The International Who’s Who of Private Funds Lawyers has brought together Fazil Hossenkhanof BLC Chambers, Brian McDermott of A&L Goodbody and Paul Scrivener of Solomon Harris to discuss types and levels of activity, the impact of regulatory changes and the current economic climate on this area, and key trends for the legal market for the year ahead.
Who’s Who Legal: Which types of funds have seen the most activity over the past year? Are there any industry sectors which have seen a significant increase in the volume of funds work?
Fazil Hossenkhan: For the last few years, there has been consistently increasing interest in African private equity given the growth rates of certain African economies and considerable improvements in governance and infrastructure. Mauritius, as a services-oriented economy, has established itself as one of the main gateways for channelling investments into the continent. There has been a marked increase in Africa-oriented private equity funds being set up in Mauritius looking to invest in a number of sectors, mainly infrastructure, energy and mining, but also financial services, SMEs and agri-business.
Brian McDermott: Given the prevailing environment of low interest rates, there has been considerable appetite among investors for products with an income component and this has resulted in the establishment of a significant number of credit funds, including exploring opportunities to invest in loan instruments through UCITS. We are also seeing continued growth in the ETF market in the form of new launches and impressive inflows and, not surprisingly, following the publication of the ESMA Guidelines, a renewed interest in the establishment of physically replicating ETFs. Ireland has proven to be well positioned to take advantage of this growth given the number of ETF providers using Ireland as a domicile for their products. We are also seeing the Irish real estate market attracting the attention of a number of international asset managers who have structured transactions through Irish fund vehicles.
Paul Scrivener: As the world’s leading domicile for alternative investment funds, the Cayman Islands continues to see a vast array of investment strategies employed by fund managers in the offshore space. Cayman’s proportionate, disclosure-based regulatory regime and absence of extensive prescriptive requirements – reflecting the fact that the investor base in Cayman funds is almost exclusively institutional/sophisticated – allows considerable flexibility for managers when formulating investment strategy for an offshore fund. Over the past 12 months it is certainly the case that we have seen a continuing trend of fund launches in some of the traditional areas such as long-short equity, credit and managed futures, but we have also seen more exotic strategies emerging, such as precious metals and intellectual property rights, as managers chase alpha in these challenging economic conditions. We have also experienced strong growth in private equity and hybrids combining hedge with private equity.
Who’s Who Legal: How have current economic conditions impacted on your practice?
Fazil Hossenkhan: There has been a clear shift of focus. Mauritius has traditionally been known as a route to investment in India. With recent economic conditions prevailing in Europe, the US and India, there has been discernably less fund formation work for India investment. On the other hand, given that valuations have been relatively low, there has been consistent activity in transactional work. Africa fund formation, on the other hand, has surged.
Brian McDermott: The challenges facing the Irish economy have been well documented but it is beginning to show encouraging signs of recovery. We are fortunate in that, as our client base in the funds practice is predominantly international and institutional, we have been somewhat insulated from the domestic economy. The wave of new regulation, which has been in part a response to the global financial crisis, has impacted all of our clients who have needed to seek our help to steer them through the compliance challenges. We have extended our team in the last 12 months, including welcoming back Elaine Keane as a new partner.
Paul Scrivener: Over the past year our funds practice has seen renewed impetus in fund formations after the inevitable fall off in new launches in the wake of the global economic crisis. As a result of this uptick we have recently strengthened our funds team, including a lateral hire at partner level from a competitor firm. Currently we are quite busy with new formations, with the main trend being funds set up by entrepreneurial, start-up managers. This is contrary to some recent media comment that these days the alternative investment fund space is the domain of the larger managers only, with the investor base continuing to be dominated by large institutional investors such as pension funds and insurance companies. That is not our experience and, in my view, there will always be room for the smaller manager with talent that can build around him or her the operational and back-office infrastructure which is so much a part of the modern alternative investment fund. As a boutique law firm ourselves we are finding that we are well placed to attract these niche managers. However, raising seed capital remains a continuing challenge and funds tend to take a lot longer to get to launch than was the case in the heady days of the mid-2000s when funds were being registered in Cayman at the rate of some 35 per week.
Who’s Who Legal: How has the implementation of the Alternative Investment Fund Directive (AIFMD) or other regulatory changes affected practice in your jurisdiction? Where is the biggest impact likely to be felt?
