funds are rapidly increasing and growing. So this includes also strategies like private equity, real estate, debt, infrastructure, and other funds. So all together Luxembourg, as a market, is often a good place, a starting point for starting distribution and setting up the funds into the EU.

Delphine: Okay. And Joe, your perspective?

Joe: Yeah. Good morning, afternoon, everyone. I think before I try and answer the question, just again just look at the size of the market again. So I mean it is enormous. It is the second largest asset management region after the U.S., with $23 trillion domiciled as of last year. Seven trillion of that, over nearly a quarter of that is in alternative investment funds. So clearly a massive market, very well-established jurisdiction as well for non-EU managers, such as Asian and U.S. managers. So clearly a big market.

In terms of the type of private funds that are here, I mean, it's obviously a mixture. Private debt funds would be the most significant market for private fund managers. But obviously there's a large proportion of private equity funds in Europe and also, of course, real estate funds.

Just to go back to the actual original question, I mean, why is it an attractive marketplace, well, as Johannes mentioned, it's a very stable political climate. You've got a very skilled, advanced workforce, skilled professionals, and, of course, excellent infrastructure. I think more importantly though you have a very well-developed legal and regulatory framework under the Alternative Investment Fund Managers Directive, also known as AIFMD. This has created a harmonized regulatory environment for fund managers, making it very easy for them to operate across multiple jurisdictions.

Also worth mentioning, it's obviously a very mature market, with 40 years of servicing funds here, within a harmonized regulatory environment within the EU. So that's obviously worth mentioning.

And then just a little bit closer to home, I mean, Ireland as a fund domicile has collectively nearly around $1 trillion dollars in alternative funds. So again a big market and a key jurisdiction for private assets. So when you look at Ireland and Luxembourg, they're significant players in this arena.

Having said all that, Europe still does have a perception of being quite a complicated market to operate in, being very regulated and for some quite expensive. So we can go through this later, but I think, for that reason, it's critical to having service providers who understand the environment, the regulatory environment and how to comply with the regulations.

Delphine: Okay, great. So for Johannes, what are the various Lux legal structures for private assets?

Johannes: Yeah. Also I want to pick up that what Joe just said. I think it's very important in the world of alternative investment funds to have innovative financial products, and this is reflected in the Luxembourg legal framework. Here we have to differentiate alternative investment funds that are regulated, regulated by the local financial supervisory authority, called CSSF. Here we are calling mutual funds, which are still under the Mutual Funds Law, they are predominantly for distribution and investors that are natural persons, but also institutional persons. But they are heavily supervised by the regulator.

The same is applicable to the so-called specialized investment fund. We have here a specific legal regime for it. It's the law of 2007.

And the next level of regulated vehicle is the so-called SICAR. SICAR is a fund that is investing in risk capital, and this builds another type of regulated entity.

Last but not least, we have the ELTIF. The ELTIF is the European Long-term Investment Fund regulation. Also an ELTIF fund is subject to the respective legislation of the EU, transposed into national law. ELTIFs are a valuable tool in the economy because they can help to facilitate long-term investments in infrastructure projects by institutional and retail investors.

Then we are coming to the unregulated alternative investment funds. It means that only AIFMs or the alternative investment funds manager now is regulated by the Financial Authority and supervised, but the product per se is not. And here the most prominent product we have in Luxembourg is the so-called Reserved Alternative Investment Fund, in short RAIF. RAIF has a specific regime. It's very popular in the meantime since it has been created with a legal framework in 2016.

And then last, but not least, we have all other non-regulated, non-supervised alternative investment funds that could be set up in different legal types, be it as a capital company or as a limited partnership.

Delphine: Okay. And Joe, what about in Ireland?

Joe: Yeah. I mean, in Ireland, there are several. For the purposes today, I'm just going to talk about two of them because I deem them to be the most appropriate for private assets. So namely that would be the Irish Collective Asset Management Vehicle, the ICAV, and the Investment Limited Partnership, the ILP. So both are appropriate vehicles for private assets due to their flexibility and efficient structures. They're both tax efficient and more tax efficient than other traditional fund structures, particularly when I look at and compare them to others in Ireland.

Another advantage is both can be structured with a high degree of flexibility and customization. Again, very important for private funds.

Overall, both of them have become very popular, particularly the ICAV. The ICAV was established here in 2015. The ILP has been updated more recently, but has also enjoyed a lot of popularity recently. So we've seen a lot of private assets funds that are using that structure the last year or two.

I suppose the main difference between the two of them is their legal structure. The ICAV is a corporate structure. So it's a separate legal entity from its investors. It can own its assets, enter into contracts, etc. And so that provides a certain amount of legal certainty there and protection for investors. The ILP is a partnership structure, so it doesn't have a legal personality as such and is separate from its partners.

