Chris Edge, Chairman and Independent Director, ONE group solutions, says the third-party ManCo market is maturing as its benefits become recognised.
Luxembourg has the most advanced and mature ‘management company’ model in Europe (for this article, we include AIFMs – similar entities for alternative funds – in this term). Yet the ‘ManCo’ market remains highly fragmented, across multiple providers (both in-house and third party), resulting in market inefficiency and higher costs for investors. For asset management, which is historically attracted to outsourcing, 90% of assets under management in Luxembourg remain managed by in-house ManCos – not by third parties.
Why is that? And will it change?
In-house ManCos range from very large down to very small players with just €1 billion to €2 billion in assets under management. Some AIFMs have even less. Recent evolution reflects a Brexit influence and the need for compliance with more prescriptive regulation. There has been expansion into EU ‘hubs’ with expanded permissions (such as MiFiD, the Markets in Financial Instruments Directive). ManCos cover more asset classes contract product solutions via these hubs. There has been increased leverage of group resources in a ‘near-shored’, distributed operating model.
However, this still leaves a model which has perennial tensions with a parent, utilises scarce capital and has a relatively high headcount. Many lack the scale to be acceptably efficient, have a fixed-cost infrastructure with limited investment prioritisation from the parent, resulting in a fragmented and sub-optimal industry approach to managing fund assets. Increasing regulatory scrutiny of substance is often met through headcount metrics rather than technology platform investment capable of an integrated approach to oversight of multiple delegates.
What are the ManCo options?
So, where to from here? Options emerging include:
• Continue consolidation as the EU ‘hub’ for the parent/group, with a renewed focus on efficiency/automation, perhaps adding elements such as portfolio management, and passporting of services into other EU domiciles,
• Use another EU hub (typically the parent head office) as the primary EU ManCo and passport into Luxembourg (often with a branch entity in Luxembourg),
• Outsource to a third-party ManCo, and
• Sell to an acquirer seeking the substance as a footprint into the Luxembourg/Europe third-party ManCo market.
The asset management sector, which has traditionally led the way in seeking to outsource non-core activities, has to date appeared fearful of outsourcing ManCo activity for four main reasons: an immature market; contagion risk from other clients of the third-party ManCo; because a multiple geographic solution is required; and loss of agility.
Consolidation into a more focused outsourcing solution would, however, benefit all stakeholders. For example, an asset manager moves from fixed to variable costs and gets a consistent interpretation of regulation, regulators themselves get to regulate across fewer, larger entities, while investors obtain lower costs as scale benefits cascade down.
The impact of the Covid crisis is also motivating asset managers to consider other options, highlighting the management time and focus required to ensure business resilience and the need for automation in the delegate oversight process, previously barely efficient in an office-based working model but found exposed in a home-based working model. Oversight requires data to be captured efficiently across multiple sources and analysed independently of the delegate, which means investment… but in an in-house model, investment is understandably prioritised by the parent into the core investment return and asset-gathering focus of its business.
Outsourced ManCos
Larger players have emerged from the early paradox of the third-party ManCo model, whereby the more successful the underlying clients were, the more likely the third-party ManCo was to lose them as they established their own in-house ManCo. The maturity of larger players has caused the threshold for such decisions by clients to create their own ManCo to increase significantly.
We see new models emerging for this sector: tech companies with a ManCo services option; one-stop consolidated ManCo and administration; client-centric and governance-focused specialists; and in-house platforms evolving into third-party models.
We also see the emergence of technology platforms covering the entire oversight responsibilities of a ManCo on one platform, including data management. This opens the possibility of a managed services hybrid model, where a third party may enable an in-house manager with its advanced platform. The in-house manager retains the regulatory and brand responsibilities – but outsources certain tasks back to the third party, delivering effective, efficient and intelligent oversight.
Winning outcome
With margin pressure here to stay for the industry, achieving critical mass to deliver services at attractive economic returns becomes crucial, both to the in-house and third-party players. Industry scale clearly exists and is growing at attractive rates, especially in the alternative investment fund sector. The challenge is consolidating that scale into fewer entities.
The convergence of an in-house model with compelling reasons to outsource, with a third-party model maturing around a few credible players, suggests a winning outcome may well result from greater collaboration and focused consolidation of core in-house scale into a professionalised third-party ManCo sector.
Technology remains key to this. Integrated platforms supporting the needs of Ucits funds such as NAV [net asset value] oversight and liquidity and risk measurement, and supporting private assets funds with, among other demands, capital call management and oversight and understanding of fund structures. Further to these, fund distribution oversight, company secretarial and regulatory compliance features are also among ingredients that are crucial to shaping future strategy, whether the ManCo is in-house or third-party.
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