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Weighing up the benefits of hosted vs standalone platforms

29th January, 2021

Investment managers (“IMs”) seeking to access new markets and investor flows in Europe by establishing a regulated fund have many options to consider. Primary among these is whether they should launch the fund on a third-party hosted platform or establish a proprietary, standalone platform. In this paper we outline the key points to consider in making that decision.

Hosted platform

Third-party hosted platforms have become increasingly popular in recent years. Given the increasing harmonisation of regulatory compliance requirements for funds operating under the UCITS and AIFMD directives, hosted formats are available that support both UCITS and Alternative Investment Funds (“AIFs”). At a basic level, a third-party hosted platform is an umbrella fund structure operated by a management company (“ManCo”). The platform comprises multiple sub-funds (or compartments), each with segregated liabilities and operating its own investment strategy.

Different models of hosted platform

Clearly, any IM considering a platform approach will, as a priority, want to ensure that there is no diminution in its relationship with its underlying investors or indeed to the value of its brand. The approach adopted by the relevant platform manager is therefore crucial in this regard. From a Davy Global Fund Management (“DGFM”) perspective, given our heritage in asset and wealth management, these considerations have been central to the design of our UCITS and AIF platforms. The process outlined below describes the platform model operated by DGFM.

Hosted platform practicalities

A crucial element of DGFM’s platform offering is that the IM is a directly appointed delegate. This maintains the IM’s direct link to the investment strategy of its sub-fund and ensures there is no dilution of the IM’s brand in terms of the sub-fund’s naming convention, marketing strategy or investment story. It also ensures that the underlying investors identify directly with the IM and view the platform simply as supporting the operational and regulatory infrastructure.

This infrastructure is in turn supported by independent service providers that undertake the requisite fund administration, depositary and audit services. The agreements with these service providers have been pre-negotiated by DGFM, which streamlines the legal set-up process. The end result is a turnkey solution that sees the IM “plug” into” an established operating and regulatory framework. This allows a more efficient product development process with clear speed-to-market advantages.

Distribution remains the prerogative of the IM, who is free to select his own sub-distributor or preferred distribution channel. The ManCo will then, subject to completion of satisfactory due diligence, legally delegate this role to the selected party.

Key benefits of a hosted platform

  • Leverage expertise: In ever-evolving markets, IMs can benefit from the “knowledge share” of the platform manager’s team. IMs can leverage the guidance and expertise of the platform manager without incurring ongoing advisory fees as this is a core part of the platform service.  
  • Economies of scale: IMs benefit from economies of scale and the operational and legal efficiencies of a hosted platform. This can be a key consideration in today’s environment of fee compression.
  • Speed to market: A hosted platform manager can simplify and streamline the legal process by using an existing suite of legal agreement templates. Having many service provider agreements already in place at umbrella level saves further time and money and enables speedy access to market. Many hosted platforms will also have a range of platform agreements in place to facilitate distribution.
  • Platform-level compliance regulation: The platform is accountable to the regulator for ensuring the ongoing regulatory compliance and governance of the platform.
  • Investment managers can focus on what they do best: The IM can focus on investment management and managing investor relationships while the platform manager’s team and platform service providers focus on ensuring the platform is operating in line with regulations and industry best practice.
  • Performance transferability: Should the IM ultimately wish to establish its own proprietary standalone platform, its fund’s performance track record can be carried over to the new proprietary platform (provided that the investment policy and objectives remain the same and there is no change to the entity providing investment management).

Limitations of a hosted platform

  • No board representation: The board of directors sits at umbrella level and determines the governance model for the umbrella fund. The investment manager does not have a representative on the board of directors.
  • No input to regulatory documents: The prospectus and many of the regulatory compliance documents are at umbrella level so the investment manager does not have input to such documents. However, IMs may tailor to their specifications the supplement to the prospectus that covers their own dedicated sub-fund.

Standalone platform

While we continue to see increased interest from investment managers looking to launch funds on hosted platforms, there is also ongoing demand from investment managers wishing to establish their own proprietary standalone platforms. 

There are many reasons why investment managers might wish to establish their own proprietary standalone platform. In our experience these reasons generally fall into one of three categories:

(1) The IM doesn’t have a corporate culture of outsourcing and instead wishes to control all aspects of running the platform, including the appointment of all service providers and the fund’s board of directors.

(2) The IM plans to launch multiple sub-funds that will gather significant assets under management, thus making the proposition of a standalone platform economically viable.

(3) The IM has the required financial resources and in-house expertise to support the setup and ongoing operation of a standalone proprietary platform.

Factors to consider when establishing a standalone proprietary platform

  • Assess the costs and benefits of establishing a proprietary platform, including the resource and time commitments involved in running the platform.
  • Selection of the ManCo is a vital decision. It is important to ensure that the ManCo has the depth and breadth of expertise to support the IM in complying with regulations and best practice. It is also important to assess the ownership structure of the ManCo and ascertain that it has the necessary substance, resources and balance sheet capital to meet the expectations of regulators and investors. An important detail to note is that the ManCo is the entity responsible for meeting the capital adequacy requirements of funds under management.
  • Factor in the time required to source service providers who will be a good fit for your fund.
  • The fund platform will require a board of directors, including locally based independent directors with the optimum mix of skills.
  • The ManCo has responsibility for ensuring regulatory compliance of the fund platform while the IM is responsible for ensuring the platform’s smooth day-to-day operations. The IM will need to ensure that appropriate resources and expertise are assigned to engage with the various service providers.

Regulatory environment

The regulatory framework that governs the funds industry is constantly evolving as regulators seek to: (1) improve investor protection, (2) increase transparency and (3) harmonise the application of EU regulations for cross-border funds.

A core principle of the European regulatory framework is that an EU-regulated fund platform has the required resources and expertise to ensure that the fund is managed and operated in line with European regulations. Historically, it was common practice to establish a Self-Managed Investment Company (SMIC) that was governed by the fund’s board of directors. In recent years the regulations have required that EU funds are managed by an entity with sufficient local substance to support the regulator in performing its supervisory role.

These developments leave IMs with two potential options to get their funds to market, either:

(1) appoint an EU-based third-party ManCo, such as DGFM, to perform oversight at a level commensurate with the regulations, or

(2) establish their own EU ManCo or MiFID entity for the same purpose.

IMs who consider the latter approach must obtain the requisite MiFID or ManCo regulatory licence, the approval of which is predicated on an ability to demonstrate that the necessary resources with the required expertise have been employed to support the nature, scale and complexity of the business.

How DGFM can help you navigate the EU funds landscape

Davy Global Fund Management is an EU-based management company that also has offices in the UK and the USA and is 100% employee owned. DGFM works with global investment managers seeking to establish a European footprint either via a hosted platform or through establishing their own proprietary platform. Our team combines practical experience with sound regulatory and technical expertise to support and guide you through your fund’s life cycle, regardless of the fund structure you choose. If you are an investment manager entering the EU funds environment for the first time, we would be delighted to help you navigate the EU funds landscape working in a guided and supportive partnership. 

 

For more information and to discuss your requirements, please contact:

 

Stephen Roberts

Stephen Roberts

Luxembourg

 

Annette Stack

Annette Stack

Dublin

 

Michael Humphreys

Michael Humphreys

London

 

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