In a recent Real Deals webinar in association with Apex Group, a panel of industry experts discussed the importance of third party AIFMs and what to expect when raising a fund in the country.

ON THE PANEL:

Xavier Parain, CEO, FundRock Management Company

Jean-Daniel Zandona, Managing Director, Apex Group

Laurent Capolaghi, Partner, Ernst & Young

Rodrigo Delcourt, Partner, Arendt & Medernach

Timothé Fuchs, CEO, Fuchs Asset Management

When it comes to domiciling a fund, a number of considerations have to be taken into account by GPs and their investors. To navigate the complexities here, third party Alternative Investment Fund Managers (AIFM) have become indispensable partners to administer European-based funds and play a significant role throughout the administration process for alternatives managers.

In a recent Real Deals webinar in association with Apex Group, a panel of industry experts discussed the importance of third party AIFMs, the key to Luxembourg’s success as a domicile and what to expect when raising a fund in the region.

AIFMs are especially well positioned to assist with the administration process including managing risk and navigating regulation, as well as providing a rounded offering for new funds.

When it comes to selecting a fund domicile, Luxembourg stands out as a jurisdiction that provides tax stability and political stability.“What's interesting to note is that there's a real proximity between the policymakers, and the financial services ecosystem in the country,” Apex Group managing director Jean-Daniel Zandona said.

Indeed, the deep-rooted financial ecosystem in the country enjoys success after success, in part, due to the alignment of interests between policymakers and financial institutions.

Ernst & Young partner Laurent Capolaghi said: “Since the Alternative Investment Fund Manager Directive [was introduced], our government, but also our service providers, have tried to do as much as possible to make sure that the Luxembourg offering is top notch and addresses the expectations of both LPs and GPs.”

The region prides itself in having the tools to cater to private equity funds’ needs, but also to meet investor requirements. Capolaghi continued: “Luxembourg appears to be a key jurisdiction when it comes to LP expectations... the reason behind that is to do with the operating model that we carry in Luxembourg, and the way the ecosystem has matured with the third party ManCo; offering those services is quite unique."

A true partnership

Service providers look to accommodate and tailor their offering to each fund they serve, and work in partnership with GPs, the panel agreed. “When they come to me in Luxembourg, they know they have people that are competent and understand alternative strategies,” Timothé Fuchs, CEO of Fuchs Asset Management said.

Rodrigo Delcourt, Partner at Arendt & Medernach was in agreement, noting that: “depending on the strategy that you’re looking at, be that real assets, private equity, infrastructure, renewable energy, debt and so on, the country has the right tools for it in our toolbox. And we certainly can find an appropriate way of structuring it.”

For funds looking to attract investors in Europe, AIFMs are also well placed to assist and trigger passporting permissions. “If you have a regulated or lightly regulated type of vehicle, which is very widely accepted in the investor's community, you need an AIFM, to trigger the passporting from a legal standpoint,” said Zandona.

He continued, noting that by employing an AIFM, GPs are able to: “Bridge that gap between your investment expertise as a manager, and the sales force you need on the ground to hit the road and knock on the right doors. And this is where we see more and more third party AIFMs not only giving you access through the passporting, but also by providing fully fledged hosting solutions for your salespeople, in a MIFIDcompliant framework.”

Taking on risk

Furthermore, the panel agreed that there has been a shift as to how the jurisdiction deals with risk management; today Luxembourg’s AIFMs are seen as being well positioned to take on risk management so GPs don’t have to.

The number of providers specialising in risk management has significantly increased, with a number of startups and providers, including third party ManCos in Luxembourg specifically positioned to manage risk for alternatives funds, Fuchs said.

Indeed, these providers are able to prioritise and focus on risk management aspects so that the managers can focus on their investment responsibilities.

The fact that the region’s AIFMs and advisors have become so accustomed to providing risk management for alternatives funds means that they are well versed in navigating many types of risk. Xavier Parain, CEO at FundRock Management Company said: “We have strong knowledge of any type of risk, we can neutralise, we can create solutions, we can compare what’s happening in the market, on different strategies, it’s quite unique. Usually, our clients do not view all that is happening in the market. For example, during the COVID period, where we saw a spike of volatility or spike of liquidity, we were able to detect this and to analyse most of our clients to benefit them.”

Parain added: “It’s a complete set of solutions around risk management that Luxembourg now offers through third party management companies and service providers on various topics.”

Bridging the knowledge gap With the burgeoning regulatory environment for alternatives investors, AIFMs and service providers are also able to bridge the knowledge gap between GPs and complex regulation.

“Regulation is now an unavoidable driving force for making decisions when it comes to investing and there is a cluster of providers and companies like Apex Group in Luxembourg that are positioned to assist with these,” Zandona said.

For firms that are at the smaller end of the scale and do not necessarily have the resources to trawl through new pieces of legislation and regulations, third parties are well placed. “This is where we [third party AIFMs and advisors] bridge an enormous gap in terms of monitoring those pieces of regulation [...] we come in and add value beyond just ticking boxes,” Zandona added.