During a recent AIFMD Round Table hosted by Dominic Hobson of PE-Connect, industry specialists came together to discuss the impact of the depositary role on the private equity sector. Private Equity Administrators (PEA) took the opportunity to consider their responses and draws the following 5 conclusions:
1 Phased Approach – AIFMD will continue to be a hot topic for the next 3-4 years while stakeholders understand the regulation based practicalities. We expect these practicalities to change once the processes are rolled out in real time and PEA believes depositaries will adopt a phased approach through the following:
a) Directly applying their operating model to the regulation;
b) Practically applying the regulation once the reporting requirements commence;
c) Reviewing processes, policies and procedures after a year to ensure the model is effective and appropriate to the client types the Depositary is dealing with.
Managing stakeholder expectations and delivery will be of primary importance over the next 2-3 years while depositaries move through the implementation stages of the regulation.
2 Economies of Scale – private equity managers wishing to maximise the economies of scale through the dual appointment of an administrator and depositary should ensure the technology platform utilised by their depositary is of a suitable standard.
With a multitude of new entrants to the market, prospective clients should review these platforms in detail, requesting physical demonstrations of internal/external reporting, access to documents and clearly understand how the synergies and oversight physically work. A good depositary should be able to access the required information in any format, without additional cost to the client. Reporting should also feed into the manager’s assurance process, demonstrating that all stakeholders are performing their duties correctly.
It is also important to remember that the AIFMD is, in effect, another layer of audit and therefore, it is important not to over complicate it. Prospective clients will not respond well to inflated fees, a lack of transparency and low value.
3 Shared Best Practise – More and more we are seeing influential investors guiding governance best practise. Every asset manager (throughout the world), who raises capital in the EU will have to consider compliance with the AIFMD. It is therefore important to consider what depositary services can offer to other markets outside of Europe with industry demands to share best practise. Administrators have expanded to match the jurisdictional needs of their global clients and depositaries could consider what additional business risk mitigation service lines they could offer on behalf of their clients’ investors to the wider global funds industry. Fund boards could also consider setting up peer group forums to share best practise on how the board is managing the practical implementation of the directive.
4 Conflicts of Interest – While there is currently no regulatory requirement for conflict of interest training, other than the requirement to maintain records and a register, standards have changed and mind-sets need to adjust from the old fund behaviours pre-AIFMD. Directors and staff now have to be aware of their conflicts and how to document them effectively. PEA believes the implementation of conflict training is an important part of their ability to evidence and closely monitor conflict management policies, processes and procedures and directors’ compliance with these policies. We would like to see the industry adopt conflict training on an annual basis alongside their AML training.
5 National Private Placement Rules – The variability to National Private Placement Rules is likely to cause a significant and expensive operational conundrum. The timing difference between regulators getting their ship in order, the number of uncertainties and the effort required to get used to the new legislation means managers need to build into their road shows a significant lead time in order to satisfy the compliance requirements of the various NPPs. The difficulty being the unknown quantity of the regulators’ individual responses and turnaround times. Managers may seek assistance from their administrators with multi-jurisdictional coverage, to assist them in communicating with the regulators to smooth through the bureaucracy.
Please feel free to call James in Guernsey or Peter in Denmark if you would be interested in hearing more:
James Orrick / +44 1481 730988 / email@example.com
Peter Toyberg / +45 70 20 40 61 / firstname.lastname@example.org