JOURNAL A special publication to mark AIMA’s 30th Anniversary
The Future for the Alternative Investment Industry
Edition 123 | September 2020 | aima.org AIMA JOURNAL EDITION 123
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Introduction 04 The role of alternative investment 28 management in successful Editorial Note 06 climate change transition Man Group EY
The future of Hedge Funds 11 A Tribute to Hans-Willem van Tuyll 32 Simmons & Simmons The future of Private Credit 34 A future accelerated 15 Dechert LLP KPMG Planning the new normal: 38 The future of alternative data 18 Strategies for risk and compliance for Hedge Funds ACA Compliance SS&C Technologies The future of the U.S. landscape for 42 Fund managers and their legal advisers: 22 alternative investments what does the future hold? K&L Gates Allen & Overy The onshoring of funds in Asia 46 The future of ESG for asset and 25 Clifford Chance LLP wealth managers PwC Ireland Back to the future in 50 Ireland and Luxembourg Maples Group
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The future of investor relations 54 for fund managers: connected, automated and secure Citco (Canada) Inc.
The future of funds administration 59 State Street
How family offices are positioning 62 themselves for the future RSM US LLP
Closing Note: 66 Letter from the outgoing AIMA Chairman
AIMA’s Team 68
AIMA Events 70
Contact Us 71
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INTRODUCTION
ith 2020 being AIMA’s 30th Anniversary year, Wwe were set to host a series of events to mark this milestone in many of the countries we serve. Alas, that was not allowed to happen. But rather than looking back at what might have been, we are looking forward with optimism to the “new normal”. This special edition of the AIMA Journal is all about the future and what it may hold for our alternatives industry.
Winston Churchill famously said, “never let a good crisis Jack Inglis go to waste”. COVID certainly presents new opportunity Chief Executive Officer for skilled fund managers to provide solid investment AIMA outcomes for the world’s pool of savings, and alternative asset managers are best positioned to deliver.
A major rethink on portfolio allocation must surely see alternatives play an enlarged role in investor preference and we are already seeing that cited in several recent surveys, with hedge funds and private credit at the top of the list.
It is hard to imagine the decade long bull market, that arose from the 2008 global financial crisis, being repeated, so the 60:40 mix simply cannot be the way forward.
For AIMA we recognise there will be much to contend with to ensure our members are not overly constrained as they seek to produce those outcomes. Just as the GFC saw banks reined in, there is now heightened risk that the use of leverage in funds will be subject to greater prudential regulation.
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As an industry, we must ensure that market dislocations, The second megatrend is that of technology. Just as the seen earlier this year, are viewed in the proper context NASDAQ continues to lead the way in stock markets so of several inter-connected factors rather than caused by managers that fully embrace the use of technology, in the activity of just one sector of the financial universe. both their investment and operational processes, will reap the benefits. The extent of UK’s divergence from EU rules post- Brexit, a possible new administration in the US at year- AIMA provides insight and guidance to the key aspects end and ongoing tensions with China accompanied by of this: the growing use of alternative data and artificial new security laws in Hong Kong all give AIMA a busy intelligence, operational efficiency through technology agenda as we prepare for 2021. and protection from the ever-growing threat of cyber intrusion. It is important, as a membership body, that we come together as a central point of knowledge and impact We don’t yet know fully what the “new normal” will look in addressing these issues which may force some like. Indeed, we don’t know when, or if, we are going to important decisions to be made by member firms. go back full time to our offices. This crisis has forced a new way of thinking about our work environments and Looking further ahead, there is little doubt that two it may be that it lends itself to a new way of life that is significant thematic trends remain intact and will gather more suitable to achieving our diversity and inclusion increasing momentum. The first of these is ESG. goals. Again, AIMA is here to lead on the discussion.
Over the coming years efforts to integrate ESG across I hope you enjoy reading this 30th Anniversary Journal. investment products will intensify, led by demand from In the ensuing pages you will find much to ponder on investors and requirements by policymakers in varying for the future as envisaged by our sponsoring partners, parts of the world. to whom I am especially grateful for their contributions.
At AIMA, we strongly believe that alternative managers are well placed to deliver double bottom line benefits: superior investment returns by doing good socially and environmentally while actively encouraging high standards of governance.
They can do this because they have the tools and flexibility that come with their mandates, short selling being just one particular example.
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EDITORIAL NOTE
he AIMA Journal is always worth reading, but Tit feels like this 30th Anniversary edition, with its focus on the future of the hedge fund industry, carries within it some particularly important messages for us all now and going forward.
As I write this in the middle of August, we have enough perspective on this turbulent year to say that hedge funds have, by and large, delivered for their clients during these initial stages of the coronavirus crisis and the industry feels in good shape. The question for us now is how to build on this resilience and move with Luke Ellis strength into a world dramatically reshaped by the CEO events of 2020. Man Group One thing that comes out of many of the excellent pieces in the journal is that one of the impacts of the coronacrisis has been to accelerate a number of trends that were already visible within the industry prior to the pandemic. We have all had stark reminders this year of the importance of understanding the liquidity of your positions; investment in technology, and particularly in systems that create flexibility while maintaining control; the need for smart, creative thinkers within an organisation; and the value of robust risk management systems.
We knew all this before the virus hit, but recent months have been a powerful confirmation of hedge fund business models that prioritised infrastructure, technology and diversification. It feels like the industry has applied the lessons it learnt from the 2008 Global Financial Crisis and is now largely more stable and able to withstand periods of intense volatility such as we experienced this spring.
Reading the newspapers, you might not know that hedge funds had negotiated the crisis in such relatively good shape. There has been a lot of focus on the travails of one or two players while largely ignoring the health of the majority. Hedge fund management is necessarily a Darwinistic environment and the past months have of course been tough for some, particularly those that hadn’t continued to invest in their businesses.
Whereas in the early days of hedge funds, it was all about finding the next $100m manager with a bright new strategy, higher ‘costs of production’ and general alpha decay have meant that smaller funds have struggled more recently, particularly since the pandemic took hold. Given the scale of investment needed in technology, risk management and infrastructure, we’re in an era where barriers to entry in the industry are higher than ever before.
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This is to be expected: the industry is maturing, a trend to create herd immunity, those predicting a return to that will only have been exacerbated by recent volatility. something like normal life in early 2021 may be left You’ll read in these pages an obituary of Hans-Willem disappointed. The 2008 crisis was about banks and (“H-W”) van Tuyll, a founder member of AIMA and liquidity, this time around it’s focused on corporations a legendary figure in the history of the hedge fund and the financial and operational leverage they’re industry. Among his many accomplishments, H-W was running, with the potential for further spikes in defaults an evangelical proponent of hedge funds becoming and restructurings. more institutional, more grown-up, more regulated in the way they did business. The global political landscape is deeply uncertain and the current crisis must not deflect our attention from Hedge funds have come a long way since H-W’s time, the need to address climate change. But, having said when, as one of those remembering him puts it, they all this, I’ll reiterate that hedge funds are by their very were viewed as “opaque, unregulated, risky.” Leading nature the right vehicle for volatile times, able to be hedge funds have embraced his vision of an industry proactive where others are reactive, able to adapt that is a transparent and an integral part of the financial swiftly to new conditions, to seize the opportunities markets, and where dependable alpha generation offered by advances in technology. serves to mitigate portfolio risk and provide investors with a source of genuine diversification. As we look ahead into an uncertain future, we should also take a moment to recognise how far we as an That brings us on to another message that comes industry have come in the past 30 years and to look from reading this latest AIMA Journal. Whether it is forward with a sense of confidence that the next 30 in stewardship and sustainability, in technological years will be even better for the Hedge Fund Industry. innovation, or indeed in how to manage through periods of huge volatility like the first half of 2020, hedge funds have increasingly come to perform a leadership role for the entire asset management industry. These are fast- moving times and adaptability has always been central to hedge funds’ business models. That nimbleness and entrepreneurial spirit has helped us deliver through the pandemic-related volatility and it will enable us to continue to lead as we face an uncertain future.
Despite the relative resilience with which the hedge fund industry has made it through the crisis so far, this is not a time for celebration or back-slapping. For one thing, there’s the question of diversity, where a lot is still to be done. Hedge funds came of age in an era when financial services were still dominated by attitudes that were often openly sexist, racist and homophobic.
This left a huge hole in the pipeline of diverse talent as quality people were either put off by the financial services culture and never joined, or rightly left the industry after a short period because of how they were treated. In the years since, we have made some progress, but not enough, and now we are past the time for excuses. The hedge fund industry doesn’t have nearly enough women, LGBT+ or people from BAME backgrounds, particularly in senior roles, as most people in leadership positions will have been in the industry for 30+ years. It is impossible to shortcut a solution to this historic gap, but we must all focus on building and developing the future pipeline, on empowering staff within our organisations to create change for the better and on offering opportunities to diverse candidates who aspire to join our industry.
There’s also the potential for further market and economic pain. As we still appear some way from a vaccine, never mind one that is widely enough used 7 AIMA JOURNAL EDITION 123
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THE FUTURE OF HEDGE FUNDS
eading the market for the past funds. Similarly the recent trend Lthirty years, the hedge funds for hedge fund co-investments, team at Simmons & Simmons which are typically associated with is perfectly placed to advise the illiquid end of the investment the market on navigating the spectrum, is expected to continue. Co-investments provide investors opportunities and challenges with the right to co-invest alongside for hedge funds over the next the manager’s fund, into which five years. the investor may or may not have themselves invested. The Simmons & Simmons hedge Sarah Crabb funds team in London is led by Co-investments usually arise where Partner Richard Perry, Iain Cullen, Dev the allocation to the fund is too Simmons & Simmons LLP Saksena, Lucian Firth and Sarah large or where the fund is limited Crabb. The team sets out its five key by investment restrictions such that predictions for the future of hedge the fund can only accept a portion funds over the next five years of the proposed allocation (if at all). below. Previously choice of fund structure 1. Greater fund customisation and domicile was largely investor driven. Fund structures are now In an extremely competitive increasingly fragmented and landscape for raising capital, there is no longer a “one size fits managers are under pressure to all” approach. Regulation, tax and tailor offerings to the specific needs macro-politics influence the choice Devarshi Saksena of potential investors. We see no of structure far more than ever Partner indication that the trend for greater before. Simmons & Simmons LLP customisation will slow down over the next five years. For example, if a fund invests in credit or a manager wants to Allocators have increased access European investors then bargaining power, as evidenced structuring an onshore fund in in recent years by fee rate Europe might be preferred but if a compression, and managers fund has a non-credit strategy or a offering bespoke fee deals in manager wants to structure “out” exchange for large tickets will of Brexit then an offshore Cayman inevitably continue. Islands’ launch may make sense.
Increased desire for investor control 2. Renewed importance of the Lucian Firth and oversight will likely prevail. seed investor Partner Managers willing to consider setting Simmons & Simmons LLP up managed accounts and funds of In recent years, we have seen one to accommodate the wishes of fewer but higher calibre start-up strategic investors will continue to managers. Two to three years ago, rise, regardless of the operational managers were mainly launching complexities and conflicts of autonomously. interest that can occur when managed alongside commingled 11 AIMA JOURNAL EDITION 123
Barriers to entry such as increased This is supported by increased Increased competitive pressure regulatory burden, compliance ESG focus from global regulators, and rising compliance costs, costs and the impact of Covid-19 including the introduction of EU together with continued downward on investor appetite to allocate to ESG legislation - the EU Sustainable pressure on fees, will likely lead to new managers, means we are now Finance Disclosure Regulation being accelerated consolidation amongst seeing more demand for seed deals the first to apply from Q1 2021. managers. in start-up conversations. As a result of continued focus from Our specialist asset management Our prediction is that emerging investors and regulators, we expect M&A team is seeing increased managers are likely to require managers to embed processes to activity in this area and expects a committed seed capital prior consider governance, culture and wave of further activity as smaller to pressing ahead with the cost diversity much more readily in their managers navigate the aftermath and expense of launching a fund own firm structures. of COVID-19. independently which may or may not be successful in attracting 4. Diversification of asset This repeats a trend for increased external capital. classes M&A activity in the sector that was seen following the turbulence of If seed capital is not a given, As managers seek to optimise the 2008-2009 financial crisis. portfolio managers might be more returns, we predict a renewed focus encouraged to join a platform or on diversification of asset classes Final word an established manager to manage and investment strategies over a particular fund or strategy with the next five years with managers Hedge funds have evolved a remuneration package that is looking to non-traditional asset considerably over the past three directly linked to the profits of the classes. decades and will continue to do so fund or strategy. over the next five years to continue As part of this diversification, to attract investment and meet We also predict a prevalence we note that both established investor needs. in seeders investing in more and emerging managers are distressed funds managed by incorporating digital assets and mature managers. gold into their investment universe.
