Alternative management, London is preparing the ground
Pending clarification regarding the implementation of the AIFM directive, the UK government intends to boost the country’s fund industry.
Just a few months before the entry into force of the AIFM (Alternative Investment Fund Managers) directive, the UK government has made an unequivocal gesture in favour of the traditional and alternative asset management sectors. When presenting his budget on 20 March last, George Osborne, the Chancellor of the Exchequer, announced that he intended to scrap the 0.5% specific tax levied on UK-domiciled investment funds. The government is also preparing to open a consultation on additional tax and regulatory changes and wants to launch an international marketing programme to support the UK asset management sector. Although it is estimated that this regulatory change will cost the UK around 145 million pounds, it is nevertheless a crucial first step towards creating a level playing field with Dublin and Luxembourg to which the UK has lost ground as a location for funds.
In 2011, the United Kingdom represented 20% of funds domiciled in the European Union compared with 34% at the beginning of the 2000s. By way of comparison, the country currently accounts for almost 80% of alternative funds based in Europe, i.e. some 307 billion euros: "The United Kingdom has always been a prime choice for the asset management industry, explains Stephen Rabel, a tax specialist at the consultancy firm of Kinetic Partners. But the government initiative deserves credit for sending out a clear signal via these tax provisions that the country wants to be a fund-friendly location."
However, the government’s programme is unlikely to drastically change the European alternative management scene: “Over the years, investors have got used to buying funds domiciled in specific jurisdictions, explains Stephen Burke, Managing Director EMEA at the IMS Group, a consultancy specialised in alternative asset management. And it will probably need several years to bring about a perceptible change in investment habits.”
The lack of a suitable infrastructure also seems to be a major obstacle to the further expansion of London as a fund domiciliation centre at European level, which will be a focal point of competition in the context of the AIFM directive: “This is a real opportunity for the United Kingdom to become a domicile for alternative funds and investment managers, but at the current time it still lacks a suitable authorised fund structure that offers investment managers the degree of freedom that they want. From this point of view, the Qualified Investor Scheme is too restrictive”, explains John Everett, Head of Technical at Bovill, a financial consultancy.
The Qualified Investor Scheme (QIS) is a specialised investment vehicle which was created in 2004. However, unlike the Luxembourg SIF and the Irish Qualified Investor Fund (QIF), the lead time is far longer – six months – and a certain number of assets are excluded from its scope of applications. “Since the introduction of the SIF in 2007, we have seen the creation of thousands of these structures which are particularly interesting for alternative funds, explains Anouk Agnes, Deputy Director General of Alfi, the Association of the Luxembourg Fund Industry. This ready-for-use system is adapted to all investment policies falling within the scope of application of the directive.” Luxembourg, where assets managed by alternative funds (private equity, funds of funds, real estate and hedge funds included) total around 250 billion euros - including 140 billion for hedge funds – sees the AIFM directive as an opportunity. “The ambition is to double the volume of assets under management in the alternative sector thanks to this directive”, adds Anouk Agnes. The transposition of the directive into the laws of Luxembourg notably provides for the creation of a limited partnership legal structure, which is well known in the Anglo-Saxon world. “The idea is to facilitate compliance for certain non-European investment managers, in particular Anglo-Saxons, by providing them with a legal structure with which they are familiar.” The Luxembourg alternative funds sector, which has always been regulated, also benefits from Luxembourg’s European passport expertise. In this connection, the Grand-Duchy is a step ahead in the area of UCITS funds: “All our service providers specialised in cross-border distribution are fully capable of recycling their expertise in this area and adapting it to the alternative sphere”, explains the Deputy Director General of Alfi.
This is therefore worrisome for London, which sees the European passport as a means of attracting funds not based in Europe. The Financial Times reports that London is preparing to welcome a certain number of operations of a continental fund currently based in the Channel Islands. After the arrival of American and Middle Eastern funds, Compagnie Benjamin de Rothschild and the Australian asset management company LM Investment Management have opened offices in the British capital this year. “As a reaction to the French government’s economic policies, a certain number of French alternative funds have decided to switch the domiciliation of their businesses to London, among others, because of the lower tax burden, but also because of convenience and living conditions”, explains Jérôme de Lavenère Lussan, CEO of Laven Partners. Nevertheless, the attraction of London could decline rapidly if the UK decides to leave the European Union. The lack of clarity regarding a certain number of points in the AIFM directive is also hampering the actions of investment managers in London: “We are on the brink of a tidal wave of regulation… but we are still surrounded by uncertainties: what will we have to do to be able to register in London? What lies in store for non-European firms? adds Jérôme de Lavenère Lussan. It seems far more certain that the hedge fund industry will lose a significant amount of business in the short term, including in London.” Pending clarification of the operation of the directive, London continues to weigh up its options.