William Gilson at Aviva Investors contemplates a manco merger, while Heimo Ploessnig at Assenagon Asset Management discusses tighter regulation with Nick Fitzpatrick.
It seems obvious for asset managers to merge their various “mancos” – or management companies, the legal entities that play a governance role in European funds – but it is not always straightforward.
It was Ucits IV that offered the scope for manco mergers. Rather than have a manco providing governance in each country where funds are domiciled, the regulation allows for centralising mancos into one location and remotely managing a range of funds.
It means that a fund manager like Aviva Investors, the UK-based business with an office in Luxembourg, could merge its two Luxembourg mancos, So will it?
William Gilson, managing director at Aviva Investors Luxembourg, says: “It seems quite obvious to go down the ‘supermanco’ route from a regulatory point of view.”
But he adds: “The problem is, we [Aviva] are split along product lines.”
One of Aviva’s mancos covers Ucits and non-Ucits funds for traditional strategies, while the other covers real estate and indirect real estate.
Eighteen legal structures and 50 sub-funds span the two mancos. A particular problem centres on merging the boards of the mancos.
“The board of the real estate manco is very real-estate focused and takes all investment decisions,” Gilson says.
The investors of the real estate funds also have significant representation through unit holder advisory committees and, therefore, know in great detail every investment, he says.
The same involvement by asset owners is not a feature of the other manco, and so Gilson says a merger would mean the real estate board sacrificing time for strategies they are not actively involved in. It would also mean board members with no real estate expertise involved in deciding acquisitions for real estate assets.
Yet despite this, Gilson says he expects that the two Luxembourg mancos will be merged. “I expect we will create a supermanco because of all the duplication that is needed by having separate mancos.”
The merger, if it happens, will be limited to Luxembourg. Aviva will not be merging mancos across jurisdictions to provide governance to other funds – so-called manco passporting.
“We are not taking up the benefits of manco passporting. There are considerations around local cultural and knowledge aspects, as well as tax. It’s easier for the French manco to look after French funds.”
If this approach is repeated widely across the industry it would dash the hopes of the two cross-border fund servicing hubs, Ireland and Luxembourg. Permission to merge mancos under Ucits IV gave both of them the opportunity to attract supermancos.
François Pfister, managing partner at Ogier, says: “There is a new opportunity for Luxembourg to become a jurisdiction of choice for mancos if we organise ourselves and provide adequate infrastructure and attract senior people to populate them.”
Meanwhile, the Commission de Surveillance du Secteur Financier (CSSF), Luxembourg’s financial regulator, has been making sure its mancos are fit for purpose (see box).
“It looks like the CSSF wants to clean the [manco] market,” says Heimo Ploessnig, head of legal and compliance at Assenagon Asset Management. “Some need closing. They are so small it would not have been good for market reputation.”
He adds: “The IMF has researched some of the around 180 Ucits IV management companies in Luxembourg.
It found that some of them were hard to find, which indicates they have room for improvement regarding substance.”
Ploessnig emphasises the importance of reputation in the international arena.
“Partly it is to do with political pressure. A Luxembourg manco could potentially manage a German or a UK fund, and although a market like Germany would view Luxembourg as an equivalent, there would still be pressure to ensure enough substance to satisfy the German regulator that its investors are protected.”
So despite the possibility of passporting one manco to another regime without the need for approval, Luxembourg, as with Ireland, would still have to satisfy other regulators who may be more conservatively leaning that their investing public is protected.
Assenagon is headquartered in Luxembourg but hails from Munich.
Ploessnig says Germany may go beyond EU requirements over the Alternative Investment Fund Managers Directive (AIFMD). “Germany has some very strict laws planned under AIFMD which could even prevent some funds being launched at all.”
The governance and substance challenges for Luxembourg are particularly important following the Bernard Madoff fraud. A portion of Madoff’s client money had passed through Luxembourg. The investigation into the Maddof episode found governance surrounding Madoff structures was lacking. Luxembourg had to defend itself against criticism of its regulation.
Meanwhile, Ploessnig says Luxembourg mancos that have carefully followed regulatory strictures should not have problems meeting the CSSF’s stronger standards in the manco circular. “For an existing Ucits IV manco that has done its job properly in the past by implementing the Markets in Financial Instruments Directive and Ucits regulations, it will have implemented a lot of the measures in the CSSF circular.”
Assenagon provides a service for another manco, specifically for compliance with synthetic short-selling rules in a Ucits fund. It is an outsourcing business it would like to expand.
This may well be possible because CSSF standards could be tough for smaller mancos.
“For example, the CSSF will not accept a manco where a compliance officer is the same person as the internal auditor and this might impact smaller asset managers who, in the past, would have used the same person.”
He adds: “The CSSF aims to strengthen the knowledge on manco boards through fit and proper tests. If a board is made up of just investment managers then compliance might not get the right coverage.”
©2013 funds europe