Fazil Hossenkhan: With the implementation date being in July 2013, there were questions being raised from fund promoters and investors earlier in the year as to whether the Mauritius domicile for funds would meet the requirements of the AIFMD and remain a viable jurisdiction for funds being marketed into Europe in the post-AIFMD era. Mauritius was fortunately one of the first African states to sign up to the ESMA MoU, which went a long way to allay the uncertainties on the ability of Mauritius funds to continue to be marketed in Europe. Issues remain, however, over marketing in certain jurisdictions because of certain member states’ private placement regimes. And although funds continue to be set up, the fund raising climate is tough and closings tend to be long and drawn-out.
Brian McDermott: There were over €2,000 billion worth of assets under management in Irish-domiciled non-UCITS funds at the end of June 2013 and the managers of each of these funds need to consider the impact of AIFMD on their products. We have been fortunate in Ireland in that the Irish regulator, the Central Bank, has worked alongside the industry in developing its new framework for authorising and regulating AIFMs and has been proactive in terms of implementing the new regime, even permitting AIFM authorisation applications to be submitted before the Directive’s implementation date. The existing Irish non-UCITS fund structure, the qualifying investor fund or QIF, is also well suited to AIFMD and so, while changes will of course be required, managers of existing QIF products may not find that its impact is as significant as initially anticipated.
While we were initially helping clients address the challenges posed by AIFMD, many are beginning to focus on the opportunities presented by the new regime particularly in terms of the marketing passport. There is the distinct possibility that the AIF product may emulate the success of UCITS given that this is the first time that we will have a pan-European alternative investment product which can be sold on a passported basis. This would be the biggest impact of AIFMD if it comes to pass.
Paul Scrivener: There is no doubt that increasing regulation is one of the top issues on the lips of all those involved in the sector with significant attention being paid to the implementation of the AIFMD and Dodd-Frank. Of the two, Dodd-Frank has probably been less significant offshore with the main impact being the need for a number of managers of Cayman funds to become registered with the SEC for the first time. A significant number of managers of Cayman funds were already SEC registered prior to Dodd-Frank and so the overall impact on the industry has not been that great. AIFMD was of considerable concern for some time as the final terms of the Directive were thrashed out. Some of the earlier iterations could have been extremely damaging for offshore funds with a European investor base and during that period our Zurich-based, European funds practice found that many fund set-ups were stalled until greater clarity emerged. Fortunately, a combination of the final version of the AIFMD being significantly improved and a proactive approach on the part of the Cayman Islands Government and the Monetary Authority means that there should be no difficulty in Cayman funds being offered to European investors on a private placement basis.
Who’s Who Legal: What trends are you likely to see in the legal market over the next few years? How will law firms need to adapt to meet these potential changes?
Fazil Hossenkhan: I expect more activity in terms of fund closings and private equity deals in Africa as markets get more sophisticated and as institutional investors acquire greater confidence in those markets. On the other hand, with a global trend towards increased regulation of fund activities and a call for greater transparency, I also expect there to be a gradual move from traditional fund jurisdictions towards potentially onshore fund and fiduciary services market as these develop in countries attracting interest. Law firms and service providers in those traditional jurisdictions would still command a fair share of the work having developed the expertise and brand. But they would also be called upon to bring in value addition which is distinct and separate from the usual jurisdiciton offering, in order to maintain their competitive edge.
Brian McDermott: While these are not new trends, we expect to see a continued convergence of the alternative and traditional asset management worlds and a further institutionalisation of the hedge funds market, both of which may be further fuelled in Europe by the arrival of AIFMD. As managers become more familiar with the new regime, and with the potential for increased regulatory focus on the use of derivatives by UCITS, certain alternative strategies which were launched as a UCITS in the past may in the future sit more comfortably in an AIF and will now benefit from an EU passport.
In terms of our funds practice, we have always expected our lawyers to be asset management experts across the range of different sectors and to have the skills to service asset management clients offering a broad range of product types and structures. We expect this to continue to be the case and that the availability of such skilled professionals will be a factor for asset managers when they are selecting where to domicile their fund.
Paul Scrivener: The legal requirements of fund managers and other users of legal services are becoming increasingly sophisticated and it is inevitable that increasing specialisms by legal practitioners will be essential. Fund managers, in particular, will continue to turn to law firms that have dedicated fund practices that have seen all the issues that can arise and so can navigate the manager to a successful fund launch in a time efficient and cost effective manner. Law firms that “dabble” in funds work are likely to fall by the wayside as managers reach out to those firms that have a well-recognised expertise and profile in the market. The provision of legal services in this sector is highly competitive and firms will need to continue to recruit the best talent available and ensure that each member of their funds team remains at the cutting edge of developments in what is a very fast-moving industry.