In order to comply with the Alternative Investment Fund Managers Directive (AIFMD), firms can either manage the process themselves, including applying to the relevant authorities to receive AIFM authorization; or they can use a hosted model whereby a fund is run through an already authorized AIFM. Yet Cordium has now launched a new service, Cordium Total AIFM Solution (CTAS), that sits somewhere in between those models. Joe Vittoria, CEO of Mirabella Financial Services, the wholly-owned subsidiary of Cordium through which the firm offers the CTAS service, explains how the solution works and how Malta is positioning itself to take advantage of AIFMD.
GC: How is this offering different than other AIFM services?
JV: There are a number of firms promoting a service, which is being termed as the Super ManCo (management company), because the ManCos that supported the UCITS funds have basically added the AIFMD compliance to their services and are promoting themselves as providers of that hosted service. AIFMD has some very specific language in regards to delegation of either the portfolio management or risk management function, and in most cases people are delegating portfolio management, such that an AIFM can delegate back to another country the activity of portfolio management. And the reason why this is attractive is that you can basically put your AIFM anywhere you want and delegate that back to the country where you are currently based. So you could have a Luxembourg-based AIFM with a manager running in London, where the manager is operating under the old MiFID environment and acting as a discretionary investment manager in London. So you don’t have to have the AIFM in your home jurisdiction or in the jurisdiction where the fund is; it could be in a third jurisdiction.
The trouble with the hosting environment is that it is bringing into your corporate lineup a new entity, a different entity—a different name, a different brand. And for some clients, that’s less attractive. So if you have ABC Capital Management in Greenwich, Connecticut, and you have the ABC fund in Cayman, you might not want to have XYZ AIFM acting on your behalf in Luxembourg, acting as a middle party to your activity, because that would have to be the investment manager of your AIF, which might be in Cayman. So that was an issue, but obviously the benefit of a hosted environment is that somebody else basically does the work and is maybe more efficient and able to do the activity at a lower price than you might be able to do it internally. For a lot of U.S.-based managers, the concept of having somebody who they can rely on to get this quite onerous set of regulations off their back is attractive.
What we have found is a third way, which is to say all the activity that we would have provided you as a hosted provider of this service, we will make that available to you to your own firm that we will set up in Malta, and in Malta we will form it, get it registered with the local regulator—the MFSA, which is EU-regulated so [the registration] works throughout Europe—we will staff it, we will get you your office, we will get you everything you need to have to make sure the local regulator says, “Yes, this is an AIFM.” But, your name is on the door. So it would be ABC fund, ABC AIFM, ABC Capital in Greenwich, Connecticut, all under the same brand. For U.S. customers, [they can’t benefit as much from the] very low tax environment within Malta, whereas for those in Europe, there’s a slightly different tax regime, whereby if you have a business that is operating outside of your residence, especially if you’re in the U.K., you can avail yourself a certain tax benefit because that business is doing an activity outside of your home country for which you can potentially keep some of the revenues away from your domestic jurisdiction; that is beneficial for some people, but not necessarily everybody. But what is particularly attractive for a lot of people is that people, hearing how onerous AIFMD is, can quickly have their own firm in a transparent manner; it’s their company, but it is operating in a jurisdiction which allows it to be started very quickly and very efficiently. What we are trying to provide here is an outsourced service; we provide all the activity required for a fixed monthly fee, which includes even external costs, for example, MFSA (Malta Financial Services Authority) fees, audit fees, external legal counsel…all these various costs that you would have to incur are bundled into one price per month; you pay that every month and everything gets done.
GC: How do you calculate the monthly fees?
JV: All our fees are fixed and are not related to AuM. Nothing that Mirabella does anywhere is related to AuM. So we might have a billion dollar manager on our regulatory platform—we have several actually on our current regulatory U.K.-based platform—and they will pay the same as a $10 million dollar manager. And part of that is because it gets rid of conflict of interest or any vested interest in one particular client over another. Obviously part of the reason we’re able to provide the service is we are sharing resources across different firms, and so because of that, we’re able to get some economies of scale in providing the service to our clients in Malta. But in order for that to work properly, we have to take out all conflict, so basically everybody is paying the same amount. And when I say basically, I mean there is a minor difference, a little bit of spectrum, let’s say maybe a thousand euros or so a month between the high and low, because, for example, we have a private equity firm, and private equity tends to have a different level of risk management involved versus somebody that’s a very high frequency trader with maybe a more complex structure, and they might need a bit more work. So it’s related to the amount of work. We could easily have a $50 million dollar fund paying more than a $300 million dollar fund, if the $50 million dollar one is a complex strategy. So the flat fee takes into account what the costs are for running the business, what it costs to satisfy all the reporting requirements and everything else that might be involved, plus an estimate of the amount of effort on the risk management side and how many risk officers have to be allocated to do the work properly, and then we come up with a fee. The average fee is around €12,000 euros per month. That gets you people, which is obviously the most expensive part of it, but also as I said before, you get a fully regulated firm up and running. You or one of your people will have to go to Malta about two or three times a year because there are going to be board meetings, and the one thing that is not included in the price is the cost of any of the directors. The directors have to oversee what we’re doing as a service provider, so it’s important that the directors are working directly for the shareholder, the owner of the business, and have no association with us whatsoever. Obviously we may know who they are, because in Malta they may have other directorships, but we don’t promote any specific directors. That is something we will help people to identify, but they’re not included in the cost or in our service…[Managers can pick directors they trust.] We encourage that, because we want there to be proper oversight. Our team would be reporting to the board on what the AIFM is supposed to be doing and how it’s undertaking its obligations.
