expanding your alternative footprint - ey · supervision and controls over investment decisions ......

Cross-border funddistribution

Expanding your alternative footprint

14 December 2017

Agenda

09:00 Introduction

09:15 Customer experience journey: market assessment and product design

10:00 Coffee break

10:15Customer experience journey: how to market in 2018 across the EU, meeting

the challenges of MiFID II

11:30 Networking coffee

Cross-border fund distribution – expanding your alternative footprint14 December 2017

Overview of product development and distribution process


Research and

market intelligence

Identify and profile

investor segments

Manage and

describe track

record and

competencies

Product strategy

• Economic viability

• Risk assessment

• Brand alignment

• Investment thesis

Commercial

Design

Valuation

&

Reporting

Governance

&

Controls

OperationsTax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Open end

Commercial

Design

Valuation

&

Reporting

Governance

&

Controls


Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Closed end

Segregated accounts and JVs

Marketing and

distribution

Managing investor

experienceCommercial

Design

Valuation

&

Reporting

Governance

&

Controls


Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Overview: Customer experience journey: market assessment and productdesign

Within the key phases of the set-up and launch of the Fund, our focus will be on the market assessment and product

design under AIFMD. This covers the commercial design, tax structuring, financial framework and operations and

controls. We will describe both challenges and issues typically associated with each step further on in the presentation.

Structures Operations

Valuation

&

Reporting

Valuation

&

Reporting

Commercial

Design

Governanc

e and

control

Tax & Legal

StructuringOperations

Valuation

&

Reporting

Fund Legal

Documentation

Governance

& Control

Regulatory

Approval

Process


Market assessment andproduct design

Commercial

Design

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Commercial Design

Elements Challenges and issues

General ► Open/closed

► Investment strategy and diversification objectives

► Use of multi share classes, sub funds, asset pools

► Equity between classes of Shareholders

► Promoters level control over structure

Financial Models ► Establish overall financial models and forward-looking metrics

► Managing capital structure and cash drag (commitment/draw down structures)

► Balancing liquidity needs for investors with inherent nature of asset class

► Distribution/capitalization policy , cost allocations, leverage strategy

Risk models ► Managing risks according to asset class and strategy

Tax and regulatory structures ► Impact of regulation

► Target clients (status/ reporting duties, eligibility)

Financial framework and

reporting► Frequency of dealing days in open ended structures

► Equitable treatment of transaction and launch costs - unit pricing mechanism

Fee structures ► Establish conceptual performance and management fee structures

► Designing performance fee models in open ended funds

Operating platforms ► Establish overall parameters and cost structures of platform in relation to fund style

► Establish service providers involvement

Capital markets and

transactions► Fund placement / intermediaries

► Target investors and fund-raising

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Tax & Legal

Structuring


Structures


Risk models ► Tax efficiency and potential leakage

► Coverage by asset class and risk models

Tax and regulatory

structures

► Establish tax model

► Taxable status of target investor (transparent or fully taxable)

► Investor preference for regulated structures (selection of fund vehicles and

domiciliation)

► Regularity constraints

► Optimizing tax leakage

► Building tax substance over time

► Financing structure and tax rulings

► Keeping track of changing regulations and tax laws

► Implications of VAT

► Regulatory reporting according to target clients

Fee structures ► Tax efficiency of performance and management fees

► Distribution model assessment

Capital markets and

transactions

► Nature (public/institutional/sophisticated) and number of investors

► Nature of intermediaries

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Operations

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Operations


Financial Models ► Establish model for managing liquidity and trapped cash

► Treasury and Finance Management (i.e., volumes of cash, complex financing structure,

hedging, external debt compliance, up-streaming cash for distributions, etc.)

Tax and regulatory

structures

► Managing the compliance process (number of legal entities and complex requirements)


reporting

► Managing acquisitions from a financial reporting perspective

► Managing the consolidation / NAV production process

► Linking internal and external valuations processes

Operating platforms ► Selection of service providers

► Managing service providers (i.e., custodian, property manager, central administrator,

etc.)