These so-called stabilisation Although historically volatile, Bitcoin investments can make sense for has demonstrated a meaningful seeders as they choose to invest in diversification effect for portfolios in funds managed by a manager with recent times and certain managers a proven track record and existing have looked to digital assets and infrastructure in return for a slice of gold as a hedge against inflationary the manager’s economic returns. risks.
3. Emphasis on responsible Employing derivatives within a investment and ESG portfolio can be a way to obtain exposure to the upside without A big talking point in the industry encountering some of the in 2020 has been responsible complexities of investing directly investment and environmental, in assets such as cryptocurrencies social and governance (ESG) and and gold. how these apply to hedge funds. 5. Consolidation within the Reports of better risk-adjusted asset management sector returns and increased net flows into sustainable funds, Our final prediction for the next five coupled with increased investor years is further consolidation within expectations from both large and the sector. Movement of portfolio next-generation investors around management teams will likely consideration of ESG factors lead to increase as established managers our prediction that many managers seek to acquire capabilities rather will incorporate ESG principles into than invest time and capital in their investment philosophies over organic growth. the next five years.
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A FUTURE ACCELERATED
s the new decade dawned, How can we leverage technologies Athe future of the Alternative such as AI, Blockchain, Machine Investments sector seemed Learning and digital payment fairly certain. Fund managers solutions to both generate would continue to shift data and alpha and improve the investor experience in a digital world? And processes into the cloud. Digital where will we find the capital and technologies – such as AI and the technology skills we require to Machine Learning – would prove achieve our objectives? John Budzyna their value at the largest firms Managing Director, Alternative and gradually be adopted across The new reality emerges Investments the sector. KPMG in the US The COVID-19 experience was an A handful of large players would awakening of sorts. On the back of convert their proprietary systems what seemed like an endless bull and tools into industry platforms, market, most asset managers had capitalizing on the demand for convinced themselves they had scalable middle and back-office time to catch up on the digitization infrastructure and processes. agenda.
The emergence of the COVID-19 Now that runway has disappeared. did not change the importance, but Those with a 5 to 8 year rather it did quickly sharpen minds transformation journey are Neil Macdonald and add urgency to the technology scrambling to expedite their Wealth and Asset Management agenda. Those without efficient timelines. Centre of Excellence Leader and effective digital data platforms KPMG in China quickly realized their ability to The problem is that, for most, the operate was being constrained. journey may require considerable investment. And few firms have the Efforts to run operations in a more skills and capabilities in-house to decentralized environment during drive and scale a successful digital the lockdown only accentuated the transformation agenda. urgent need for change. That, in turn, has driven many Important technology questions firms to reconsider their operating reemerged onto the Alternative models. Some are now working Investment agenda: How will we with outsourcers. More are flocking Pascal Denis combine and communicate key towards the bigger technology Partner, Head of Advisory data sources – such as trading data, providers and the large industry KPMG in Luxembourg research data, risk management platform providers who are offering data and investor data – in a scalable processes and tools to the decentralized work environment? industry.
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Stepping on the gas Having a vision They will be looking at innovations in AI, IoT, 5G technologies – as well Don’t expect all technology The leading fund managers as emerging technologies such as decisions to be outsourced or know it will take more than Edge Computing and Quantum delegated to the platform players, investment capital to achieve digital Computing – to uncover new ways however. Many fund managers transformation. Indeed, our view to gain the trading advantage over are also working to rapidly build suggests the top firms in 2030 will their peers and competitors. their own internal capabilities. be those that view technology as an Most now recognize that cloud is enabler of future growth. And that Get there. Now. the foundation for future digital will require a more holistic view of transformation. the transformation journey. As we look forward to the next decade, the future of the Those with some processes or It will start with a fundamental Alternatives sector remains fairly data still residing on their own ‘on- rethink of the business model, clear. By 2030, the cloud conversion premise’ computers and servers will operating model and value process and the centralization of be looking to move them offsite – proposition. Fund managers will data throughout the operating both as a way to reduce complexity, need to carefully consider what platform will have been completed. and to provide managers and activities will differentiate their Non-core activities will be either employees the integrated data firms from the competition and automated or outsourced to they require to do their jobs and what activities can be better (or at increasingly powerful platform generate alpha. least equally) delivered through players. Workplaces will be more automation or outsourcing. virtualized. Others are now quickly assessing the value of automation and Fund managers will also need to The difference is that this is no artificial intelligence. They are take some time to understand the longer the vision for 2030, but looking for tools and technologies new and evolving expectations rather the new reality for 2025. that can enhance their digital of their clients. They, too, have Welcome to a future accelerated. channels and improve the investor undergone a radical digital experience. transformation as a result of the response to COVID-19; they will For example, they are testing new increasingly expect sophisticated RegTech solutions to help improve digital channels and will look compliance and back office unfavorably on those that seem out efficiency. And they are spending on of step with the competition. new virtualization and collaboration tools designed to better connect As ever, mid-office and back-office their employees to their clients, processes – regulatory, trading each other and the enterprise. execution, treasury, finance, risk and compliance, for example – To be sure, there will be a number will need to be reimagined and of fund managers who, finding redesigned in order to enable the themselves hindered by margin future business and operating constraints, may choose to reduce models. investment into new technology initiatives. But by 2030, we expect the big tech players and asset management However, our view suggests these platform providers to be delivering firms will struggle to effectively many of these processes as compete in the new digital world a service, allowing most fund that is emerging from the COVID-19 managers to refocus on their core experience. differentiators.
Rather, it will be the firms that The most aggressive and innovative strategically deploy investments in fund managers will also see this as digital tools and capabilities that an opportunity to fundamentally will reach their accelerated targets. reinvent the alpha generation And they will be the successful and process. innovative ones that lead the sector in the future.
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THE FUTURE OF ALTERNATIVE DATA FOR HEDGE FUNDS
ecent years have seen What is new is the explosive growth Rdramatic increases in the of data available in the digital age, use of alternative data by hedge combined with the advancement of funds to uncover new investment intelligent technologies to access, opportunities, sharpen decision synthesize and analyze it. making, mitigate risks and Alternative data has become generate alpha. a disruptor in the hedge fund industry. The advantages go to In a survey we conducted earlier this firms that successfully harness it, year with the Alternative Investment enhance their existing research, Michael Megaw Management Association (AIMA), and apply it to their decision- Managing Director, Regulatory, Casting the Net: How Hedge Funds making process, whether human or Analytics and Data are Using Alternative Data, more algorithmic. SS&C Technologies than half the respondents said they were actively using alternative data The use of alternative data does and another 14% were exploring not replace information gathered options. through conventional means – company reports, and economic While definitions of alternative data forecasts. Instead, alternative data vary widely, it is most easily thought augments and enhances traditional of as any information pertinent research with deeper insights into to companies, sectors or markets investment opportunities and risks. outside the realm of traditional financial and economic data. The market leaders in hedge funds have been able to mix alternative Throughout history, businesses data effectively into their overall have sought to gain an advantage strategy that gives them a unique by uncovering patterns and trends story for their fundraising efforts that weren’t readily apparent with prospective investors. through conventional analysis.
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Adoption Will Continue in both technology and expertise efforts. Firms who want to test the to support an alternative data alternative data waters will first All signals point to continued growth initiative. Fund managers can gain ensure they have the necessary in all aspects of alternative data – in scale by outsourcing alternative software and skillsets to work the abundance of data available, data aggregation, management with the data, and draft policies in the number of providers, and and analysis – everything except governing its use. its adoption and application. A the investment process itself, which substantial majority of respondents is proprietary to each firm. They will then conduct thorough due to our survey expect more diligence on vendors to understand widespread mainstream adoption Future Applications the reliability and integrity of their over the next five years. data sources. Once they have Even though alternative data identified the appropriate data We will likely see more innovation has seen significant growth and and providers, they will engage in among providers, too, as they seek generated a lot of buzz in the hedge a trial agreement and conduct a to differentiate their offerings – fund market, it is still in its infancy. cost-benefit analysis to determine though eventually, we expect to There is bound to be a certain reasonably quickly the potential see a “flight to quality” as managers amount of trial-and-error as firms return-on-investment (ROI). increasingly figure out which try and figure out which datasets providers are truly delivering value. are appropriate to their objectives After implementation, firms do The focus on value will in turn, drive and how to apply the data. periodic reviews to evaluate consolidation among key players. whether alternative data are Standards that would enable delivering the desired advantages. As for the supply of data, consider managers to more easily compare 90% of the data available today was and evaluate vendors, as well as The alternative fund industry generated in just the last two years, best practices in the application is known for its innovation and and the data supply continues to of alternative data, are still being unbridled creativity relative to other grow at an estimated 2.5 quintillion defined. asset managers. bytes per day. A regulatory framework specifically Early adopters of alternative data Suffice to say the availability of addressing alternative data will continue to play an influential data won’t be a problem. Instead, has yet to take shape, raising a role in shaping the alternative funds the challenge for fund firms will be number of questions from hedge industry’s to improve investment figuring out how to capture the right fund managers – for example, do performance, increase operational data, make sense of it, and derive “exclusive” datasets from a vendor alpha, and raise additional funds. sufficient value from it to warrant amount to material, non-public the investment in alternative data information or confer an unfair resources. advantage?
To realize the full potential of Does the use of photo imagery, alternative data and to advance social media tracking or mobile its adoption more rapidly and download statistics raise personal broadly, fund firms need to have privacy issues? Current regulations the technology infrastructure and governing the use of the staff resources to aggregate, store, information will evolve to address synthesize, analyze and backtest these questions. the data. Meanwhile, hedge funds may Large, established funds who view find that alternative data has alternative data as core to their applicability beyond portfolio process likely have the financial management decisions. In the retail resources to invest in an AI- investment world, for instance, powered analytics engine and hire mutual fund companies are data scientists to extract actionable analyzing trend and investor profile insights from the data. For emerging data to optimize their product and mid-size players, these can be marketing and distribution. formidable barriers to adoption. Fund managers may eventually However, firms can catch up quickly be using alternative data to by working with a technology understand their investor clientele provider who has already invested better and target their fundraising 19 AIMA JOURNAL EDITION 123
The global leader in hedge fund administration
ssctech.com 20 AIMA’S 30th ANNIVERSARY EDITION
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FUND MANAGERS AND THEIR LEGAL ADVISERS: WHAT DOES THE FUTURE HOLD?