GC: What types of clients are you targeting?
JV: I think there’s a general sense that a lot of U.S. firms decided to take a wait-and-see approach to what was going to happen with AIFMD. I think a year ago they were thinking they would rely solely on the reverse solicitation, which would allow them to continue to market into Europe. I think a lot of the law firms and prime brokers and various others suggested that might be more difficult to rely upon. Secondly, I think a lot of U.S. managers have realized that if all U.S. managers stop raising money in Europe, the few that do take the effort to go into Europe could potentially find themselves getting a bigger share of the pie. So we’re seeing quite a few U.S.-based managers from around $700 million up to—a couple are over $10 billion—but most are around $2-4 billion, people who are still interested in raising money, clearly, who don’t want to be shut out of Europe and also who sense that for the cost of basically an all in cost of €200,000 euros or so a year, they can have their own AIFM, which was probably not a price that they thought they would be paying for a service like that when they first looked at it a year or so ago.
GC: What are some of the concerns you hear from managers about taking this approach to AIFMD?
JV: People are rightfully curious about Malta as a jurisdiction. Some people might not even be able to find it on a map. It’s a smaller jurisdiction, and some people would probably want to do a bit more due diligence to get comfortable. The reality is that any EU jurisdiction is equivalent in this respect, and as I often tell people, I started my first hedge fund back in ’97, and at that time people were telling me Cayman wasn’t really 100% kosher and that Bermuda had more institutional potential for starting a hedge fund. And obviously that changed very quickly, and I think people looking at Malta today are going to realize that compared to five or ten years ago, there’s already a significantly higher quality perception of it, and it’s improving all the time. The Maltese have done something very clever. They have recognized that AIFMD is a great opportunity; the regulator recognizes it as something they can really work toward; they’re building a skill set in risk management, which at the end of the day is what’s fundamental to this concept of the AIFMs being based in Malta and how they can satisfy the requirements. And they’re really building up a universe of people who can provide that service. So I think they’re going to surprise a lot of people in how quickly it will grow, but there’s no doubt it’s less well known than Luxembourg, Dublin, the U.K….so from that perspective I think Malta is the first question. The second question, once you’ve decided Malta is okay, is how is the local regulator looking at this. What are their views? Is the regulator on board? I would point out that the chairman of the MFSA was happy to be associated with our product if you read our press release. He sees it as a very innovative approach to the problem and is keen to meet people [to talk about this]. It’s great when you can go to Malta and meet with the chairman of the MFSA and hear it directly from him.
[Aside from the jurisdiction questions], another questions is how easy is it to integrate an existing firms risk management policies and procedures into another firm that effectively now sits in between that existing firm, and the existing fund and this new entity has responsibility over the risk management function, and even though it is your own firm, that is to say you are controlling it, how do you integrate risk governance into the process. That’s really critical because that’s an area that Mirabella has been in this business of regulatory hosting for a long time. We’ve hosted some very large firms, very well-known U.S. firms; it’s public information because it’s on the FCA register, so you’ll see names like Graham Capital and various other multi-billion dollar firms that we’ve helped in the past. And you can imagine that when we’re hosting somebody, we have to integrate our risk oversight into their existing systems. So we have quite a skill set I think and are really able to convince people we’re going for the least intrusive, most cooperative approach to getting that done. But obviously that’s an area where people want to know how much is this going to change the way I do business. And the answer is that the goal is to not make it a significant intrusion into what you already do.
GC Friday Interview: Cordium's Joe Vittoria on the Outsourced AIFM Model
In order to comply with the Alternative Investment Fund Managers Directive (AIFMD), firms can either manage the process themselves, including applying to the relevant authorities to receive AIFM authorization; or they can use a hosted model whereby a fund is run through an already authorized AIFM. Yet Cordium has now launched a new service, Cordium Total AIFM Solution (CTAS), that sits somewhere in between those models. Joe Vittoria, CEO of Mirabella Financial Services, the wholly-owned subsidiary of Cordium through which the firm offers the CTAS service, explains how the solution works and how Malta is positioning itself to take advantage of AIFMD.
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