But as mentioned, both structures are seen to be as modern, progressive structures, high level of investment protection and transparency. So both are very appealing to private asset managers, which where complexity and liquidity of the assets can create additional risks, these are important factors.

Delphine: Okay, great. Thank you. What is the market landscape like in Ireland and Luxembourg, and what are the current trends? So Joe, why don't we start with you on that question?

Joe: Yeah, sure, Delphine. Like I think there's kind of four trends here I'd like to talk about. It's the new growth of the Irish fund industry, technological innovations, increased consolidation activity at the service provider level, and then an increased regulatory environment overall.

So I mean the first one, continued growth, we've seen massive growth in Ireland over the past couple of years. So we surpassed four trillion in assets under administration here last year, and that's driven in part by increased demand for alternative investment funds, including private funds.

I suppose not unlike a lot of other jurisdictions, technological innovation. So we've seen huge advancements in the blockchain for custody and settlement. Artificial intelligence help us with our overall operating model and efficiencies. Cloud-based platforms have been incorporated into management processes, but also improving efficiency, transparency, and accuracy. So yeah, you're seeing technology playing a key role. And I think you're seeing within the Irish fund industry a high level of automation. I think there's an automation close to 96% here, so that's leading to greater efficiencies across the board.

I also mentioned that increased merger and acquisition activity. There's been a considerable amount of asset consolidation and merger the last few years, and it's ramped up significantly since 2020. So if we look at it within just the fund administration industry in Europe alone, I've seen about 50 since 2020, which is a lot of consolidation. So what's driving this? Well, I think you've seen they're doing this for growth reasons, increase offering, reduction of costs, and staying competitive in a challenging marketplace seems to be the main reasons for that. But it's also a big trend.

And then lastly, but not least, is the increased regulation and regulatory scrutiny we've seen from regulators across Europe and indeed beyond. So because of that, it's very important for us to have an open, transparent relationship with our regulator, the Central Bank of Ireland.

So yeah, I think those are the key trends, Delphine, I'm seeing in Ireland certainly.

Delphine: Okay. Okay. And what about in Luxembourg?

Johannes: Yeah, Delphine, and I would like to also to mirror here what Joe just mentioned. So starting at the back, well, we see also a heavy trend on the need for being compliant with regulatory requirements. So the degrees of the applications you have to fulfill for a fund management company, alternative investment funds manager, as well as also for regulated funds is constantly increasing. Clients are expecting that the AIFM is all the time compliant and ensuring being ahead of all regulations.

On the investment strategy side, it's a clear trend, in my opinion, towards private equity, real estate, and debt. Besides that and combined with the new requirements of ESG, so sustainability, we see also there are a lot on infrastructure, renewable energies as a trend for alternative investment funds.

Besides that, as known in Luxembourg, we are up for distribution. The distribution for funds into EU and non-EU countries out of Luxembourg is constantly increasing, and here also the regulatory requirements are unfortunately also increasing in this respect.

A further trend, we just briefly mentioned it in the other question what are the let's say this structure of fund types we can offer in Luxembourg due to a new regulation. On the ELTIF side, European Long-term Investment Fund, I think here we will see an upcoming trend for launch of more of these products, which gives also more possibility for individual investors of a certain advance to be invested in and to be distributed also in EU countries.

Delphine: Okay. Okay. And the next question for the two Joes, the AIFM Directive has been around for more than 10 years. Has it been successful in Ireland and in Luxembourg? And why don't we start with Joe?

Joe: Yeah, sure. So I think like before, I mean, it's a difficult question to answer. I think the answer is yes, overall, obviously. But I think it's probably worth looking into why it came into force and how it came into force in the first place.

It came into force on the back of the Global Financial Crisis. Certain events, such as the collapse of Lehman Brothers and the Madoff incident, highlighted the range of risks to investors in alternative investment funds and private funds were exposed to. So the EU introduced all these safeguards to ensure that investors in these funds were well-informed and adequately protected to allow, to avoid the fallout from these events going forward.

So I mean, we're sort of 10 years on from the implementation of AIFMD, and as I said, I think it has been a success. I think you could just point to the increase in assets under management across Europe in that time. And as mentioned previously, there's now $7.5 trillion worth or euros worth of assets under the AIFMD regime. So I think that would be a big indicator that it has been a success.

Why has it been a success? I think it's probably been successful for a number of reasons. I think it's you've got that increased investor protection, a higher level of protection being imposed on the managers on behalf the investors, the harmonization of regulation across Europe and an even playing filed and a single market for alternative investment funds. You've got more transparency. So the AIFMs are obliged to disclose more. Managers have to disclose more information about their funds. That helps the investors make more informed decisions. You've improved risk management as a result of this, mitigating all the risks. You've enhanced market stability as well because of it.