► IT infrastructure (administration, financial reporting)

► Managing geographical diversity

► Managing strategic partnerships

► Design of efficient business processes

► Assessment of need to execute Sub-funds to accommodate different pools of Investors

► Assessment of need of single or multiple asset owning entities

► Date required for product governance

Capital markets and

transactions

► Investor data requirements

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Governance

&

Controls

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Governance & Controls


Financial Models ► Establish risk sensitivity parameters

► Budgetary process and KPIs

Risk models ► Overall risk model and governance structure

Tax and regulatory

structures

► Identification and management of tax risks


reporting

► Identification and management of financial risks

Fee structures ► Monitoring of fee structures

Operating platforms ► Identification and management of operational risks

► Controlling of business across multiple service provider environments

► Implementation of key internal controls and business processes

► Monitoring of internal controls and business processes

► The role of the various service providers (particularly custodian / distributors)

► Supervision and controls over investment decisions

► Representation of unit holders in the activities of the fund

Commercial

Design

Valuation

&

Reporting

Governance

&

ControlsOperations

Tax & Legal

Structuring

Fund Legal

Documentation

Regulatory

Approval

Process


Designing fund platforms in EuropeA balance between regulatory requirements and operating effectiveness

Fund Management House

Out-of-

scope

AIF

Joint

Venture

Managed

account

AIFM

Board of Directors

Risk Management

Portfolio Management

Other activities

Compli-

ance

Officer

Internal

audit

Investment Adviser

Committees

Research/deal

sourcing

Due diligence

Structuring

Treasury and

financing

Valuer

Depositary

Tax adv.

Legal adv.

Administrator

AM/PMRisk mgt coordination

Asset

management

service

contracts

AIF 1 AIF 2 AIF 3

Appoint

AIFM

Local

asset

mgt

service

contracts

Property

management

Local

property

mgt

Local

accoun-

ting

Local

service

providers

Accounting

Administration

Middle office appoints

Transfer

agent

Investments InvestmentsLocal

service

providers

Service

provider


Integrating AIFM into a global platformGlobal Model

Source: EY

Investorlevel

Managerlevel

Board members

Investorlevel

GP/decisiontaker/

substance

…

US investors

Fundlevel

European investors Asian/other investorsGlobal distribution

Use of placement agents and distributors

Local series of funds for

three different investor groups (ring-fencing)

Assetlevel

Assetmanagement

Localgovernance based on

global functions (e.g., risk management)

Globalcontinuity withlocal expertise

Optimize administration platform

Focus on specific investor requirements of the

product — open-ended fund, closed-ended fund,

segregated account

US GP EU AIFM US/Cayman GP

A B C A D E A F G

DelawareFund 3 Lux SIF 4

CaymanFund 3

SPV

SPV SPV SPV

SPV

SPV SPV

SPV

SPV SPV

SPV

SPV

Identify and qualify global deal flow

Investment advisor


Overview of product development and distribution process


Research and

market intelligence

Identify and profile

investor segments

Manage and

describe track

record and

competencies

Product strategy

• Economic viability

• Risk assessment

• Brand alignment

• Investment thesis

Commercial

Design

Valuation

&

Reporting

Governance

&

Controls


Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Open end

Commercial

Design

Valuation

&

Reporting

Governance

&

Controls


Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Closed end

Segregated accounts and JVs

Marketing and

distribution

Managing investor

experienceCommercial

Design

Valuation

&

Reporting

Governance

&

Controls


Structuring

Fund Legal

Documentation

Regulatory

Approval

Process

Key conceptsESMA 35-43-620 June 2nd 2017

► “Manufacturer” means, taking into account Recital 15 and Article 9 of the MiFID II Delegated Directive, a firm that

manufactures an investment product, including the creation, development, issuance or design of that product,

including when advising corporate issuers on the launch of a new product

► “Distributor” means , taking into account Recital 15 and Article 10 of the MiFID II Delegated Directive, a firm that

offers, recommends or sells an investment product and service to a client

► Distribution mechanisms (market practices):