ne of the outstanding where it makes sense. Some Ofeatures of the record- buyers have looked to defer or breaking bull market of the even abandon deals rendered last decade has been the uneconomic, while sellers have extraordinary growth of the sought to keep transactions alive, in some cases, forcing buyers to Alternative Investment (AI) complete. industry. But on the offensive side, the crisis We’ve seen rapid expansion across has opened up opportunities, all the six main asset classes – particularly but not exclusively on private equity, debt, real estate, the distressed debt side, that have hedge, infrastructure and energy. been eagerly anticipated. Peter Myners Given that their interests spread Partner and Co-Head of A&O’s over so many key sectors of the “This market is creating Alternative Investment Initiative economy, it is not surprising that opportunities and many of the Allen & Overy they have felt the affects of the big players have been waiting for Covid-19 crisis deeply. something to happen to create dislocation,” he says. “The industry Indeed, they provide a picture had been massively competitive in of the effects of the pandemic in terms of sourcing and bidding on microcosm, and how they respond deals.” will have a major influence on where the wider economy goes next. The initial focus once the crisis hit was on liquid investment As transactions become more opportunities, as fund managers complex, geographically diverse took advantage of debt and equity and sector specific, the demand trading down to buy in to assets Paul Loynes for ever-more sophisticated legal they’d been tracking for a while. Formerly European GC at Apollo advice will grow. Global Management and In recent weeks, however, the more Deputy GC But there are other pressures illiquid side of the industry has SoftBank’s Vision Fund building up – in terms of regulation, started to pick up, across different investor and public expectation and asset classes. in terms of how funds are organised and operate – that will also change To take advantage of these the relationship between funds and opportunities, distressed, credit their legal advisors. and special situation funds, moved quickly to raise fresh capital from Impact of the crisis investors, or to pivot existing funds, and the industry as a whole was In the short-term, the reaction estimated by Preqin to be sitting of AI funds to the crisis has been on some USD2.6tn of accumulated both defensive and offensive, says capital ahead of the crisis. Peter Myners, a Luxembourg-based partner with Allen & Overy and It is likely that we will see a rapid co-head of the firm’s Alternative acceleration of transactions once Investment Initiative. the economic outlook is clearer and valuations stabilise, adds Myners, They have focused on mitigating helped, not least, by the likelihood the effect of the crisis on existing that interest rates will remain low investments, injecting liquidity 22 AIMA’S 30th ANNIVERSARY EDITION
and that businesses will continue “Investors are likely to be asking terms being negotiated.” It is turning to private debt funds for a lot more questions about ESG, at this time that in-house teams liquidity. such as how funds have treated most need to call on additional their employees during lockdown support and a lot of funds look for “As they grow, diversify, become and about community investment. secondments from law firms during more sector specific and expand So compliance pressures will only this phase, he says. into new geographies, fund increase, even if that pressure managers are becoming more is coming more from investors But needs will be different at every institutional in the way they rather than from legislation.” stage of the investment cycle. “If operate and more organised in the average life of a fund is 7 how they source legal services. Myners agrees that this trend will years, you spend a year setting up, demand new kinds of support from four years deploying capital and But they remain lean legal teams. “Most fund managers the final two managing and exiting organisationally, compared to are embedding ESG much more those investments. During that traditional banks and corporates. structurally into their decision time, your legal needs are going They are seeking support from making processes, making it a key to vary enormously. That calls for law firms that have a detailed element of diligence and reporting. flexibility.” understanding of their needs.” They are being more transparent about meeting investor demands. Forward-looking funds, he believes, Regulatory and investor pressure This tends to require additional are using this slightly quieter period resource.” in the wake of the pandemic to Private debt funds remain relatively re-assess those needs, to look at lightly regulated1 , compared with However, he believes another their infrastructure and prepare the traditional banking sector, and equally complex pressure is back themselves for the next wave of regulators are likely to be observing on the table for the legal and heightened deal activity. the private debt sector closely as compliance teams of fund managers the crisis unfolds. in the short term – the growing “The good firms are thinking about likelihood of a hard Brexit at the end how they can best structure their Specific new regulation is also in of this year, which is likely to create legal functions to be nimble and the pipeline, not least the European significant trading challenges for capable of turning things round Commissions latest version of the industry, compounded by travel quickly.” the Alternative Investment Fund restrictions put in place as a result Managers Directive (AIFMD II), of the crisis. Funds remain focused on working which will take effect next year. with external legal advisers Resourcing challenges who understand their strategic But it remains to be seen how far priorities, can co-ordinate and governments and regulators will Myners and Loynes expect to deliver insights from across relevant clamp down on the industry, argues see funds deploy technology, geographies, sector and practice Paul Loynes, formerly European automation and alternative areas, and demonstrate innovation general counsel at Apollo and resourcing models, such as interim in delivering services efficiently. It deputy GC at SoftBank’s Vision consultant lawyers and project is a trend that was already there, Fund. Instead, he expects the management experts, to keep their says Myners, but one that has been biggest pressure to come from the costs under control and increase accelerated by the crisis. funds’ own investors. productivity. “These are demanding clients – but They are demanding much greater Opportunities to bring in legal demanding in a good way,” he says. transparency, improved reporting, support at key points of the “They want to work with lawyers and tangible evidence that funds are investment cycle will be a driving who understand them and can addressing pressing environmental, factor, argues Loynes, with the act as trusted business advisers. social and governance (ESG) issues. fundraising processing requiring The key to success for any law the greatest need for support. firm supporting this industry in Investors may, as a result, be a future will be the ability to deliver lot more discerning about where “Investors are demanding more advice in a dynamic, commercially they put their money, a trend that and more specific deal terms relevant and efficient way.” could bolster the bigger funds with which may mean side-letters or greater capacity to respond. an increasing number of bespoke
1 Non-bank Lending in the European Union
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24 AIMA’S 30th ANNIVERSARY EDITION
THE FUTURE OF ESG FOR ASSET AND WEALTH MANAGERS
here is no doubt that The US Department of Labor Tduring the global recently announced a proposed pandemic there have been rule that would clarify that ERISA examples of how sustainable plan fiduciaries may not invest in / ESG linked investments have ESG funds if the investment strategy of such ESG funds is to subordinate likely outperformed their return or increase risk for the counterparts. Looking forward, purpose of non-financial objectives. will this performance record be the only driver of ESG and In May 2020, the SEC’s Investor sustainable investing, or are Advisory Committee encouraged there other factors which will the US to take the lead on drive this agenda? developing a principles-based framework focused on disclosure To be able to look to the future of of material ESG items - recognising ESG for asset and wealth managers the importance investor grade ESG (AWM), not only do you need to data plays in the investment and understand what has happened in proxy voting process. The SEC’s Olwyn Alexander the past - you also need to identify Office of Compliance Inspections Global AWM Leader the present state. and Examinations has named ESG PwC Ireland claims by registered investment From a regulatory standpoint advisors as an exam priority for this year. Within Europe, there has been little slow down as the European Within Asia, the heterogeneous Commission plans for Europe to nature of different fund markets become the first climate neutral implies that the adoption of ESG continent by 2050. In our article has been quite diverse. However, Sustainable Finance, a new era for the common positive thread is asset managers we outlined the the increasing awareness and European regulatory developments importance of ESG in asset to March 2020 and since then, management over the past few regulatory activity has kept on years. accelerating with numerous consultations in this area. In Hong Kong, the SFC has provided guidance on enhanced disclosures Will other parts of the world follow for SFC-authorised green or ESG this trend? funds. In Singapore, the Monetary Authority of Singapore (MAS) Within the US, the Sustainability announced a Green Finance Accounting Standards Board has Action Plan and recently released developed a framework which is a consultation paper for its broad-based, crosses 77 industries Environmental Risk Management and recommends topics and metrics Guidelines for the banking, which can be used for companies insurance and asset management to consider as they make their sectors (June 2020). disclosures. Other industry or trade associations have also developed India’s mutual fund industry their own recommendations to adopted a stewardship code, green assist their members. investment guidelines have been
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issued in China and the Korean • Continuous and increasing as the road to recovery begins, and exchange set up an ESG team regulatory focus: The focus is not how they are embedding ESG and to review and report on the ESG only about increasing the availability sustainable practices into their practices of firms. of data in this area and the business moving forward. disclosures which AWM and their From a regulatory perspective financial products are making, but At PwC, our purpose is to build therefore, whilst some territories also about how AWM themselves trust in society and solve important may be moving at different speeds, do business and conduct their problems. We’re a network of firms ESG and the sustainable finance interactions with investors. in 158 countries with over 250,000 agenda are high on regulators’ people who are committed to priorities. • Transparency is key: delivering quality in assurance, Transparency is fundamental to advisory and tax services. Find out AWM and Investors - changing ESG and the sustainable investing more and tell us what matters to perspectives? agenda globally. Asset managers you by visiting us at www.pwc.com. who fully embrace transparency It has been well documented into their business and financial This content is for general that some of the world’s largest products will be the ones who are information purposes only, and asset managers have been and able to show the market and their should not be used as a substitute are increasingly more focused on investors the true impact of their for consultation with professional embedding ESG and sustainability investment decisions and business. advisers. practices within their own businesses and also the products • New opportunities for © 2020 PwC. All rights reserved. which are being offered. investment: As economies recover PwC refers to the PwC network and/ in this new “normal”, there is or one or more of its member firms, In our 2016 survey, only 10% of no doubt that opportunities for each of which is a separate legal AWM CEOs identified that they were investment will present themselves. entity. Please see www.pwc.com/ “extremely” concerned about the There are still targets which have structure for further details impact of climate change on their been set which need to be met and business. Yet in our 23rd Annual it will be critical that AWM play a key Global CEO Survey (released March role in this process - not only from a 2020), this had increased to 25%. financing perspective.
Investors themselves are becoming • Increasing focus on health, increasingly engaged on matters well-being and societal change: relating to ESG and sustainability. AWM will not only need to look Our 2019 global survey of internally to the welfare and work investors identified that as a group, environment of their own staff, but investors placed ESG ahead of also to those companies in which fees, relationships and operational they are invested. They also need strength. to consider how they can bring about societal change through the Investors are looking to the course of their own business, and companies and portfolios they also through the financial products are invested in not only from a which they offer, transitioning from financial return perspective, but ESG integration (as a mainstream also from a corporate responsibility component of investment and perspective. This in turn is leading risk management processes) to to higher levels of engagement by delivering environmental and social investors with AWM as they seek impact. to gain a better understanding of how ESG and sustainability risks • Listen to your investors: are being managed, monitored and Investors were focused on this responded to. area prior to the pandemic, and this will only exacerbate. Investors The future will seek investments which not only provide a return, but also ones The global pandemic has heightened which “do some good”. Additionally, the already growing focus on ESG investors will focus on the managers and sustainable investing. So, what themselves - their response to the does this mean for the future? pandemic, what changes were made 26 AIMA’S 30th ANNIVERSARY EDITION
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THE ROLE OF ALTERNATIVE INVESTMENT MANAGEMENT IN SUCCESSFUL CLIMATE CHANGE TRANSITION
n these challenging times of 2010 (Frankfurt School, UNEP and Ia global COVID-19 pandemic, BNEF). Around the turn of the last alternative investing can still play decade, renewable energy was still a role in securing a successful maturing, and the business model climate transition, by enabling was yet to be proven, which is exactly why we see the high levels the provision of funding for of PE and VC funding at this time. early stage technologies and innovative businesses that are In the last decade as maturity aimed at tackling sustainability. has been achieved, the sector has become dominated by large Private markets and institutional global players, and start-ups tend investors are better able to provide to be funded by utilities with a the patient capital needed to match less significant role for VC and PE the risk profile and illiquidity of such funding. Large initial public offerings Scott Mc Evatt investments. Patient capital can are now much less frequent, with Manager | Wealth and Asset invest for the long term, working to secondary PE as public equity and Management prove the viability of these business convertible issues more common. EY models, taking a risk profile that Email Scott Mc Evatt may not be acceptable to public With this hypothesis in mind then, it markets and working to convert it to is clear that the role of more patient a more traditionally acceptable one. forms of capital in helping to achieve a successful climate transition is to Once this has been achieved and help prove those business cases of the risk profile is reduced, other the future. forms of public market finance will enter to help these industries or Despite the above, there are still technologies achieve global scale. significant investment opportunities for early stage investment related to Renewable energy investment renewable energy; however, where provides a useful case study for this this investment was previously hypothesis. Technological advances focused on proving the business as well as government subsidies case of the underlying renewable now make renewable energy cost- energy technology, it will likely focus competitive with traditional forms more so on tertiary services and of energy generation. infrastructure opportunities arising out of the shift to renewables. Given this maturation of the renewable energy sector, we would One example is electric vehicle (EV) expect a steep fall off in venture charging. capital (VC) and private equity (PE) investment as public companies Today, inherent usage and volume start to dominate the production risks make financing these projects of the major sources of renewable difficult for banks and other forms of energy, solar and wind power. more mainstream finance. Clearly, there can be a role for patient This is indeed the case: VC and capital in the EV charging market PE funding of renewable energy until the point of maturation, where projects in 2018 was at US$2 billion reliable income streams have versus a record figure of US$9.9 been established, allowing more billion in 2008 and US$8 billion in traditional forms of finance to enter. 28 AIMA’S 30th ANNIVERSARY EDITION
The real estate (RE) sector is another In order to successfully contribute however, whether an alternative area of alternative investing that to this change, alternative investors investment firm aims to be at the can have a huge impact in securing must integrate the goals of climate vanguard of investing in businesses a successful climate transition. In transition throughout their that will help to drive the climate 2016, the United Nations reported investment process and work to transformation or fosters less that the building sector contributed exert influence, so that these assets aspirational ambitions, all firms to 30% of global annual greenhouse are built and operated in a way that must focus their attention on the gas emissions and consumed is consistent with these goals. very real risks posed by a disorderly around 40% of world energy. climate transition. Adopting an integrated There are two main areas of focus environmental, social and Increasingly, regulators are in this sector; efforts must be made governance approach to RE challenging financial market to adapt and innovate around investment will not only drive participants to treat these risks newer less carbon intensive ways societal benefits, but it has also alongside more mainstream of RE construction and secondly been found that green-certified financial risks, which is reflected investments must be made to adapt buildings generally have positive in the European Securities and existing stocks of commercial RE. sale and rental premiums compared Markets Authority’s final paper on with non-green buildings, as well as the integration of sustainability Indeed, there are multiple operating costs up to 14% lower risks and factors into the UCITS construction technology (contech) and 9% higher occupancy rates, Directive and AIFMD. and property technology (proptech) while it appears that sustainable firms that are grappling with how to housing retrofits can maximize Alternative investment firms must overcome these challenges. They financial returns. now consider both physical (sea are leveraging everything from level rise, extreme heat, flooding) cutting-edge choices for building Clearly, alternative investment and transition risks (obsolescence, materials, architectural tools, players will look to play a greater or stranded assets in the energy site management and artificial lesser role in the climate transition sector) as we move away from a intelligence, to applying “internet of based on their skills, expertise or fossil fuel-dominated energy sector. things” technology. sector specialisation, for example;
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While every firm must focus on case) and ultimately converting mitigation of these risks at a unacceptable market risks to more minimum, we expect the leaders will mainstream risks, paving the way go further and focus on adaptation for the entry of larger financial of investments to climate risks. institutions.