So I think it's a combination of those of having a success. I think in addition it's worth also mentioning that it is a globally recognized product now. So it has a bit of . . . it has a brand recognition. It's not unlike UCITS, the more regulated retail version of it. So there is a perception out there that it is a highly-regulated product with advanced investor protection. So overall I'm saying, yes, it has been a success.

Delphine: All right. And what about in Lux?

Johannes: Well, Delphine, I would agree with Joe. AIFMD was and is a success in Luxembourg, and this has different reasons. As said already before, Luxembourg is one of the largest funds domicile in Europe, and it's also leading the cross-border fund distribution. So currently we have a more than 75 countries around the globe where Lux domiciled funds are distributed to.

Luxembourg and also in collaboration with the regulator, Luxembourg is known for having a very open and transparent communication with the regulator, and the regulator is always approachable, which is also in the benefit for the investors, for initiator of funds as well as for the participants in the market.

We have adopted in Luxembourg a very pragmatic and business-orientated approach for implementation of the AIFMD in 2013, which then led to the implementation and giving the framework for the Reserved Alternative Investment Fund. So alongside with the AIFMD implementation, one part of the success story in Luxembourg is really the Reserved Alternative Investment Fund. Whereas this product is personally not regulated, the AIFM is regulated, but the product is still participating and benefiting from all of the pros of a regulated fund, for example also the marketing passport as well as the cross-border distribution.

Also the time to market to set up a fund in Luxembourg is very key for initiators of funds. So here it's really a known track record in Luxembourg that you are able to set up a fund within a few weeks only.

Delphine: Okay. So one more question for you two. So how can a non-EU manager, someone from the U.S. or maybe someone from APAC access the European market? And Johannes, why don't we stay with you?

Johannes: Okay. Yeah, happy to take this question. So first of all, you would have two options. Either you are entering the market and you create your own AIFM, whereas you administer your funds then within your own company. This being said, the process is very lengthy to get all the approvals. As we have heard also from Joe, the regulatory requirements and the regulatory burden is quite high. You have to fulfill a lot of reporting and substantive requirements. So this would take a U.S. manager, a U.S. initiator a long time, up to one year, even sometimes more.

The other alternative is you appoint a third-party fund management company, a third-party AIFM that fulfills already all the requirements and let then the manager in the U.S. or the advisor, the initiator concentrate on their key expertise, which is investment portfolio management and making their respective decisions.

Delphine: Okay. And Joe, your thoughts?

Joe: Yeah. I mean, just like Johannes said, they're the main options if you're going for a full AIFMD model.

There is another option as well, through the so-called depositary lites, so a regime where you don't actually have to establish a fund in a European domicile. So under the National Private Placement Regime, also known as the depositary-lite regime, you can, if you want to avoid going through the more substantial requirements of setting up an AIF in a European jurisdiction, you can, for instance, set up a fund in a jurisdiction like the Cayman Islands or BVI or these types . . . or indeed Delaware, where you don't have to go through all that. You do obviously have to appoint an AIFM and a depositary, but it's often seen as kind of an easier and cost-effective way of marketing into Europe without setting up on the ground.

So I think that has also been a success story, where we have I think somewhere north of a trillion dollars in non-EU AIFs marketed onto that over the past several years.

So yeah, I'll just give you a quick example. I think the fact that we had a client there last year, who by their own admission had never heard of AIFMD prior to launching the fund, and they had the fund launched with themselves as depositary and a third-party AIF within three months. So it can be done quite quickly and without too much expense.

But yeah, just conscious of times. I think, between myself and Joe, we've covered most of the options there for U.S. managers trying to access the EU market.

Delphine: Okay. All right. So we're close to our quitting time, and let me just at least get one or two questions then from what's come in thus far. Question, "From start to finish, how long does it take to set up a typical PE fund in Luxembourg and/or Ireland?" So Joe, if you could take that one.

Joe: Yeah. It depends really. I mean, it depends on a number of factors. It could be anywhere between three to six months really in reality. I think it also depends how fractured your service provider model would be. If you're appointing numerous service providers, you've got to negotiate several different contracts with different providers. You've due diligence to do on different providers. So I think these are the factors that will determine the length of time. I think the one advantage that Intertrust has is that we have most of those service providers that you require under AIFMD under one roof. But yeah, in Ireland, I've given kind of a long enough range, but somewhere in between three to six months I guess.

Delphine: Okay. And in Luxembourg?

Johannes: Yeah, I think it's similar. It's really depending. If you would like to launch a regulated fund, then you have to run through the full approval process from the regulator, so it might take a bit longer. If you go for an unregulated fund, for example a RAIF or a standalone alternative investment fund, the period is shorter. As Joe already outlined, it's very important that you go then for a one-stop-shop solution to reduce the time, the time to market as well. And then you could end up for an unregulated vehicle with a standard setup between three to six months.

Delphine: Got it. And we're at time. I would like to thank everyone for attending the webinar today. Enjoy the rest of your day.