Execution-only services

Investment advisory (independent or non-independent)

Discretionary portfolio management



Product governance requirement

► Set-up of a product approval process:

Definition of a target market: compatible clients versus

non compatible

Product testing: stress tests against different scenarios /

assessment of all relevant risks associated with the target

market

Appropriate distribution strategy: the product is marketed

and distributed to investors within the target group and

target market

Adequate fee structure

► Monitoring: periodical review of the performance of the

products to assess whether they performed in accordance

with their design and validate their target market

Impacts on AIFM business modelM

an

ufa

ctu

rer

role

► Ensure the products and the manufacturer’s distribution

strategy are consistent with the identified target market

► Identify the investors for whom the product is not compatible

► Perform a regular review of the products distributed to ensure

the ongoing consistency of the product with the distribution

strategy

► Responsible for suitability and appropriateness testing

Dis

trib

uto

rro

le

► Assessment of the intended target market from the manufacturer

► Assessment of the continued compatibility between the distributed

product and the ‘actual‘ target market

► Application of an appropriate distribution strategy to ensure that the

product ends up with the type of customers whose needs,

characteristics and objectives have been designed for

► Application of suitability and appropriateness testing in line with target

clients

► Effective communication channels between the manufacturer and

distributor

► Target market identification based on quantitative and qualitative

criteria

► Use of five categories prescribed by ESMA to determine target

market*

► Definition of a distibution strategy that is consitent with the identified

target market

► Best effort to select distributors whose type of clients and services

offered are compatible with the target market of the product

► Propose the type of investment service through which the targeted

client should acquire the product

► Periodical review of product performance

► Enhanced transparency especially with regard to cost and charges

MiFID impacts on distributionProduct governance – Articles 16 & 24 / ESMA guidelines June 2017


MiFID impacts on distributionBan on inducements – Articles 23 & 24 of MiFID II

Ban on inducement requirement Impacts on AIFM business modelD

istr

ibu

tor

role

► Inducement ban for discretionary portfolio management

services:

An investment firm is forbidden from accepting trailer fees or

other types or retrocessions from issuers when providing

portfolio management services to clients

► Inducement banned for independent investment advisory

services:

The service provider may not receive any remuneration from a

third party (e.g. management company) for its advice, and

only non-monetary benefits – such as product training – are

permitted, provided their receipt does not impair compliance

with the duty to act in the best interest of clients

► Account segregation between accounts entitled to inducements and

those that are not

► Enhanced disclosure to clients (information on advisory services,

information on instruments, costs and charges disclosure)

► Pressure on management fees applied to the fund i.e. distributor

offering discretionary portfolio management or independent advisory

services will seek revenues from investors which weighs on the

overall amount of management fees perceived by the ManCo/AIFM

► Oversight obligation on distributor as per:

CSSF 12/546

ESMA guidance 30/11/2016

► AIFM oversight of distributors will need to take into account this ban

on inducements. Distribution agreements will need to reflect the

necessity to segregate between accounts

Ma

nC

o/A

IFM

AIFM scope of activitiesRoles and responsibilities - Overview

BIL Manage Invest – Marketing project - Confidential

Investment manager roleAIFM

AIFsAIFs

Non MiFID intermediary MiFID intermediary

Obligations of AIFM Obligations of AIFM as

Global Distributor (GD)

Distributor onboardingSub-distributor oversight if

applicable

GD oversight

Obligations of AIFM as

Product manufacturer

Obligations of AIFM as

Global Distributor (GD)

Distributor onboardingProduct governance & ban on

inducements

GD oversight Sub-distributor oversight

Product governance for

manufacturer

Investment

advisor

Partially out of MiFID scope Within MiFID scope

Direct distribution Indirect distribution

Professional investor

Professional investor

Within MiFID

scope

Out of MiFID

scope

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