As outlined above, we see the alternative investment managers’ The question from here is where role being at the early and alternative investment managers development stages of investment will place their future bets in order in the sustainable finance to maximise their influence on ecosystem. ensuring a greener future for all, while also investing in a way that This is through investing where minimises their investors’ exposure public markets consider the risk to both physical and transition risks too high, working to prove the associated with climate change. underlying business case (it is not about proving the technology but the actual viability of the business
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ESG investing — a necessity or simply just good business practice? Minds made for transforming financial services ey.com/uk/esginvesting EYG no. 003540-20Gbl © 2020 EYGM Limited. All Rights Reserved. ED None Reserved. All Rights Limited. 003540-20Gbl © 2020 EYGM no. EYG
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A TRIBUTE TO HANS-WILLEM VAN TUYLL The man we all knew as H-W
ans-Willem Reinier, Baron He gave his time, enthusiasm, Hvan Tuyll van Serooskerken, energy and quiet support: never heer van Vleuten, Knight in the expecting anything in return. order of Oranje-Nassau, known to all of us simply as H-W, left us In 1997, he was the driving force too soon on 11 February 2020. behind the creation of the first AIMA DDQ for CTAs and in 1999 He was a Founding Member of persuaded the AIMA Council to look the European Managed Futures to Asia. Off to Asia we went: opening Association, EMFA, now AIMA, doors, educating and helping to when seventeen of us sat around bring the burgeoning Asia-Pacific a table in Montreux, Switzerland industry together. Florence Lombard in September 1990 to form the Former AIMA CEO, 1993-2009 association. We travelled tirelessly to Hong Kong, Tokyo, Singapore, Sydney, later to He served on the AIMA Board from China and South Korea, forging the 1995 to 2003, as Deputy Chairman, way with the first AIMA Investor and then Chairman from 2001 to 2003. Regulatory Forums in the region, which led to the establishment First and foremost, he was a of AIMA Chapters and offices commodities and managed futures throughout the region - and for man. He represented Cargill AIMA to become the alternative Investor Services, where he had a investment representative body of long and illustrious career starting choice across the region. in 1969. He held various global roles, from Brazil to Japan, then based in Emma Mugridge, AIMA Director Geneva - in the latter years focusing (1996-2008) writes: “AIMA and the on managed futures and hedge industry have been blessed with funds. In 1992, he was elected to the the altruistic input of a number board of the Cargill International of individuals who work tirelessly Pension Board and also served as and generously on their behalf. a Member of the Advisory Board of PerTrac Financial Solutions. H-W was among the first. He was kind, interested and interesting, He convinced Cargill to become our highly knowledgable and first Sponsoring Member, leading determined to help the industry be the way and encouraging many the best it could be. other eminent organisations to follow. In those early days, nearly Bear in mind that in the industry’s half of EMFA’s income came from early days, it was seen as our Sponsoring Members and I do opaque, unregulated, and risky. not believe the association would Derivatives then hedge funds were have thrived without their support. regularly vilified. This generated growing interest from regulators and politicians, and impacted 32 AIMA’S 30th ANNIVERSARY EDITION
investment streams. It was a cycle Amherst, (2013-Present): “It seems On a personal level, it was my that needed breaking. a fundamental truth that one pleasure to work with him, from the fails to keep in touch with those first day in 1990 and until I left AIMA H-W was one of those who pushed who helped us until it is too late in 2010. He was a willing mentor, forward on all fronts: serving on to do so. I was especially sorry generous with his time and ideas. and leading the AIMA Council; to hear of H-W’s passing. He was To say that he taught me all I know chairing, for many years, the one of those helpful individuals about Asia is an understatement. Conference Committee (he was a who took time out of his busy prodigious conference attendee) life to mentor a young academic/ I have so many fond memories of and advising organisers on entrepreneur to understand the our travels across the region. One topics; leading the charge for the alternative investment industry that moved me deeply, during one CTA DDQ; actively encouraging and its players during the early of our early trips to Singapore, was new membership; supporting 1990s and thereafter. His kindness his story of the time, at the end of all and attending many AIMA and thoughtfulness were just part WWII, he and his mother had been events around the world. Always of his character. released from a Japanese prisoner encouraging. Always welcoming. of war camp and reunited with his And, for me, always supportive H-W reminded me that, in the end, father. and kind. the industry is a people business and one had to take the time Our next stop was to be Tokyo, He was a true gentleman. I am to work with them to move the where he had a number of good deeply thankful to have known industry forward. This led me to friends. This highlights the man, and worked with him.” spend more time with industry the power of his forgiveness and As well as the association, he actively leaders of the day to better the generosity of his spirit. supported industry pioneers and appreciate their views. This often helped to develop independent entailed meetings and discussions Over and above everything, he was research. at ‘unofficial venues’ in Europe or a dedicated family man - always Asia. finding time to reach out each day. Nicola Meaden Grenham, Founder To his wife Eugenie, his children of TASS: “In October 1993, TASS One H-W-centered event stands Alexandra, Bryony, Sabine and held the first of many conferences out. While attending an industry Reinout, I want to say thank you for at which twenty hedge fund conference in Hong Kong, a group sharing him with us. managers presented to qualified of us celebrated H-W’s birthday at investors. The events were the bar atop the Peninsula Hotel I will always be grateful for having known as TASS Twenty Trader in Kowloon. We shared a set of walked the managed futures, Talk (TTTTs). H-W attended the toasts involving a cognac dated hedge funds and Asia-Pacific inaugural event and every event some fifty years old or more. It was paths alongside him. He will be thereafter in Europe, Australia, only fair that, since H-W had paid remembered for his outstanding Japan and the USA for the rest of for dinner, I pay for the drinks. contribution to the alternative the decade. How costly could it be? When one investment industry, a true friend of the party raised her hand as an deeply missed by many. For many women in this industry, indication to leave, I thought she he was one of the first men to meant another round of drinks– support and sponsor us. This and I obliged. The two rounds Florence Lombard was formerly was not an easy task in the male- cost more than my entire trip to the Chief Executive Officer of AIMA dominated financial sector. Hong Kong and back. It was worth between 1993-2009. H-W’s Rolodex was extensive it since the story has returned the and he willingly introduced us cost, many times over. to managers and investors to enable TASS to promote this once More importantly, it led to a closer fledgling industry for the benefit relationship with H-W. of all stakeholders. For the many women in this I wish to thank H-W for permitting industry who have made it, you’ll me to be along for the ride. The find a consistent theme; H-W was industry and I would not be where our dear friend and ally.” we are today without H-W.’s willingness to share and care at Thomas Schneeweis, Professor the beginning of it all.” Emeritus, Finance, Isenberg School of Management, UMass
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THE FUTURE OF PRIVATE CREDIT
he private credit industry seize such opportunities, given their Temerged in the aftermath of scale and resources, allowing them the last global financial crisis and to perform quicker due diligence has grown strongly ever since, and invest on the back of wider both in terms of capital raised access to capital. and the strategies in which it is While a large number of pooled employed. distressed debt funds were raised in the first months of 2020, we It is logical to ask questions about believe that many managers will act the future of private credit in the on an opportunistic basis, matching context of the COVID-19 pandemic, the right deals with the right LPs, both in terms of the immediate and housed in single-deal or co-invest longer term effects. vehicles with bespoke management and performance fee structures. Marianna Tothova Credit Opportunities In all likelihood sophisticated Partner LPs which have long-established Dechert LLP In a downturn, managers typically relationships with managers will Email Marianna Tothova try to harvest immediate special benefit from these opportunities credit opportunities. the most.
Analysts have reported that the However, we have seen more window for distressed opportunities traditional private credit fund has been very short but a second, managers (typically targeting more sustained opportunity set is risk averse LPs) loosening their expected once state interventions investment restrictions to allow for come to an inevitable end, and opportunistic investments without, companies reassess the state however, making distressed of their finances and need for debt the main component of liquidity, in light of the new market their strategies, or offering more conditions. Competition for deals focused funds that sit between in an already saturated market the generations of a manager’s will doubtless become even more established credit fund offerings intense. to take advantage of immediate investment opportunities. To take advantage of distressed opportunities, timing and speed will Smaller managers might gain a be of the essence. Large managers competitive advantage in certain will likely be better positioned to 34 AIMA’S 30th ANNIVERSARY EDITION
sectors or jurisdictions, where their signs of consolidation and gradual in the private credit space is specific knowledge will outweigh sophistication over the past few resulting in the emergence of new the scale at which the industry years, a trend which we expect will business models, like retail peer- giants operate. be accelerated by the effects of the to-peer lending platforms, the pandemic. impact of new technology does Liquidity not seem to have been felt quite The scale of the market means yet in the traditional private credit For existing deals liquidity is key. that managers must distinguish space, where the business remains Some managers are already themselves from others through the personal and tailor-made for both wrestling with breached covenants quality and scale of their resources LPs and borrowers. or requests to apply EBITDA “C” in (where additional restructuring quarterly calculations. While such expertise is particularly valued), Due to the private character of the requests may appear easy to refuse, better access to large high-quality industry and the lack of globally private credit is personal; the deals, and capacity to provide applicable data it is difficult to relationship with the borrower is a tailored reporting to the LPs. As develop widely usable and cost- long-term one and deals are tailor- perceived economies of scale bite, efficient technology solutions made. Keeping the dialogue open investors might start expecting resulting in each manager forging and the relationship unharmed lower management fees. their own path, which puts is essential to unlocking further additional pressure on operational opportunities, and such requests ESG costs. might be more difficult to handle than one might think. The pandemic has caused a Appropriate technology solutions fundamental shift in global could provide insight to industry In some sectors, loan origination perspective on a number of players by augmenting deal has become more difficult, such key issues. These include the modelling, data analytics and as in the senior loan space. Due to inefficiencies of healthcare systems intelligent reporting to investors, delays in due diligence caused by and their impact on certain especially if built on “bigger” data. the pandemic, some managers may demographics, the sustainability of To the extent that anonymised data need to request an extension to the various industries and the related could be shared across the industry, investment period in order to deploy green economic recovery, and any increased transparency would commitments. Such extensions how racial and gender inequality allow for more efficient supervision might, in turn, affect the timing of negatively impacts, among other and regulation of the industry. the launch of new funds or cause things, many people’s economic issues in terms of deal exclusivity opportunity. Systemic importance and regulation in case of concurrent investment periods running for similar funds at While sensitivity to these issues has Due to its size and increasing the same time. been on the rise over the past decade popularity in Europe and the US or so, the pandemic has helped (and elsewhere), especially with Funds may also need to seek to propel them to the forefront of pension funds and insurance additional liquidity for follow-on investors’ and managers’ minds. companies, the private credit investments and to cover ongoing This trend has crystallised through industry is steadily becoming of expenses or deal restructuring various industry initiatives and ESG interest to regulators. While, to date, costs. regulations. the private credit industry remains largely unregulated, it is unlikely to While newly raised funds may We expect that regulators and remain so for much longer. still obtain a subscription line investors will increasingly require (although the market has somewhat adherence to high ESG standards, Hence it is important for the industry toughened and might be inaccessible or, at least, detailed ESG assessment to work closely with regulators to for first-time managers) existing and reporting in relation to ensure that new regulation will not funds with limited or no uncalled investments. Putting aside the feel- hinder, but rather stimulate, healthy commitments to pledge will have to good factor of the ESG aspects of development of this asset class use NAV facilities secured by their an investment, high ESG standards which is, and might continue to be, assets. The cost of such financing will be increasingly important the primary source of financing for might reflect negatively in fund simply from a risk management and many businesses in the years to returns. profitability perspective. come.
