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Today New City Initiative is comprised of 49 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

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The Management Company (or “ManCo”) was a proposition that seemed almost too good to be true for a number of firms who were assessing how they should approach the EU’s Alternative Investment Fund Managers Directive (AIFMD) back in 2013 and early 2014.

These EU structures allowed managers to delegate risk management to the ManCo; retain control over their portfolios; and distribute products across the EU without having to go through the aggravation and cost of setting up an EU branch or subsidiary.

It was a model that had come to prominence earlier in the decade when UCITS IV was implemented permitting managers to use cross-border ManCos. The ManCo was an ideal set-up for US or APAC managers, who wanted to test the investor waters in the EU, in a cost-effective manner and without over-committing resources.

The ManCo (along with lawyers and consultants) was given yet another boost by Brexit as providers warned UK managers they risked being shut-off from EU investors.  Exiting the Single Market means that UK-based UCITS and AIFMs are at a risk of becoming designated third country fund managers, and will no longer benefit from pan-EU cross-border distribution available through the passport. This obviously matters more to some managers than to others.

Firms are therefore conducting analysis on ManCos and whether it will be sensible to appoint one. It is certainly wise managers be considering the case for hiring a ManCo, but they need to be mindful of unexpected challenges and regulatory developments. Time and again, EU regulators have warned against UK firms setting up letterbox entities – that is branches with barebones or no substance – within the EU as a contemptuous attempt to keep their passporting rights.

There is no clear or definitive indication that ManCos are implicitly being accused by regulators of not providing sufficient substance, but it is certainly something managers should acknowledge as a potential business risk, particularly given the EU-focus on delegation right now. ManCos would beg to differ and argue that they do provide substance to non-EU managers and that any regulatory stance suggesting otherwise is unfair.

There is a possibility protectionism could revert in the EU, and if this occurred, it is highly probable fund managers selling into the EU may be forced to up their presence on the continent, particularly if restrictions were imposed on the ManCo operating model.  Such a requirement would dramatically increase costs for managers with UK and EU client interests.

As the EU continues to make a push for substance, managers need to be careful about how they approach their Brexit strategy. The cost of appointing a ManCo is not insignificant, and on-boarding can take some time. It is better for managers to wait until there is further regulatory clarity on the status of ManCos before rushing into appointing one.

The danger for fund managers seemingly at the moment is not the final outcome or net result of Brexit, but rather the uncertainty leading up to it.  Market timing is absolutely everything in trading, and managers on both sides of the Channel need to adopt a similar approach to their Brexit planning.