In today’s globalised investment environment, fund managers can more accurately target their investor bases by establishing funds across borders. Establishing a cross-border fund also allows managers to select the specific jurisdiction that offers the most advantageous setting for their particular investment approach, taking into consideration proximity to market, specialism in particular sectors and available fund structures.
Managers typically want to move quickly to take advantage of existing opportunities and capitalise on a given market. But there are a range of challenges during the fund establishment process that can cause significant delays in the market-readiness of a fund, as well as adding potentially significant unforeseen costs. It’s critical that managers are aware of these factors and consider them when developing a fund establishment plan and timeline. Here we identify some key areas where fund establishment can be delayed.
1. KYC documentation and bank accounts
Because of anti-money laundering (AML) regulations, the process of opening a bank account for a fund in any jurisdiction can be complicated. Different domiciles have different timeframes and levels of complexity for administration. The processes and timelines related to opening bank accounts and validating know-your-client (KYC) documentation can vary greatly by country.
Luxembourg, Jersey and the UK, for instance, have robust fund regimes and recognised bank account providers. Even in those countries, however, it can take six to eight weeks — and potentially longer — to open a bank account, which is often a prerequisite for other steps in the fund establishment process. Other financial centres, such as Mauritius, may be less well known to some investor bases, but they can be far quicker when it comes to establishing a fund.
Particularly when operating in a new jurisdiction, fund managers may not be aware of local administrative quirks. It’s important to conduct due diligence well in advance of establishing a fund to understand local administrative and compliance requirements that may affect your timelines.
2. Registrations and choice of domicile
The choice of domicile is always a critical decision for managers establishing funds. Managers often launch a fund in another jurisdiction to broaden their profile and try to attract a new investor base. However, moving into a new jurisdiction can sometimes mean effectively starting from scratch.
In many jurisdictions, gaining fund approval can be difficult, even in popular fund hubs such as Ireland and Luxembourg. When fund administration services are provided by multiple service providers, separate contracts must be in place before getting approval to conduct business. This can be a time-consuming process that delays establishment.
Even within jurisdictions, the time to set up a fund can vary. In Luxembourg, for example, the time and cost of establishment will depend on whether the investment vehicle is regulated or not and the applicable Alternative Investment Fund Managers Directive (AIFMD) regime. The authorisation process of a regulated AIF typically takes three to six months from the filing of the initial application with the Luxembourg regulator. The setting up of an unregulated AIF may take one to two months.
It’s not uncommon for the choice of domicile to change part-way through the set-up process. A manager may abandon one jurisdiction for another that promises a faster fund establishment process. Understanding how fund registration may affect timelines is important when setting expectations with advisors and investors.
3. Constant regulatory change
It would be easy to assume that fund regulation and compliance are concerns only after a fund has been established. However, keeping on top of regulatory change in any jurisdiction is critical to avoiding delays during the fund launch process.
Pre-marketing of a fund is a crucial step in garnering investor interest and securing capital to scale a fund to a reasonable size. Managers in the EU can conduct pre-marketing cross-border before the fund is established, using the AIFM passport. However, there are new and strict rules around how a manager can market their AIF in the EU, and doing so incorrectly in a member state can cause damaging delays to a fund launch.
A non-compliant approach may cause a manager to be barred from soliciting investments into their fund or employing strategies in that member state for up to three years.
ESG regulations, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), can also affect the pre-launch timeline of a fund. While no impediment to setting up a fund, having Article 8 or 9 status within SFDR is now seen by many investors, particularly in the EU, as a requirement for investment. This leaves non-sustainable Article 6 funds with a reduced investor base. ESG rules are rapidly evolving in many jurisdictions, forming an increasingly complex landscape for managers marketing their funds cross-border. Paying close attention to changes in regulatory and reporting requirements can help appease potential investors while avoiding potential non-compliance, delays and penalties.
4. Delays in the wake of the pandemic
In the post-Covid world, performing administrative tasks (such as obtaining registrations) and setting up bank accounts may take longer than usual. Government agencies are working with lean staffing, and the turnaround time for basic services tends to be delayed. The larger fund hubs of Ireland and Luxembourg are also dealing with huge numbers of new fund applications. So, even if managers think they have factored in all the usual timescales, they still may experience unexpected delays.
As a result, there may be trade-offs in domicile choice that managers will have to consider if they want to get their fund up and running quickly to take advantage of unfolding opportunities. Managers should also be prepared to adapt to shifting timelines.
Preparing a fund establishment timeline
Most managers understand the steps that typically need to be taken to establish a fund, but may not be aware of certain country-specific obligations when expanding into a new jurisdiction, which can create significant delays and additional costs. Jurisdiction-specific knowledge is critical when establishing a cross-border fund in order to develop accurate timelines, set clear expectations and avoid unforeseen costs. Given the complexities of establishing a fund in a new country, managers will typically want to consult with third-party experts familiar with the obligations and timelines of the target jurisdiction.
By Rosemary McCollin, Sales Director, Vistra UK
Looking to set up a fund in another jurisdiction? Download Vistra's FREE cross-border fund establishment checklist containing everything you need consider.
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