Consolidation Technology and Transparency
From a long-term perspective, Whilst the deployment of the industry has started showing technology and wider digitalisation 35 AIMA JOURNAL EDITION 123
Cross-border made coherent
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36 AIMA’S 30th ANNIVERSARY EDITION
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PLANNING THE NEW NORMAL: STRATEGIES FOR RISK AND COMPLIANCE
OVID-19 plunged the world The distributed workforce: post- Ceconomy into the worst COVID, firms are quickly realizing recession and unemployment that work-from-home is viable, crisis since the Great Depression. more efficient and expands the The pandemic shuttered talent pool. All departments need to be equipped to operate as a companies and dispersed remote work-from-home team at a employees to work from home moment’s notice and for extended where possible. periods.
This remote work paradigm Team collaboration by shouting over challenged financial firms to deploy a cubicle wall isn’t just impossible Carlo di Florio their business continuity and in today’s distributed workforce, it Partner & Global Chief Services operational resilience plans. also unfavourable as it leads to poor Officer record retention and an inability to ACA Compliance Group Compliance and risk leaders must capture useful metrics to measure Email Carlo di Florio continue to strategize, embrace performance. change and modernization to re- imagine their functions to drive Centralised data: bringing data sets cost savings while maintaining together empowers compliance effectiveness. teams to do more, faster, and enables a holistic approach to surveillance. The pandemic provides a fast- For example, orders, trades, and forward insight to the regulatory positions are required to complete trends and industry forces that are regulatory filings, transaction driving the future of compliance reporting, and systematically and risk. monitor for inappropriate trading activity. Fees and expenses must We’re seeing a range of industry be captured to identify potential drivers that have inspired three key conflicts and improper allocation strategies to adapt within this new issues. Investor data is needed Martin Lovick paradigm. centrally for AML purposes. Director Electronic communications data is ACA Compliance Group Strategy 1 - Leverage technology required to conduct surveillance. Email Martin Lovick to transform compliance and risk Firm and personal trading data functions while delivering big cost for detection of market abuse, savings investment mandate violation, front running and other personal account Regulators have overtaken dealing risks. investment managers: historically, managers had more sophisticated Scale necessitates automation: technology than the regulators - this personal trading compliance has changed since the 2008 Financial systems now incorporate elaborate Crisis. Regulators globally have brokerage integrations with rules- made significant investments in based processing: a complex technology, big data and advanced web of “if-this-then-that” logic analytics, also experimenting with can be applied to new trade data artificial intelligence, including to determine if the trade needs machine learning, natural language investigation, if it was automatically processing and robotic automation. cleared, or if it corresponds to a trade request that was preapproved.
38 AIMA’S 30th ANNIVERSARY EDITION
In the future, firms will rely on more Operational agility: this is critical and Examinations’ (OCIE) recent advanced rulesets – for example, a for high-volume, time-sensitive Cybersecurity and Resiliency restricted trading list (RTL) specific tasks with extended hiring and Observations Risk Alert focuses on to a particular product area (e.g. training periods, or where workflow the need for managers to manage private markets). fluctuations can be seasonal or their operational resiliency. unpredictable. These time-sensitive Outsourcing and third-party risks: tasks may also be time-consuming Integrated frameworks: many with greater distribution comes tasks – email surveillance rabbit firms historically addressed the increased reliance on managed holes, 60 to 90-minute expert capability to maintain operations services and outsourcing – an on- consultations that need to be during crisis through business demand set of capabilities that is chaperoned, long DDQs that need continuity and disaster recovery more cost-effective and efficient to be reviewed. Utilizing a third- plans - these were often inadequate in delivering repetitive operational party service provider for these and poorly tested. An operational tasks to scale. In-house resources tasks protects against staff turnover resilience program – properly will continue to drive strategy, and unexpected demands. implemented - gives firms the oversight and decision-making. framework and tools needed to Technical expertise and peer respond to crisis including the As firm boundaries expand, a benchmarking: addressing some following key components: plethora of third-party providers risks require specialised knowledge become involved in efficient and expertise – for example, • Programme governance operations. Many of these cybersecurity - but the amount or • Business continuity and ‘warehouse’ important data or are seasonality of work may not justify resilience operationally or financially critical. adding to the headcount. Also, few • Third-party and supply chain Third-party risk oversight cannot firms want to be outliers when it resilience be a one-time review, or even comes to addressing regulatory • Cybersecurity resilience an annual review. Technology is obligations. Service providers • Technology infrastructure required to conduct and manage offer insights on best practices resilience this workflow. and trends, as well as peer • Digital systems and software benchmarking. resilience Accessibility: firms must react to • Data and information resilience their environments very quickly Investor expectations: clients and • Training, testing and feedback and compliance must be ready to investors insist that managers have loop support the distributed workforce. robust operational infrastructure Chat bots and automated business – a focus certain to increase post- The Path Forward: assistant integrations will become COVID. Due diligence will examine commonplace to address common in detail the sufficiency of the firm’s While the above have tended to have employee questions and reduce resources, expertise, and resilience. a discrete role in a firm’s business the burden on the compliance Engaging with a service provider operations - it is now critical to team. For example, “Is IBM on the can help provide assurance that have a holistic approach to govern restricted trading list?” is a question these expectations are being met. and manage these disciplines in an that a compliance bot can readily optimal way. We are experiencing answer. Strategy 3 – Drive operational a perfect storm of interconnected resilience to optimize cyber, BCP geopolitical, economic and Strategy 2 – Outsource to drive and 3rd party risk management environmental threats. Embracing better outcomes and flexibility at smart technology, outsourcing reduced cost Top regulatory priority: operational and cyber solutions will help firms resilience is a top priority for survive - and even thrive - despite Task specialization: is the CCO the regulators, effectively replacing the storm. best person to review and approve financial resilience that has been marketing materials? If resources the focus over the past decade. are not available internally or The SEC has targeted pandemic turnaround times are not meeting response questions centered the business expectations, an around resilience on their recent outsourced solution is likely to examinations and inquiries are also yield immediate benefits. If senior coming from the NFA, FCA, Bank professionals are spending too of England and other regulators. much time on operational minutia, For example, its presence as a key then high risk areas may not be area of focus in the FCA’s 2020/21 getting the appropriate attention. Business Plan and the SEC’s Office of Compliance Inspections 39 AIMA JOURNAL EDITION 123
Reimagining Risk Resilience
The Covid-19 pandemic remote work paradigm has challenged financial firms to deploy and re-examine their business continuity plans and operational resilience.
Compliance and risk leaders must embrace change and modernization to re-imagine their operational functions and to drive cost savings while maintaining effectiveness. We are here to support you: » Leverage our smart technology to transform and streamline your compliance and risk functions
» Reinforce your compliance team’s responsibilities through our outsourced resources and staffing solutions
» Drive operational resilience to optimise cyber, business continuity and third-party risk management
Speak to ACA about how we can help your firm adapt within this new paradigm.
www.acacompliancegroup.com | [email protected] US: +1 (212) 951-1030 | | UK: +44 (0)20 7042 0500
40 AIMA’S 30th ANNIVERSARY EDITION
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THE FUTURE OF THE U.S. LANDSCAPE FOR ALTERNATIVE INVESTMENTS
A. Introduction1 Congress also seeks expanded access to alternative investments. he pending federal election will The “Fair Investment Opportunities determine whether the U.S. for Professional Experts Act” would Marisa N. Bocci T remains on the current path of expand the definition of “accredited Partner populist nationalism or reasserts its investor” to include licensed brokers K&L GATES role as a global leader on regulatory and registered advisers, and would developments. With respect to authorize the SEC to include Sasha Burstein U.S. policy affecting the alternative “professional experts.” The “Main Partner investment industry, the election Street Growth Act” would create K&L GATES outcome will have the highest “venture exchanges,” which would relative impacts on systemic risk, also expand opportunities for retail Daniel F. C. Crowley sustainability and certain investment investors. Partner strategies. However, regardless of K&L GATES political climate, it seems clear that ii. 401(k) Plans alternative investments will become C. Todd Gibson increasingly relevant to “mom and Main Street Investors’ indirect Partner pop” retail investors and present access to alternatives through K&L GATES a broader menu of strategies and retirement accounts is approaching products for institutional investors. a sea change. Defined benefit Kenneth Holston pension plans, which regularly Partner B. Expanding Access invest large sums in alternative K&L GATES investments, are yielding to defined i. “Main Street Investors” contribution retirement plans, such as 401(k) plans, which rarely do so. The SEC agenda includes advancing As legal and operational barriers Main Street Investor access to fall, 401(k) plan participants will investments beyond traditional allocate portions of their retirement public equity, so it has proposed accounts to alternative investments. expanding the “accredited investor” Main Street Investors will access definition. As access broadens, the alternatives largely through target SEC will seek to protect Main Street date funds. These funds are typically Investors through transparency, mutual funds or bank-sponsored diverse asset allocation, and, collective investment trusts, which possibly, new substantive function as funds of funds. protections. Target date funds are designed for plan participants expecting to
1 Citations to authority are omitted but are available upon request.
42 AIMA’S 30th ANNIVERSARY EDITION
retire in particular years (e.g., 2030 addressing ESG issues, institutional or 2040). 401(k) accounts already investors will continue to pressure invest in target date funds; however, U.S. investment managers to because of liability concerns and integrate public company, data legal and operational issues, and ESG risk disclosures with their target date funds typically invest processes. exclusively in public securities. Technological developments will In June 2020, the Department of also improve transparency of ESG Labor (“DOL”) issued an information risks, with blockchain enabling letter outlining how ERISA plan companies to track products fiduciaries may offer a “private throughout their supply chains equity component” to individual and ensure environmental or participants. Furthermore, DOL sustainability expectations are met. Secretary Eugene Scalia and SEC Whether required by regulations, Chairman Jay Clayton praised the enabled by technology, or driven expansion of access to alternative by politics, more ESG disclosure investments in retirement plans. will foster greater adoption of ESG investment products. Private fund managers will develop structures to meet the inherent ii. Renewables challenges. These structures may include diversified funds of funds Even as the Production Tax Credit that include an allocation to liquid for wind energy and the alternative Yasho Lahiri investments alongside an illiquid Investment Tax Credit for solar Partner private fund. Private fund managers energy sunset, overall investment K&L GATES may also develop their own target in renewable energy will continue date funds. In time, 401(k) plans to increase. Private fund dollars David C. Owen will invest more like defined benefit will flow increasingly to the solar PV Of Counsel plans. and energy storage industry (e.g., K&L GATES battery technology) and offshore C. New Products wind production, partly for ESG Robert L. Sichel reasons. Private fund interest in Partner As the market for alternative renewables follows developments K&L GATES investment products grows, the over the last decade confirming that search for “alpha” will grow more renewable energy is reliable, cost Alex Selig difficult. Although funds will effective, and capable of generating Associate continue to serve as alternatives significant returns. K&L GATES to bank lenders, particularly in stressful times,2 new sources of The marriage of strong investment return will become fundamentals and increased ESG increasingly prominent regardless demand underpin the continued of the election outcome. rise of renewables. Given the long-dated nature of renewable i. ESG investments, managers will make longer-term bets on both energy Investor demand for U.S. managers storage and generation through to apply environmental, social, and solar energy, as well as onshore and governance (“ESG”) principles is offshore wind production. growing, due in part to regulatory developments abroad (e.g., MiFID iii. Real Assets II and AIFMD) that provide greater transparency of ESG risks and Investors have long been involved opportunities. in natural resources-backed investment funds, such as farmland Although the U.S. has not adopted and timber funds. Driven by ESG, and similar uniform regulations perhaps political considerations, a
2 Major industries will continue to find private lenders, particularly pooled investment vehicles, more receptive than banks due to continuing regulatory and net capital pressure on banks. 43 AIMA JOURNAL EDITION 123
new segment of investors could find D. Conclusion natural resource “real asset” funds an attractive source of investment Depending on the outcome of the returns and sustainability benefits. election, systemic risk, sustainability and many other policy issues will be Some managers seek sustainability more or less salient. In either case, certification for real assets in alternative investments will benefit their portfolios in order to satisfy from broader access for Main Street ESG-driven demand. Further, the Investors and new investment growing exposure of institutional strategies. Regulators, lawmakers, investors to natural resource fund sponsors, and investors face assets (particularly, agriculture) continuing challenges, but such and underserved resources such stakeholder interests will remain as water rights will drive investor aligned in the direction of measured interest and input on legislation and growth and sensible innovation. All policy. of these developments raise policy concerns, so the role AIMA plays in iv. Insurance educating policymakers will remain indispensable. Private funds have become significant participants in the insurance markets, a trend that will only accelerate in coming years. Some have bought or established reinsurance companies and, as such, participate directly in reinsurance markets. Funds also participate indirectly, through investments in insurance-linked securities and instruments. As property and casualty insurance markets have low correlation to financial markets, such investments can be attractive to investors.
Insurance companies will be increasingly important investors in, and sponsors of, private funds. As sponsors, insurers provide decades of experience investing general account assets and are particularly important players in fixed-income strategies. Insurance companies also are increasingly significant as investors in insurance-dedicated funds (“IDFs”). Insurers write insurance and annuity products linked to the returns of such funds, enabling the purchasers of insurance products access to private fund strategies on a tax- efficient basis.
44 AIMA’S 30th ANNIVERSARY EDITION
HEDGE FUND EXPERIENCE WITH GLOBAL REACH
Our asset management and investment funds practice is one of the largest and most sophisticated in the world, operating across Asia, Australia, Europe, and North America.
Our experience with organizing hedge funds reaches just as far, extending to major hedge fund jurisdictions from the Cayman Islands to the Isle of Man. We will help you select the best location as we advise you on the most effective structure for organizing your fund offerings. Our lawyers understand all fund strategies and structures, and cover the life cycle of fund formation, from structuring the management company, general partner, and the fund to operational issues, winding-up, and dissolution.
Whether you are structuring a registered hedge fund or winding up a leveraged fund, we can take you where you need to be.
K&L Gates LLP. Global counsel across fi ve continents. Learn more at klgates.com.
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THE ONSHORING OF FUNDS IN ASIA
large proportion of business. However, there are Aalternative investment funds few jurisdictions that serve both distributed and/or investing functions well, and that is exactly in Asia have traditionally what Asian financial centres are been established in “offshore” aiming to do. jurisdictions (principally, the It is this co-location of fund Cayman Islands and other tax manager and fund domicile (and neutral jurisdictions where the related ease of operation the fund manager has limited and administration, robustness substance). of tax structuring, and increasing familiarity to international That is slowly but noticeably investors) that makes these onshore evolving. Over the last decade, jurisdictions such a compelling a confluence of factors have offering for Asia-focussed funds. Daryl Liu contributed to a pronounced shift Partner to “onshore” jurisdictions (typically, Singapore introduced the Clifford Chance LLP tax advantageous jurisdictions Singapore limited partnership in with a network of double taxation 2009, and Hong Kong’s new limited treaties where the fund manager is partnership fund regime will come also located). into operation on 31 August 2020.
Evolving global investor As the limited partnership remains preferences, substance concerns the dominant vehicle of choice from a tax perspective (including for private funds globally, these related political and public relation onshore limited partnership vehicles issues in the EU and elsewhere), present a serious alternative to the anti-money laundering related traditional offshore option for Asian concerns, increasing familiarity fund managers. with onshore vehicle options and regulatory developments in both In the last several years, Hong Kong onshore and offshore jurisdictions and Singapore have also introduced have all contributed to a discernible variable capital corporate vehicles Viola Lui move towards the adoption of Asian (e.g., the Hong Kong open-ended Partner fund domiciles. fund company and the Singapore Clifford Chance LLP variable capital company) that In recent years, Asian financial target use by the funds and asset centres like Hong Kong and management industry across a Singapore have both added broad variety of open-ended and onshore vehicle options to the closed-end funds. toolbox of available fund vehicles, and aggressively promoted the With increasing adoption of these growth of the local fund and asset vehicles by fund managers and management industry. investors alike, these onshore options have been rapidly If one were to survey the global gaining traction in the market – a landscape of fund domiciles and consideration that is key to any fund management businesses fund manager aiming to raise a today, there are jurisdictions that successful fund product. are renowned for being attractive fund domiciles and others well- Asian financial centres have been known for being financial centres just as keen to create a straight- with a supportive ecosystem for forward and business friendly establishing a fund management regulatory framework for fund 46 AIMA’S 30th ANNIVERSARY EDITION
managers. For example, Singapore being met, provides funds, With Asian financial centres introduced a two-tiered licensing regardless of their tax residency, determined to provide a competitive and registration regime for fund exemption from Hong Kong profits offering to fund and asset managers managers based on AUM, and tax on their assessable profits and with the increasing adoption rolled out a simplified licensing arising from qualifying transactions of fund vehicles available in those regime for managers of venture as well as transactions incidental jurisdictions, all signs point to the capital funds in recognition of their thereto. continued onshoring of funds in business model, investor base and Asia. in support of start-up and growth Besides expanding the scope of stage businesses. funds eligible for tax exemption, the new Hong Kong unified funds For Hong Kong, in addition to the tax exemption regime also removes relaxations to the Securities and certain problematic features under Futures Commission (SFC) licensing the offshore funds tax exemption requirements of hedge fund regime and expands the scope of managers that were introduced qualifying investments. in 2007, the SFC recently provided guidance for private equity firms These improvements provide seeking to be licensed by the SFC. greater flexibility and more certainty to fund managers seeking Moreover, the SFC has offered a to “onshore” their funds in Hong concession rate for the annual Kong. In addition, the Hong Kong licensing fees payable by fund government has announced its managers and their licensed intention to provide a tax concession individuals. for carried interest.
For tax certainty and mitigation While details have not been of exposure of funds managed by released, clarity on the tax treatment onshore fund managers, Singapore of carried interest, together with tax and Hong Kong have both also relief, have been warmly welcomed introduced safe harbours for funds by the funds industry. managed on a discretionary basis by fund managers located in the Efforts by both Singapore and Hong jurisdiction. Kong to introduce tax incentives and provide clarity of tax treatment For example, the Resident Fund have been a key part of their efforts Scheme, Enhanced Tier Fund to become attractive fund domiciles Scheme and Offshore Fund Scheme that present an alternative to allow a wide range of specified traditional tax neutral offshore income from an extensive list of jurisdictions. designated investments to be exempt from Singapore tax. Finally, the availability of an extensive double tax treaty network Furthermore, Singapore fund in both Hong Kong and Singapore managers that qualify for the make them a preferred jurisdiction Financial Sector Incentive for for structuring investments across Fund Managers also enjoy a key Asian destinations. concessionary corporate tax rate for fund management and investment The comparative ease of designing advisory services. administration, operation and governance arrangements when Similarly, Hong Kong has exempted fund manager, fund vehicles and qualifying assessable profits of investment holding structures are non-resident “offshore” funds from located in a single jurisdiction is Hong Kong profits tax since 2006. increasingly attractive at a time when running a multi-national Beginning April 2019, a new “unified structure that traverses several funds tax exemption” regime came jurisdictions is becoming more into effect in Hong Kong which, complex and coming under greater subject to qualifying conditions scrutiny. 47 AIMA JOURNAL EDITION 123
LIBOR: ARE YOU READY TO CHANGE?
The shift from LIBOR will be the most significant change to financial markets in years and asset managers have to be ready. Firms must take active steps to prepare. The Covid-19 pandemic has not delayed the end of 2021 transition deadline to replace LIBORs with Risk Free Rates (RFRs). Asset managers must identify and quantify their exposure to LIBOR risk, a process which has scale and legal complexity.
Our global funds & investment management team has the product and governance expertise to guide you through the transition process. We advise widely on disclosures and communications to investors and clients. Our people stand ready to help you to understand what this will mean for your business, to prepare you for the future.
To learn more about LIBOR, RFRs and how to prepare, head to www.cliffordchance.com/libor
Clifford Chance shares a global commitment to dignity, diversity and inclusiveness. www.cliffordchance.com
48 AIMA’S 30th ANNIVERSARY EDITION
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BACK TO THE FUTURE IN IRELAND AND LUXEMBOURG
he evolution of the Irish and AUM increasing by 40% in two TLuxembourg fund industries years4 , growth in the alternative demonstrates that 30 years space is set to continue on this in the ever-changing world of upward trajectory. alternative funds is a very long The Growth Story So Far time. If we consider the exponential As the Maples Group has large growth of both countries’ funds and well-established legal, fund, industries, common themes fiduciary and other businesses in emerge. both jurisdictions, we have had front-row seats for the relentless Government Support Peter Stapleton expansion of two of the EU’s leading Partner, Dublin fund domiciles. We reflect here on Firstly, both have consistently Maples Group that journey and consider future benefitted from strong, reliable Email Peter Stapleton opportunities. government support and investment, with continuous Looking back 30 years, Ireland had legislative and regulatory initiatives only just implemented the UCITS to accommodate the changing regime and introduced Europe’s first needs of the alternative funds regulated product for alternative market. funds. Today, Irish funds comprise over €3 trillion of assets under Recent Irish examples include the management (“AUM”) in more than Central Bank of Ireland’s 24-hour 8,000 products. Ireland has also enhanced approval process for AIFs, become a truly global fund centre, the introduction of the extremely administering over €5 trillion of successful ICAV vehicle, and the assets, including more than 40% of incoming government’s stated 1 the world’s hedge funds . priority to complete the much- awaited reform of the investment Johan Terblanche Simultaneously, momentum was limited partnership (“ILP”). Managing Partner, Luxembourg gathering in the Luxembourg UCITS Maples Group and alternative space following the In Luxembourg, growth has Email Johan Terblanche introduction of both the UCITS and been facilitated primarily by the Part II UCI regimes in 1988. Since introduction of two new types then, the Luxembourg industry of limited partnership (SCSp and has flourished and today, AUM SCS), which have become the legal in regulated Luxembourg funds vehicles of choice for Luxembourg 2 exceeds €4.6 trillion . AIFs, as well as the RAIF regime, which has proved extremely popular With the number of €1 billion+ largely thanks to its impressive private equity funds doubling in the time-to-market efficiencies and full 3 last year and private debt funds’ AIFMD compliance.
1 Irish Funds 2 ALFI 3 ALFI Private Equity & Venture Capital Fund Survey, November 2019 4 ALFI Private Debt Fund Survey, November 2019
50 AIMA’S 30th ANNIVERSARY EDITION
EU Single Market Access structures, as managers have sought to complement their Secondly, both countries have taken traditional Cayman Islands, British full advantage of the opportunities Virgin Islands and other non-EU presented by the EU single market. product offerings.
The initial period of growth owed Finally, the stable and transparent much to the development and tax regimes offered by both global success of the UCITS regime countries, together with their wide as the gold standard for regulated networks of double tax treaties, liquid products. have recently become even more attractive in the context of global Later, we saw Ireland and tax initiatives such as BEPS and Luxembourg develop as ATAD. domiciles for hedge, private credit, PE, infrastructure and Upwards and onwards? RE products: a trend which has gained in momentum since the Turning to the future, we expect the implementation of AIFMD. same three themes to continue to bolster the Irish and Luxembourg More recently in the context of the fund industries. UK’s departure from the EU, both countries have seen a significant Government Support influx of asset managers building Adam Donoghue local management companies Continued government investment Partner, London and investment firms to ensure and promotion is assured in the Maples Group continuity of EU financial service coming years, particularly given Email Adam Donoghue passport rights. the sudden need to encourage new sources of economic activity Economic / Political Trends following the 2020 pandemic.
Macroeconomic and geopolitical One clear example is sustainability. issues have also played a part. The 30 years from now will mark the 2050 2008 global financial crisis, the European Green Deal target for the Madoff scandal and the liquidity EU to become climate-neutral, and challenges faced by many funds both Ireland and Luxembourg are created a preference among many committed to being at the forefront European institutional investors for of sustainable finance. the additional protections offered by EU regulated products. Ireland was the first country to fully divest from fossil fuels; we have That trend has continued in already seen the issue of a €3 billion the recent low-yield market State-backed green bond and a Michelle Barry environment, with growing huge increase in the number of Associate, Luxembourg allocations by EU pension funds, Irish ESG product launches; and the Maples Group insurance companies and other government has put sustainability Email Michelle Barry institutional investors to alternative at the core of its Ireland for Finance / illiquid EU products. 2025 strategy.
We have also seen an increase in the popularity of unregulated AIFs, which, depending on the product, can represent a significant portion of the AIF population in Luxembourg and Ireland.
That is in turn part of the wider trend of using Luxembourg and Irish vehicles as parallel funds or within global master-feeder 51 AIMA JOURNAL EDITION 123
In Luxembourg, LuxFLAG an which have gained little market Whatever the future holds, given the independent finance labelling traction to date. vital role that alternative funds have agency providing ESG, sustainability played in the development of both and climate finance certification Economic / Political Trends countries as truly global financial was established several years ago, centres, we can be confident while the launch of the dedicated Finally, we believe that geopolitics that both will remain nimble and Luxembourg Green Exchange and will continue to be a factor. Whether proactive in continuing to adapt to the sizeable and rapidly growing or not there is a helpful UK-EU industry and investor needs. number of responsible investing deal on financial services, there funds domiciled in Luxembourg is a clear indication that Ireland This article is intended to provide is further evidence of a thriving and Luxembourg will continue to only general information for the sector. expand from mere fund domiciles clients and professional contacts into wider asset management hubs. of the legal services division of the EU Single Market Access Maples Group. It does not purport We also expect that the predicted to be comprehensive or to render We expect the opportunities growth of China, India and other legal advice. presented by the EU single market emerging Asian economies in to expand rather than contract. the coming decades present an The EU’s action plan to reignite the opportunity for both locations to Capital Markets Union initiative ensure that they remain Asia’s offers much promise. gateways to Europe.
The scheduled review of AIFMD Our global experience across the and the implementation of the Maples Group is that there is no agreed changes affecting the cross- ‘one size fits all’ solution to fund border distribution of funds should structuring. There will always be a reduce Member State gold-plating, need for the familiarity, flexibility, red-tape, and further enhance the speed to market and operational appeal of Irish and Luxembourg efficiency offered by the leading UCITS and AIFs for cross-border Caribbean and Channel Islands management and marketing. fund centres.
We also expect that a new wave of long-term investment products can Equally, we believe that the positions be facilitated through the scheduled of Luxembourg and Ireland as the review and enhancement of the leading EU fund centres are secure EuVeCa, EuSEF and ELTIF regimes, and will continue to gain in strength.
52 AIMA’S 30th ANNIVERSARY EDITION
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THE FUTURE OF INVESTOR RELATIONS FOR FUND MANAGERS: CONNECTED, AUTOMATED AND SECURE
he nature and pace by which Similarly, managers expect less Tfund managers communicate email interaction, primarily with their investors is shifting for security reasons, and to across multiple touch-points, communicate through portal use driven by investors’ need and data feeds direct to their in- house sales/CRM systems. Investor for enhanced information documents and key investor data and higher levels of security, can be accessed by managers which can be most effectively directly from a portal, enabling them facilitated though digitization to review sensitive documentation and automation. immediately, without the need to contact their administrator. We see the demands of managers Both groups rely heavily on first-hand with the rapidity of how the smooth functioning of an they are attuning the information investor relations process. This they provide to investors’ is managed through reliance on needs evident on a daily basis. data processing and transparency, Technological innovation has ideally achieved through utilizing changed investor relations beyond automated workflow within a Emer McGuckin recognition in the past decade, but proprietary transfer agency system. Managing Director, Head of Investor will the pace of this change remain Consequently, they have seamless Relations consistent over the decade to access to a trove of dynamic data Citco (Canada) Inc. come? and systematic reports available entirely ‘on-demand’, a further nod Fast, connected and transparent to data security.
It is clear that investors and The need for readily-available and managers are demanding accessible information will only better access to data and more amplify in the coming years with API transparency. connections to managers, investors and third party systems already in Investors increasingly expect motion. Secure sharing, editing and to be able see and track trades interrogation of real time data will electronically, right through become more critical for successful the investment process. This investor communications; however, necessitates hosting all fund for this to happen, it will need documents digitally (online) and to be underpinned by increased end-to-end tracking from trade automation, data integrity and submission to registration. The accessibility. use of a portal materially increases efficiency by eliminating needless Out with paper, in with automation information exchange via email with their fund managers. We have seen a clear uptick among managers in facilitating online
54 AIMA’S 30th ANNIVERSARY EDITION
trading. Uptake on the investor side correct data is sourced directly from a way that completely removes any has been slower, however, their an administration system and is manual operation processes from feedback following the introduction available on demand. the equation. of online trading capabilities has been extremely positive and both We are now at a stage in the KYI: Know Your Investor groups are particularly interested in development of investor online static data updates. communications where all parties One of the obvious advantages accept that technology enriches of greater connectivity stemming The risks associated with trades an administrator’s interaction with from increased automation is more submitted via fax or email are managers and enhances their efficient collection of AML/KYC data, mitigated by the move to electronic communication with investors. which needs to be securely acquired trading. This ensures secure They require a full end-to-end and stored. We have certainly seen trade delivery plus accurate trade solution, digitized subscriptions increased interest from managers booking and rapid confirmation. A and redemptions, full automation in security and portal usage in their fully systematic workflow process on investor set-up and order interaction with investors more can achieve this, from NAV sign- processing, and immediate generally. off, report auto-generation and confirmation of trading – all of which release of statements to investors, are made possible by the emergence Managers are aware of the trade finalization and settlement of of increased automation. continued expectation in the redemption proceeds. industry that a fund really ‘knows its Given the rapidity of its adoption, customer’. Automated reporting is key: will the pace of change continue? managers require reporting We expect it will as the industry They are also aware that more delivered at a set time or stated moves further away from paper- extensive AML regimes now points within the NAV cycle. They based trading and signed letters typically require full transparency expect a full suite of standard of authorization for static data on beneficial owners/controllers reporting as well as tailored reports updates. We will see more flexible and on the source of wealth of that can be scheduled to be made technical solutions in future, those individuals. available to them without manual allowing managers and investors intervention. This ensures the to trade, report and share data in
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The move to direct connectivity In order to meet this ever- between manager and investor increasing data security need, mentioned above removes flexible technology will continue the possibility of fraudulent to be a must - providing investors instructions. Yet what do they and managers with unprecedented expect when it comes to the security levels of data control and security, of investor data? where investors and managers can own and systematically reconcile A secure data room where their own data. managers can communicate electronically with their prospects as well as live investors is a must. In closing, we are operating in Within a data room, managers an era of increased connectivity should be able to control all access and security – underpinned by to data and have full transparency intelligent automation, through on who is accessing it at the touch smart technology application. of a button. There are no signs that manager The rise in online trading requires expectations on this will decrease more security options underpinning and, in fact, the future of investor it, such as Dual Factor Authentication, relations will be even faster, more watermarked documents, SMS one- transparent, secure and flexible, time passcode on trade signing, allowing managers more time and digital certificates embedded and energy to focus on investor in the document that are tamper- prospecting and management. proof once signed.
56 AIMA’S 30th ANNIVERSARY EDITION
Full Fund Best-In-Class Administration Middle & & Transfer Back-Office Risk, Performance & Agency Attribution Reporting
Pioneering Front End Reporting
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Regulatory Reporting COMPLETE & Depositary SOLUTIONS Automated, Our industry-leading technology, Auditable Waterfall experienced people and global reach enable us to deliver end-to-end services for alternative asset investors of all kinds
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For further information contact Niall Fagan T +44 (0) 7765 241889 Onshore, Offshore [email protected] E & UCITS Expertise Nate Goodman T +1 (201) 699 9435 E [email protected] Eric Chng T +852 9168 8896 Private Equity E [email protected] & Real Estate citco.com
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THE FUTURE OF FUND ADMINISTRATION
Growth in the Alternatives Industry These growth factors and fee trends will further crystalize the business und administration for case for outsourcing functions Falternatives will continue to be across the front, middle and back Marianne Oar a growth opportunity for service office for both asset managers and Managing director and product providers, with projections pointing investors. manager private markets to ongoing market expansion. State Street Preqin estimates that by 2023, What Does This Mean for Fund global assets will reach US$14 Administration? trillion1. Jen Tribush For fund administrators, there Senior vice president and global This growth will be powered will be additional opportunities to head of alternatives product by several factors. First, we provide enhanced offerings in the State Street believe institutional investors front office and more streamlined will increase their allocations to services for the middle and back alternatives products, particularly offices at scale. among pension funds, insurance companies and sovereign wealth Asset managers and their funds. investors will continue to look for administrators who act as strategic Second, we expect increasing partners and can provide services appetite for direct private deals at scale, yet allow for specific as investors look to diversify their customization through technology. portfolios. Third, asset managers We believe asset managers and will continue to innovate in terms their limited partners (LPs) will be of new products and strategies to focused on: capture alpha for their investors through private markets. Streamlined communication: An integrated approach to the Asset managers will also see communication flow between fund demand from investors when it administrators, asset managers, comes to fee transparency and investors and other interested third customization. parties will be essential.
We will see management fee Asset managers can no longer pressure tighten, and thus a afford to carry the cost of separate need to reduce operational costs. investment, accounting or To provide additional alpha performance books of record to transparency, pressure on incentive manage and reconcile. Technology fees is not likely to ease up. plays a key role here in providing
1 Preqin -The Future of Alternatives, October 2018
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each interested party with a increasingly complex demands, disability, LGBTQ and gender consolidated view that is relevant including: equality parameters to name a for them. few. • Hybrids – Alternatives portfolios Data transparency: Asset available to registered investors In closing, the fund administration managers are also looking to and the United States ’40 Act future is bright with continued their service providers for data funds partnership evolving within the transparency along with self- alternatives industry between service reporting capabilities that • Investor transparency – administrators, asset managers allow them to quickly customize Investors want to be able and asset owners. Because we are their data reviews, performance to view their positions and truly stronger together. and analytics. Technology plays a portfolio across all alternative crucial role in delivering this ability investment vehicles as well as as well. The economic downturn registered products associated with COVID-19 has emphasized the need for smarter • Increased regulation – technology built into workflows Providing additional services across the investment lifecycle – to help managers comply with from investment simulation to LP evolving regulatory reporting and regulatory reporting. requirements across the globe.
Value-added services: With The New Normal regulatory and data privacy concerns, as well as the cost to As 2020 begins to settle into a maintain a desk, investment and ‘new normal’ in the wake of the maintenance of trading systems global COVID-19 crisis and the can be cost prohibitive. Managers Black Lives Matter movement, we are looking to service providers believe the industry will also look to for solutions that enhance trading administrators who support: efficiency and access to liquidity, help them comply with regulation • Environmental sustainability: such as the uncleared margin rules We believe that asset managers (UMR) and optimize treasury tools. and investors will continue to This is specifically a potential issue focus on adding Environmental, for emergent managers who, as a Social and Governance start-up company, often need to (ESG) metrics into their risk leverage the scale of an experienced frameworks and ensure that provider. their administration partners are focusing on ESG within their Technology and innovation: firms. Corporate responsibility Continued innovation through new must be a focus for all publicly technologies such as increasing use traded and privately held of artificial intelligence to streamline companies as organizations processes, and blockchain to globally rally together to improve recordkeeping. These support their communities. technologies are becoming part of the industry’s DNA, making them • Diversity: Administration a critical capability for service partners should continue to providers. focus on creating a diverse and inclusive workforce. New markets: Asset managers are The strength of a business looking beyond North America to is directly tied to the well- drive growth. This means they need being of the communities in service providers with global reach which they operate. With that and local expertise to enable a in mind, asset managers will smooth entry. seek providers with diversity as part of their core culture to Catering to business complexities: champion strong communities Another important aspect is the and values. This objective goes ability of the provider to service beyond race and encompasses 60 AIMA’S 30th ANNIVERSARY EDITION
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HOW FAMILY OFFICES ARE POSITIONING THEMSELVES FOR THE FUTURE
s the human and economic a quick, sharp rebound. It is all the Atoll of the coronavirus more reason why family offices mounts, no sector of the should consider leveraging the rare economy has been immune opportunity to make investments at from the downturn, and this values not seen in years. includes family offices. With According to PitchBook, a research all this uncertainty in markets, firm that compiles data on private there is an opportunity for family investment and tracks family offices, offices to position themselves there are more than 1,800 family strategically to withstand the offices around the globe, with more Jason Kuruvilla noise from the virus and invest than 800 within the United States Partner, Financial Services Senior for the future. alone. However, it is likely that this Analyst number is higher, because some RSM US LLP The reasoning is because this family offices simply do not register Email Jason Kuruvilla public health emergency, as severe and are not captured in PitchBook’s and costly as it is, will eventually data. According to a study by pass. Even if other sectors of the Campden Wealth, an independent economy take longer to recover, research company, family offices the rebound for family offices could manage about $4 trillion globally. very well come in the form of a V –
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Managing a crisis verified, timely data on their facilitate discussions and calm investments or businesses. Consider anxiety. Depending on the size and scope investing in business intelligence of the family office, there are a tools or hire outside consultants Positioning for the future: number of factors that need to to gain a different perspective that be considered in navigating these the office would not normally have A family office that has considered treacherous times: access to such resources. some or all of these factors may be best positioned to invest in • Human capital management: As • Cybersecurity and technology the depressed equity and credit the old saying goes in the investment management: As offices close markets. business, a firm’s most valuable down to help slow the spread of asset goes out the door every night. the virus, confirming the strength • Cash is king: According to In family offices, this means placing a of the information technology Bloomberg LP, more than a third priority on taking care of employees infrastructure, bandwidth and of family offices boosted their cash and key executives who work in the records management will help reserves last year as they bet on a office handling the administrative, reduce any office disruptions as global recession in 2020. Family investment, or risk functions. These office personnel work from home. offices are sitting on the sidelines individuals are critical to making Cyber criminals may try to find as markets continue to fluctuate, sure the office runs smoothly and opportunities to penetrate key and they will be ready to invest. As is able to handle the family’s needs reporting systems during this credit spreads tighten, family offices during times of crisis. In some period of vulnerability. In addition, might be a good avenue for other cases, outsourcing key back-office social media platforms could be businesses looking for liquidity in a functions with third-party providers subject to possible phishing or down market. has provided that temporary social engineering campaigns by transition while the office prepares criminals against family members • Impact investing and for remote operations. Reviewing to gain access to private data. The sustainability: As equity prices and memorialising succession plans digital transformation is happening have taken a tumble and financial will be necessary to prepare for the all around us and may encourage conditions tighten, families time when they are activated. some families to move away from questioning sustainable or impact the traditional office and convert investing in the past might find the • Liquidity and credit management: into a virtual office. lower market values an attractive Depending on portfolio allocations, opportunity to invest in this space. alternative investments may have • Business continuity plans, A 2019 survey completed by UBS a number of restrictions that will insurance, and regulatory reported that the average family prevent the family from withdrawing management: In times of crisis, office portfolio allocates 19% to capital. Investments with a like the spread of the coronavirus, sustainability. In that same survey, hedge fund or with private equity families need to review their disaster 25% of family offices globally managers may include a mandate recovery plans on how the office will engaged in impact investing. of a lock-up period from when the function when the office is closed for original investment was made. In an extended period of time. Plans • Private direct investing: Families addition, investments in fine art, might include where members of looking to invest in technology real estate, yachts, private jets or the family will safely reside, travel and health care businesses might other illiquid assets may take some restrictions, initiation of backup have an opportunity to invest at a time to liquidate. Managing both plans to outsource all functions of lower price compared to before the sides of the balance sheet, reviewing the office to a third party provider, spread of the virus. budgets and cash flow are all use of private security, or oversight functions that should be monitored. of wealth by an institutional trustee. • Increasing allocation to hedge Working with a relationship banker Also, review insurance coverages funds or other alternatives funds: to ensure access to lines of credit in connection with general liability, As interest rates hit record lows, or other sources of financing will disaster, life, kidnapping, real estate, this will be a good opportunity be important to help the family investments, personal assets, for family offices to deploy through these difficult times. and data breaches. Family offices capital with hedge fund or other registered with regulatory agencies alternative managers that have • Information sharing and data like the Securities and Exchange historically generated stronger management: The financial Commission need to review returns in depressed markets. markets in recent times have led communication plans and reporting Private credit and distressed debt many investors to make irrational to maintain compliance during this are some examples of strategies decisions based on unverified period of disruption. Documented that will see more attention data. Family offices with complex plans regarding communications from investment managers as structures may have issues getting with outside investors will help businesses struggle to service debt 63 AIMA JOURNAL EDITION 123
or maintain solvency. According to The takeaway Goldman Sachs, the 2020 market turmoil has given investors more This is a good time for family confidence with hedge funds as offices to review key policies and they have outperformed prior year procedures as it safely waits for performance and outpaced other the Coronavirus and recession to asset classes. Hedge funds or other fade away. With proper planning, alternative funds should have family offices will be well positioned no issue attracting capital from to preserve capital, transition investors, especially family offices, into the digital economy, invest in looking for that much needed undervalued assets and equip the diversification in an uncertain world. next generation of family members with the right tools to drive future success.
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CLOSING NOTE: LETTER FROM THE OUTGOING AIMA CHAIRMAN
t is appropriate at AIMA’s 30th anniversary to Ilook at how our industry has grown in that period and—more important—where it can go from here.
The hallmark of the alternatives industry over the past 30 years has been change, and adapting to change— implicitly recognizing that ours is an opportunistic, nimble industry, responding rapidly to new developments and the ever-evolving needs of society.
Over the next 30 years, we can expect more of the same—but here, “more of the same” means more continued, dynamic change rather than any kind of Simon M. Lorne stasis. Outgoing Chairman of AIMA’s Council September 2016 to September 2020 Our investor base has changed, and we have changed Current Council Member to accommodate it. Where we used to manage primarily for wealthy individuals and families, today most of our assets come from institutional investors, who themselves are managing funds for millions of retirees and other beneficiaries.
Our regulatory environment has changed, and our industry has become somewhat more concentrated. Those two tend to work hand in glove in a positive feedback loop: increased regulation creates barriers to entry, making scale more valuable, creating a demand by the public (and the industry’s financial competitors) for more regulation. There is scant evidence of any change in that trend.
The markets have changed, and we have changed in response to them. Today we think of things like quantitative investing, artificial intelligence, neural networks, alternative credit and ESG considerations as the newer things we focus on, while not abandoning the tried-and-true analytical methodologies and hedging techniques that gave us our initial breath of life with Alfred Winslow Jones, if not Ben Graham.
We are an attentive, opportunistic industry, carefully watching the landscape, ready to pounce on the next opening, hopefully before any of our competitors.
We invest enormous sums in the search for profitable investment opportunities, using every imaginable means. In times of disruption, those opportunities present themselves in ways not previously considered. When we are successful, our myriad investors and their beneficiaries reap the benefits. 66 AIMA’S 30th ANNIVERSARY EDITION
Where will our industry be at some point in the future? A closing personal note, if I may. This marks the end Who knows? All we can be certain of is that we will not of what has been four years as Chairman of AIMA. It be where we are now. We will have moved on from the has been a privilege and an honor. To the energetic themes of today, some of them identified above, and and capable individuals who have served with me will be finding new boundaries, new methodologies, to on Council, to our Chief Executive, Jack Inglis, and his seize the moment. At the same time, the methodologies Deputy, Jiri Krol, to the dedicated Staff of AIMA, and to that are today the new frontiers will still be in our our thousands of members, I will forever be grateful. I arsenal to the extent that they have proved successful look forward to continuing to contribute, in whatever and productive. capacity, as we claim AIMA’s place in the future.
That said, two areas of immediate adjacency stand out for the near future. As markets evolve geographically, alternative funds, and AIMA, will be there. China is an obvious candidate for substantially increased investments, but some emerging areas of Asia Pacific, as well as Latin America and Africa, are witnessing the green shoots of early growth. Internally, too, we are all recognizing the need to broaden our recruiting horizons.
Throughout history, talent has been spread more diversely than opportunity, and if we are to continue making the best talent available to our investors, we need to put aside familiarity bias and find that talent wherever it may be. Progress has been slow, but it is visibly accelerating.
We are the petri dish of the financial markets, and through the financial markets, of the global economy itself. The goal, as always, is to maximize returns relative to the associated risks; the more effectively we do that, the more efficiently will the markets allocate capital to enterprises, thereby ensuring economic vitality.
AIMA itself will also evolve in the future. It has ably led the global industry over the last 30 years, and there is no reason to expect less in the years to come. There will be challenges. Our industry is an essential part of capitalism, perhaps capitalism in its most elemental form. Time and again, capitalism has proven that with a reasonable modicum of regulation, it is the most effective economic engine for maximizing human well-being. Nonetheless, that verity continues to be questioned.
Lessons that have been learned through experience are forgotten in subsequent generations. In the largest essentially capitalist markets in the world, advocates of socialism continue to attract a following, primarily among some who have not learned the lessons of economic history, and have not experienced life in different systems.
I have every hope and confidence that the alternatives industry will withstand those challenges, and will proudly lead the way into the markets of tomorrow.
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AIMA’S TEAM Listed alphabetically
Khristel Aldana Gennifer Goh US Membership and Event Associate Events Manager, Singapore
Dawn Angley Paul Hale Associate Director, Head of Events Managing Director, Global Head of Tax Affairs
Anton Balint Jordan Hogan Research and Communications Associate Membership Analyst
Lorna Barnard Maryam Idroos Events Coordinator Membership and Events Associate
Yasmin Bou Hamze Jack Inglis Analyst, Private Credit Chief Executive Officer, AIMA
Max Budra Adam Jacobs-Dean Associate, Markets, Governance and Innovation Managing Director, Global Head of Markets, Governance and Innovation Michael Bugel Managing Director, Co-Head of APAC Tom Kehoe Managing Director, Global Head of Research and Marie-Adelaide de Nicolay Communications Head of Brussels Office Remmert Keijzer James Delaney Associate Director, Asset Management Regulation Director, Asset Management Regulation Jiří Krόl Katarzyna Gaffke Deputy CEO, Global Head of Government Affairs and Office Manager Global Head of the Alternative Credit Countil
Michael Gallagher Kathy Kwan Head of Australia Events Manager, Hong Kong
Caterina Giordo Alexis Kwon Team Assistant US Associate Director
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Charline Lacroix Kirk Taylor Associate, Events Manager Chief Operating Officer
Kher Sheng Lee Lee Kwang Teo Managing Director, Co-Head of APAC and Deputy Director, Head of Singapore Global Head of Government Affairs Fiona Treble Claude Mendes Managing Director, Global Head of Membership Research & Communications Intern Courtney Tremlett Jane Moran Team Assistant Coordinator, Government Affairs Claire Van Wyk-Allan Odetta Ng Director, Head of Canada Office Manager, Hong Kong Jennifer Wood Michelle Noyes Managing Director, Global Head of Asset Management Managing Director, Head of Americas Regulation & Sound Practices
Aniqah Rao Frank Wu Analyst, Markets, Governance and Innovation Director, Head of China
Mary Richardson Company Secretary
Kirsten Smith Executive Assistant / Global Head of HR
Nick Smith Director, Private Credit
Kanako Someya General Manager, Japan
Laura Stern Membership Administrator
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AIMA I T AL NT
AIMA t t t th h t t t 0 t t th t t th ht h t t t T t t h t t
AIMA A AN ANN AL F M 0 0 30 SE TEM ER
AIMA LAT I AMM 0 SE TEM ER O TO ER
AIMA L AL IN T F M 0 0 O TO ER
AIMA L AL LIC LAT I T AL F M 0 0 0 NOVEM ER
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CONTACT US
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THANK YOU TO ALL OUR SPONSORS
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Thank you for reading our special publication to mark AIMA’s 30th Anniversary. If you would like to contribute to future AIMA Journals, please email Caterina Giordo
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